Financial Choices: College, Retirement, or Both?

Life is full of choices. Should you watch Breaking Bad or Modern Family? Eat leftovers for dinner or order out? Exercise before work or after? Some choices, though, are much more significant. Here is one such financial dilemma for parents.

Should you save for retirement or college?
DSCN8976It’s the paramount financial conflict many parents face, especially as more couples start having children later in life. Should you save for college or retirement? The pressure is fierce on both sides.

Over the past 20 years, college costs have grown roughly 4% to 6% each year–generally double the rate of inflation and typical salary increases–with the price for four years at an average private college now hitting $192,876, and a whopping $262,917 at the most expensive private colleges.

Even public colleges, whose costs a generation ago could be covered mostly by student summer jobs and some parental scrimping, now total about $100,000 for four years (Source: College Board’s Trends in College Pricing 2013 and assumed 5% annual college inflation). Many parents have more than one child, adding to the strain. Yet without a college degree, many jobs and career paths are off limits.

On the other side, the pressure to save for retirement is intense. Longer life expectancies, disappearing pensions, and the uncertainty of Social Security’s long-term fiscal health make it critical to build the biggest nest egg you can during your working years.

In order to maintain your current standard of living in retirement, a general guideline is to accumulate enough savings to replace 60% to 90% of your current income in retirement–a sum that could equal hundreds of thousands of dollars or more. And with retirements that can last 20 to 30 years or longer, it’s essential to factor in inflation, which can take a big bite out of your purchasing power and has averaged 2.5% per year over the past 20 years (Source: Consumer Price Index data published by the U.S. Department of Labor, 2013).

So with these two competing financial needs and often limited funds, what’s a parent to do?

conventional_wisdom_7-10-2012The prevailing wisdom
Answer: retirement should win out. Saving for retirement should be something you do no matter what. It’s an investment in your future security when you’ll no longer be bringing home a paycheck, and it generally should take precedence over saving for your child’s college education.

It’s akin to putting on your own oxygen mask first, and then securing your child’s. Unless your retirement plan is to have your children be on the hook for taking care of you financially later in life, retirement funding should come first.

And yet…
It’s unrealistic to expect parents to ignore college funding altogether, and that approach really isn’t smart anyway because regular contributions–even small ones–can add up over time. One possible solution is to figure out what you can afford to save each month and then split your savings, with a focus on retirement. So, for example, you might decide to allocate 85% of your savings to retirement and 15% to college, or 80/20 or 75/25, or whatever ratio works for you.

Although saving for retirement should take priority, setting aside even a small amount for college can help. For example, parents of a preschooler who save $100 per month for 15 years would have $24,609, assuming an average 4% return. Saving $200 per month in the same scenario would net $49,218.*

These aren’t staggering numbers, but you might be able to add to your savings over the years, and if nothing else, think of this sum as a down payment–many parents don’t save the full amount before college. Rather, they try to save as much as they can, then look for other ways to help pay the bills at college time. Like what?

file000195499258Loans, for one. Borrowing excessively isn’t prudent, but the federal government allows undergraduate students to borrow up to $27,000 in Stafford Loans over four years–a relatively reasonable amount–and these loans come with an income-based repayment option down the road.

In addition, your child can apply for merit scholarships at the colleges he or she is applying to, and may be eligible for need-based college grants. And there are other ways to lower costs–like attending State U over Private U, living at home, graduating in three years instead of four, earning credits through MOOCs (massive open online courses), working during college, or maybe not attending college right away or even at all.

In fact, last summer, a senior vice president at Google responsible for hiring practices at the company noted that 14% of some teams included people who never went to college, but who nevertheless possessed the problem solving, leadership, intellectual humility, and creative skills Google is looking for (“In Head-Hunting, Big Data May Not Be Such a Big Deal,” New York Times, June 19, 2013). One more reason to put a check in the retirement column.

The Decision to Pay Off Your Mortgage in Retirement

For many homeowners, paying off a mortgage is a financial milestone. This is especially true when you are retired. Not having the burden of a monthly mortgage payment during retirement can free up money to help you live the retirement lifestyle you’ve always wanted.

To pay off, or not to pay off: that is the question
NRT-payoffmortgageQ413_02Some retirees are lucky enough to have paid off their mortgage before they reach retirement. For others, however, that monthly obligation continues. If you are retired, you may be wondering whether you should pay off your mortgage. Unfortunately, there’s no one answer that’s right for everyone. Instead, the answer will depend upon a variety of factors and how they relate to your individual situation.

Return on retirement investments vs. mortgage interest rate
One way many retirees pay off their mortgage is by using funds from their retirement investments. To determine whether this is a good option for you, you’ll need to consider the current and anticipated rate of return on your retirement investments versus your current mortgage interest rate. In other words, do you expect to earn a higher after-tax rate of return on your current retirement investments than the after-tax interest rate you currently pay on your mortgage (i.e., the interest rate that you’re paying, factoring in any mortgage interest deduction you’re entitled to)?

For example, assume you pay an after-tax mortgage interest rate of 4%. You are considering withdrawing funds from your retirement investments to pay off your mortgage balance. In general, you would need to earn an after-tax return of greater than 4% on your retirement investments to make keeping your money invested for retirement the smarter choice.

On the other hand, if your retirement funds are primarily held in investments that typically offer a lower rate of return than the interest rate you pay on your mortgage, you may be better off withdrawing your retirement funds to pay off your mortgage.

Additional considerations
As you weigh your options, you’ll also want to consider these additional points:

– Effect on retirement nest egg: If you rely on your retirement savings for most of your income during retirement, you should generally avoid paying off your mortgage if it will end up depleting a significant portion of your retirement savings. Ideally, you should pay off your mortgage only if you have a small mortgage balance in comparison to your overall retirement nest egg.

file00032137357– Tax consequences: Keep in mind that if you are going to withdraw funds from a retirement account to pay off your mortgage, there are some potential tax consequences you should be aware of. First, if you withdraw pretax funds from a retirement account, the amount you withdraw is generally taxable. As a result, you’ll want to be sure to account for the taxes you’ll have to pay on the amount you withdraw from pretax funds. Depending on your tax bracket, that could be a significant amount.

In addition, if you take a large enough distribution from your retirement account, you could end up pushing yourself into a higher income tax bracket. Finally, unless you are 59½ or older, you may pay a penalty for early withdrawal.

– Comfort with mortgage debt: For many retirees, a monthly mortgage obligation can be a heavy burden. If no longer having a mortgage would give you greater peace of mind, give the emotional benefits of paying off your mortgage some extra consideration.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014

Women Face Unique Retirement Planning Challenges

Women can face special challenges when saving for retirement. Generally speaking, women tend to spend less time in the workforce, and when they do work, they typically earn less than men in comparable jobs. As a result, women’s retirement plan balances, Social Security benefits, and pension benefits are often lower than their male counterparts. In addition, women generally live longer than men, so they typically have to stretch their retirement savings and benefits over a longer period of time.

WideModern_Entrepreneur_120513620x413What can you do to maximize your chances of achieving a financially secure retirement? Start saving as soon as possible. The best time to start saving for retirement is in your 20s; the second best time is right now. At every stage of your life, there will always be other financial needs competing with the need to save for retirement. Don’t make the mistake of assuming it will be easier to save for retirement in 5, 10, or 15 years. It won’t. Start small, with whatever amount you can afford, and contribute regularly, adding to your contribution when you can.

If you’re in the workforce, an employer retirement plan like a 401(k) plan can be a convenient, no hassle way to get started and build your retirement nest egg–contributions are deducted automatically from your paycheck and may qualify you for employer matching funds. If you’re out of the workforce and married, you can contribute to an IRA (traditional or Roth), provided your spouse earns enough to cover the contributions.

In many cases, your job is your lifeline to being able to save for retirement. Before leaving the workforce for family obligations, consider exploring with your employer the possibility of flexible work arrangements, including telecommuting and part-time work, that might enable you to continue to earn a paycheck as you balance your family obligations.

Start planning now by taking the following steps: (1) set a retirement savings goal; (2) start saving as much as you can on a regular basis, and track your progress at least twice per year; and (3) find out how much you can expect to receive from Social Security at

Buckets of Money: A Retirement Income Strategy

Some retirees are able to live solely on the earnings that their investment portfolios produce, but most also have to figure out how to draw down their principal over time. Even if you’ve calculated how much you can withdraw from your savings each year, market volatility can present a special challenge when you know you’ll need that nest egg to supply income for many years to come.

10106-21876When you were saving for retirement, you may have pursued an asset allocation strategy that balanced your needs for growth, income, and safety. You can take a similar multi-pronged approach to turning your nest egg into ongoing income. One way to do this is sometimes called the “bucket” strategy. This involves creating multiple pools of money; each pool, or “bucket,” is invested depending on when you’ll need the money, and may have its own asset allocation.

Buckets for your “bucket list”
When you’re retired, your top priority is to make sure you have enough money to pay your bills, including a few unexpected expenses. That’s money you need to be able to access easily and reliably, without worrying about whether the money will be there when you need it. Estimate your expenses over the next one to five years and set aside that total amount as your first “bucket.”

Safety is your priority for this money, so it would generally be invested in extremely conservative investments, such as bank certificates of deposit, Treasury bills, a money market fund, or maybe even a short-term bond fund. You won’t earn much if any income on this money.

But you’re unlikely to suffer much loss, either, and earnings aren’t the purpose of your first bucket. Your circumstances will determine the investment mix and the number of years it’s designed to supply; for example, some people prefer to set aside only two or three years of living expenses.

This bucket can give you some peace of mind during periods of market volatility, since it might help reduce the need to sell investments at an inopportune time. However, remember that unlike a bank account or Treasury bill, a money market fund is neither insured nor guaranteed by the Federal Deposit Insurance Corp.

A money market attempts to maintain a stable $1 per share price, but there is no guarantee it will always do so. And though a short-term bond fund’s value is relatively stable compared to many other funds, it may still fluctuate.

Refilling the bucket
buckets-of-change-1024x545As this first bucket is depleted over time, it must be replenished. This is the purpose of your second bucket, which is designed to produce income that can replace what you take from the first. This bucket has a longer time horizon than your first bucket, which may allow you to take on somewhat more risk in pursuing the potential for higher returns.

With interest rates at historic lows, you might need some combination of fixed-income investments, such as intermediate-term bonds or an income annuity, and other instruments that also offer income potential, such as dividend-paying stocks.

With your first bucket, the damage inflation can do is limited, since your time frame is fairly short. However, your second bucket must take inflation into account. It has to be able to replace the money you take out of your first bucket, plus cover any cost increases caused by inflation.

To do that, you may need to take on somewhat more risk. The value of this bucket is likely to fluctuate more than that of the first bucket, but since it has a longer time horizon, you may have more flexibility to adjust to any market surprises.

Going back to the well
The primary function of your third bucket is to provide long-term growth that will enable you to keep refilling the first two. The longer you expect to live, the more you need to think about inflation; without a growth component in your portfolio, you may be shortening your nest egg’s life span.

BucketTo fight the long-term effects of inflation, you’ll need investments that may see price swings but that offer the most potential to increase the value of your overall portfolio. You’ll want this money to grow enough to not only combat inflation but also to increase your portfolio’s chances of lasting as long as you need it to. And if you hope to leave an estate for your heirs, this bucket could help you provide it.

How many buckets do I need?
This is only one example of a bucket strategy. You might prefer to have only two buckets–one for living expenses, the other to replenish it–or other buckets to address specific goals. Can you accomplish the same results without designating buckets? Probably. But a bucket approach helps clarify the various needs that your retirement portfolio must fill, and how various specific investments can address them.

Note: Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The tax information provided is not intended to be a substitute for specific individualized tax planning advice. I suggest that you consult with a qualified tax advisor.

Paying for Long Term Care Insurance with Tax Free Funds

The high cost of long-term care can quickly drain your savings, absorb most of your income, and affect the quality of life for you and your family. Long-term care insurance (LTCI) allows you to share that cost with an insurance company. If you’re concerned about protecting your assets and maintaining your financial independence, (LTCI) may be right for you.

can-two-long-term-care-insurance-policies-300x200But LTCI premiums can be expensive, and cash or income needed to cover those premiums may not be readily available. The good news is that there are several tax-free options that can help you pay for LTCI.

Using a health savings account
A health savings account, or HSA, is a tax advantaged savings account tied to a high deductible health insurance plan. An HSA is funded with pretax contributions up to certain annual limits set by the IRS. Any growth inside an HSA is tax deferred, and what you don’t spend in one year can carry over to subsequent years. Just as importantly, withdrawals made from your HSA for qualified medical expenses are tax free.

Tax-qualified LTCI premiums are a qualified medical expense eligible to be paid from HSA funds. The maximum annual premium you can pay tax free is subject to long-term care premium deduction limits.

Convert taxable annuity to tax-free long-term care insurance
Generally, withdrawals from a nonqualified deferred annuity (premiums paid with after-tax dollars) are considered to come first from earnings, then from your investment (premiums paid) in the contract. The earnings portion of the withdrawal is treated as income to the annuity owner, subject to ordinary income taxes.

taxes1IRC Section 1035 allows you to exchange one annuity for another without any immediate tax consequences, as long as certain requirements are met. But, what you may not know is that the Pension Protection Act (PPA) extends the tax-free exchange of annuities for qualified stand-alone LTCI or combination annuity/LTCI policies. This effectively allows you to purchase LTCI with annuity cash values that would otherwise have been taxable to you if withdrawn. However, there are some potential drawbacks:

1) You may incur annuity surrender charges when transferring your annuity.

2) Transferring your annuity means you won’t have the potential income the annuity could provide. While premiums for qualified LTCI are tax deductible as qualified medical expenses, annuity payments used to pay for long-term care are not tax deductible.

3) Not all long-term care policies allow you to pay premiums in a lump sum, so you may have to make partial 1035 exchanges from the annuity to the LTCI company, but not all annuities allow partial 1035 exchanges.

HELPS may help
Another opportunity to pay for LTCI on a tax-free basis may be available to qualifying retired public safety officers. Part of the Pension Protection Act of 2006, the Healthcare Enhancement for Local Public Safety (HELPS) Retirees Act, allows certain retired public safety officers to make tax-free withdrawals from their retirement plans to help pay for LTCI for themselves and their respective spouses and dependents.

Eligible retired public safety officers include law enforcement officers, firefighters, chaplains, and members of a rescue squad or ambulance crew. Public safety officers must have attained normal retirement age or they must be separated from service due to a disability. HELPS does not extend to 911 operators, dispatchers, and administrative personnel. In addition, if an eligible participant dies, the exclusion from tax for withdrawals does not extend to surviving spouses or other beneficiaries of the participant’s retirement plan.

Eligible government retirement plans include qualified trusts, Section 403(a) plans, Section 403(b) annuities, and Section 457(b) plans. Up to $3,000 per year may be withdrawn on a pretax basis, and the money must be paid directly from the retirement plan to the LTCI company. However, not all retirement plans may allow for these withdrawals, and some state laws may not allow the tax-free treatment of distributions.

HSAs, the PPA, and the HELPS Act have opened the door to long-term care coverage for people who might otherwise have a hard time affording it. Your financial professional may be able to provide more information on these and other ways to help you plan for the potentially high cost of long-term care.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The tax information provided is not intended to be a substitute for specific individualized tax planning advice. I suggest that you consult with a qualified tax advisor.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

Four Retirement Savings Myths

MythsGlass2No matter how many years you are from retirement, it’s essential to have some kind of game plan in place for financing it. With today’s longer life expectancies, retirement can last 25 years or more, and counting on Social Security or a company pension to cover all your retirement income needs isn’t a strategy you really want to rely on. As you put a plan together, watch out for these common myths.

Myth No. 1: I can postpone saving now and make it up later
Reality: This is very hard to do. If you wait until–fill in the blank–you buy a new car, the kids are in college, you’ve paid off your own student loans, your business is off the ground, or you’ve remodeled your kitchen, you might never have the money to save for retirement. Bottom line–at every stage of your life, there will be competing financial needs. Don’t make the mistake of thinking it will be easier to save for retirement in just a few years. It won’t.

Consider this: A 25 year old who saves $400 per month for retirement until age 65 in a tax-deferred account earning 4% a year would have $472,785 by age 65. By comparison, a 35 year old would have $277,620 by age 65, a 45 year old would have $146,710, and a 55 year old would have $58,900. Note: This is a hypothetical example and is not intended to reflect the actual performance of any specific investment.

Why such a difference? Compounding. Compounding is the process by which earnings are reinvested back into a portfolio, and those earnings may themselves earn returns, then those returns may earn returns, and so on. The key is to allow enough time for compounding to go to work–thus the importance of starting to save early.

Now, is it likely that a 25 year old will be able to save for retirement month after month for 40 straight years? Probably not. There are times when saving for retirement will likely need to take a back seat–for example, if you’re between jobs, at home caring for children, or amassing funds for a down payment on a home. However, by starting to save for retirement early, not only do you put yourself in the best possible position to take advantage of compounding, but you get into the retirement mindset, which hopefully makes you more likely to resume contributions as soon as you can.

early-retirementMyth No. 2: A retirement target date fund puts me on investment autopilot
Reality: Not necessarily. Retirement target date mutual funds–funds that automatically adjust to a more conservative asset mix as you approach retirement and the fund’s target date–are appealing to retirement investors because the fund assumes the job of reallocating the asset mix over time. But these funds can vary quite a bit. Even funds with the same target date can vary in their exposure to stocks.

If you decide to invest in a retirement target date fund, make sure you understand the fund’s “glide path,” which refers to how the asset allocation will change over time, including when it turns the most conservative. You should also compare fees among similar target date funds.

Myth No. 3: I should invest primarily in bonds rather than stocks as I get older
Reality: Not necessarily. A common guideline is to subtract your age from 100 to determine the percentage of stocks you should have in your portfolio, with the remainder in bonds and cash alternatives. But this strategy may need some updating for two reasons. One, with more retirements lasting 25 years or longer, your savings could be threatened by years of inflation.

Though inflation is relatively low right now, it’s possible that it may get worse in coming years, and historically, stocks have had a better chance than bonds of beating inflation over the long term (though keep in mind that past performance is no guarantee of future results). And two, because interest rates are bound to rise eventually, bond prices could be threatened since they tend to move in the opposite direction from interest rates.

Myth No. 4: I will need much less income in retirement
Reality: Maybe, but it might be a mistake to count on it. In fact, in the early years of retirement, you may find that you spend just as much money, or maybe more, than when you were working, especially if you are still paying a mortgage and possibly other loans like auto or college-related loans. Even if you pay off your mortgage and other loans, you’ll still be on the hook for utilities, property maintenance and insurance, property taxes, federal (and maybe state) income taxes, and other insurance costs, along with food, transportation, and miscellaneous personal items.

Wild card expenses during retirement–meaning they can vary dramatically from person to person–include travel/leisure costs, health-care costs, financial help for adult children, and expenses related to grandchildren. Because spending habits in retirement can vary widely, it’s a good idea as you approach retirement to analyze what expenses you expect to have when you retire.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

The Financial Realities of Relocating

NSS-jobrelocationQ313_02With the housing market and overall economy starting to improve, more Americans are packing up and relocating. According to the U.S. Census Bureau, the number of people moving for a new job or transfer numbered 3.5 million in 2011-2012, up from 2.8 million the previous year.

Whether you’re planning to move for a new job or transfer, or you’re accompanying a spouse or partner who has accepted a new position, it’s important to consider how your new location will impact your bottom line.

Comparing costs
There are many costs that can vary from one geographic location to the next. Depending on where you’re moving to, you may be in for a pleasant surprise or a financial shock. Here are some things to consider:

Housing: The cost of housing is a significant financial factor in your move. Relocating from a high-cost area like New York City to a lower-cost area like San Antonio might translate into several thousand dollars’ worth of annual savings on housing costs. Also, keep in mind that if you’re buying property, higher housing costs will most likely mean higher real estate taxes.

General cost of living: Aside from housing, will other items like groceries, transportation, utilities (e.g., heating/cooling, electricity, water, cable/phone/Internet), health care, and child care cost more or less in your new location?

Juma-2_-Three-Main-State-Taxes-You-Must-Know-AboutState and local income taxes: Seven states have no income tax–Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Other states have a variety of state and local income taxes. You can use an online paycheck calculator to get an estimate of what your net income will be in different states.

Bottom line–will your new location cost more or less? If you haven’t already negotiated your new salary, you can investigate the salary you would need to earn at your new location to maintain your current standard of living. Many online job boards have cost-of-living comparison tools where you can compare the costs of different locations.

Other considerations
You may also have other considerations that partly involve costs, for example:

Commuting time: Will your new commute be longer than your current one? In addition to costing more, a longer commute will mean less time for you to spend at home or on personal endeavors.

Family and friends: Will you be moving far away from family and/or friends? If so, there might be airfare and/or other travel costs in your future. Unfortunately, airfares at peak travel times like holidays and school vacations are typically the most expensive. You may also find yourself allocating more of your vacation time for visits with family.

Keeping up with the Joneses: No one wants to admit this is even a factor, but you might be surprised at the subtle influence this dynamic can have on your bottom line. For example, does everyone in your new neighborhood drive a certain kind of car, hire professional landscapers, or send their children to camp all summer?

Your spouse’s job prospects: Has your spouse/partner been able to find a job in your new location? If not, are there ample job opportunities for someone with his/her experience and skills?

Relocation expenses
As for how you’ll pay for the move, some employers offer relocation packages that cover the costs associated with selling your house, hiring a moving company, transporting your belongings and vehicles, finding a new house, and paying for food, fuel, and lodging along the way. If not, you’ll be on the hook. But you may be able to deduct some of your moving expenses; for more information, see IRS Publication 521, Moving Expenses.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

Affordable Care Act: Do You Need to Change Your Medical Plan?

I already have health insurance. Will I have to change my plan because of the new health-care reform law?

Your present insurance plan may be considered a grandfathered plan under the ACA if your plan has been continually in existence since March 23, 2010 (the date of enactment of the ACA), and has not significantly cut or reduced benefits, raised co-insurance charges, significantly raised co-payments or deductibles, and your employer contribution toward the cost of the plan hasn’t significantly decreased.

However, if a grandfathered plan significantly reduces your benefits, decreases the annual dollar limit of coverage, or increases your out-of-pocket spending above what it was on March 23, 2010, then the plan will lose its grandfathered status.

Some provisions of the ACA apply to all plans, including grandfathered plans. These provisions include:

  • No lifetime limits on the dollar cost of coverage provided by the plan
  • Coverage can’t be rescinded or cancelled due to illness or medical condition
  • Coverage must be extended to adult dependents up to age 26

The ACA doesn’t apply to all types of insurance. For example, the law doesn’t apply to property and casualty insurance such as automobile insurance, homeowners insurance, and umbrella liability coverage. The ACA also doesn’t affect life, accident, disability, and workers’ compensation insurance. Nor does the law apply to long-term care insurance, nursing home insurance, and home health-care plans, as long as they’re sold as stand-alone plans and are not part of a health plan. Medicare supplement insurance (Medigap) is generally not covered by the ACA if it’s sold as a separate plan and not as part of a health insurance policy.

A health insurance Exchange is essentially a one-stop health insurance marketplace. Exchanges are not issuers of health insurance. Rather, they contract with insurance companies who then make their insurance coverage available for examination and purchase through the Exchange. In essence, Exchanges are designed to bring buyers and sellers of health insurance together, with the goal of increasing access to affordable coverage.

The Patient Protection and Affordable Care Act does not require that anyone buy coverage through an Exchange. However, beginning in 2014, each state will have one Exchange for individuals and one for small businesses (or they may combine them). States have the option of running their own state-based Exchange or partnering with the federal government to operate a federally facilitated Exchange. States not making a choice default to a federally run Exchange.

Through an Exchange, you can compare private health plans based on coverage options, deductibles, and cost; get direct answers to questions about coverage options and eligibility for tax credits, cost-sharing reductions, or subsidies; and obtain information on a provider’s claims payment policies and practices, denied claims history, and payment policy for out-of-network benefits.

Policies sold through an Exchange must meet certain requirements. Exchange policies can’t impose lifetime limits on the dollar value of coverage, nor may plans place annual limits on the dollar value of coverage. Insurance must also be “guaranteed renewable” and can only be cancelled in cases of fraud. And Exchanges can only offer qualified health plans that cover essential benefits.

In order to be eligible to participate in an individual Exchange:

    • You must be a U.S. citizen, national, or noncitizen lawfully present in the United States
    • You cannot be incarcerated
    • You must meet applicable state residency standards

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

When Market Volatility Is Most Dangerous

When Is Market Volatility Most Dangerous?
dreamVSrealityThough a market downturn generally isn’t fun for most people, its timing can have a greater impact on some investors than on others. For example, a market downturn can have greater significance for retirees than for those who are still accumulating assets. And it has the most impact if it occurs early in retirement. Why? Because of something known as the “sequence of returns”–basically, the order in which events affect a portfolio.

For retirees, timing is everything
To understand the importance of the sequence of returns, let’s look at two hypothetical retirees, both of whom start retirement with a $200,000 portfolio. Each year on January 1, Jim withdraws $10,000 for living expenses; so does Pam. During the first 10 years, each earns an average annualized 6% return (though the actual yearly returns fluctuate), and both experience a 3-year bear market. With the same average annual returns, the same withdrawals, and the same bear market, both should end up with the same balance, right?

They don’t, and here’s why: though both portfolios earned the same annual returns, the order in which those returns were received was reversed. The 3-year decline hit Jim in the first 3 years; Pam went through the bear market at the end of her 10 years.

Jim’s Return                 Jim’s Balance              Pam’s Return               Pam’s Balance

Year 1                        -5%                             $180,500                            15%                           $218,500
Year 2                        -2%                             $167,090                            12%                           $233,520
Year 3                        -1%                             $155,519                            14%                           $254,813
Year 4                         3%                             $149,885                              8%                           $264,398
Year 5                         7%                             $149,677                              9%                           $277,294
Year 6                         9%                             $152,247                              7%                           $286,004
Year 7                         8%                             $153,627                              3%                           $284,284
Year 8                       14%                             $163,735                             -1%                           $271,541
Year 9                       12%                             $172,183                             -2%                           $256,311
Year 10                     15%                             $186,511                             -5%                           $233,995

As you can see, Pam’s account balance at the end of 10 years is more than $47,000 higher than Jim’s. That means that even if both portfolios earned no return at all in the future, Pam would be able to continue to withdraw her $10,000 a year for almost 5 years longer than Jim. This is a hypothetical example for illustrative purposes only, of course, and doesn’t represent the results of any actual investment, but it demonstrates the timing challenge new retirees can face.

Weighing income and longevity
If you’re in or near retirement, you have to think both short-term and long-term. You need to consider not only your own longevity, but also whether your portfolio will last as long as you do. To do that requires balancing portfolio longevity with the need for immediate income.

The math involved in the sequence of returns dictates that if you’re either withdrawing money from your portfolio or about to start, you’ll want to pay especially close attention to the level of risk you face. After the 2008 market crash, many individual investors fled equities and invested instead in bonds. Along with actions by the Federal Reserve, that demand helped push interest rates to all-time lows.

However, when interest rates begin to rise, investors will face falling bond prices. And yet if you avoid both stocks and bonds entirely, current super-low interest rates might not provide enough income. Achieving the right combination of safety, income, and growth is one of the key tasks of retirement investing.

Seeking balance
You obviously can’t control the timing of a market downturn, but you might have some control over its long-term impact on your portfolio. If your timing is flexible and you’re unlucky enough to get hit with a downturn at the wrong time, you might consider postponing retirement until the worst has passed. Any additional earnings obviously will help rebuild your portfolio, while postponing withdrawals might help soften any impact from an unfortunate sequence of returns. And reducing withdrawal amounts, especially in the early retirement years, also could help your portfolio heal more quickly.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The tax information provided is not intended to be a substitute for specific individualized tax planning advice. We suggest that you consult with a qualified tax advisor.

Social Security: Questions and Answers

Whether you’re close to retirement or years away from receiving Social Security benefits, you may not know much about the intricacies of this important program. Here are some questions and answers that can help you learn more.

Will Social Security be around when you need it?
You’ve probably heard media reports about the worrisome financial condition of Social Security, but how heavily should you weigh this information? While it’s very likely that some changes will be made to Social Security (e.g., payroll taxes may increase, benefits may be reduced by a certain percentage, or cost-of-living adjustments may be calculated differently), there’s been no proposal to eliminate Social Security. Although no one knows what will happen, if you’re approaching retirement, it’s probable that you’ll receive the benefits you’ve been expecting. If you’re still a long way from retirement, it may be wise to consider various scenarios when planning for Social Security income.

How does the Social Security Administration know how much you’ve earned?
If you work for an employer, your employer will deduct Social Security taxes from your paycheck and report your wages to the Social Security Administration (SSA). If you’re self-employed, you pay your self-employment Social Security taxes and report your earnings to the SSA by filing your federal income tax return. To view your lifetime earnings record, you can sign up to access your Social Security Statement online at the SSA’s website,

Will a retirement pension affect your Social Security benefit?
If your pension is from a job where you paid Social Security taxes, it won’t affect your Social Security benefit. However, if your pension is from a job where you did not pay Social Security taxes (such as certain government jobs) two special provisions may apply.

The first provision, called the government pension offset (GPO), may apply if you’re entitled to receive a government pension as well as Social Security spousal retirement or survivor’s benefits based on your spouse’s (or former spouse’s) earnings. Under this provision, your spousal or survivor’s benefit may be reduced by two-thirds of your government pension (some exceptions apply).

The second provision, called the windfall elimination provision (WEP), affects how your Social Security retirement or disability benefit is figured if you receive a pension from work not covered by Social Security. The formula used to figure your benefit is modified, resulting in a lower Social Security benefit.

If someone else receives benefits based on your earnings record, will your benefit be reduced as a result?
Your benefit will not be affected if other people, such as your spouse, former spouse, or dependent children, receive Social Security benefits based on your earnings record.

If you delay receiving benefits until after full retirement age, should you still sign up for Medicare at age 65?
Even if you plan on waiting until full retirement age or later to take your Social Security retirement benefits, make sure to sign up for Medicare three months before you reach age 65. If you enroll late for Medicare Part B (medical insurance) your coverage may be delayed or cost more later. Visit the Medicare website, to learn more.

Do IRA withdrawals count toward the Social Security earnings limit?
Prior to full retirement age, an earnings limit applies if you receive Social Security benefits. If you earn more than this amount, your benefit will be reduced. However, only wages from a job or net earnings from self-employment count toward this limit. Unearned income, such as IRA withdrawals, investment earnings, or capital gains, does not count.

What if you change your mind about when to begin Social Security benefits?
You have a limited opportunity to change your mind after you’ve applied for benefits. You can complete Form SSA-521, Request for Withdrawal of Application, and reapply at a later date. But if you’re already receiving benefits, you can withdraw your claim only if it has been less than 12 months since you first became entitled to benefits, and you’re limited to one withdrawal per lifetime. In addition, there are financial consequences–you must repay all benefits already paid to you or your family members based on your application, as well as any money withheld from your checks, including Medicare premiums or income taxes.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013