Category: Retirement Planning

CARES Act – What May Affect You

The COVID-19 (COVID-19) pandemic has left its mark on global and domestic markets. Government guidelines to practice “social distancing” has significantly impacted commerce as consumers are staying at home. The U.S. stock market ended its historical bull run of eleven years in mid-March. Many businesses have suffered in this time, unfortunately resulting in many employees being laid off.

The United States Congress scrambled to create a stimulus relief bill to help aide the economy and the American people. The Senate passed the COVID-19 Aid, Relief, and Economic Security (CARES) Act on March 25, 2020. On March 27, 2020, the House of Representatives passed the bill, and it was signed into law by President Trump just hours later.

This bill is an estimated $2 trillion emergency fiscal package, marking the largest stimulus bill ever passed. The bill is quite expansive, totaling 335 pages in length. It covers quite a few areas including aide to state and local governments, aide to specific business industries, tax credits to businesses, and support to states for paying unemployment benefits. For the purposes of this article, the topics discussed will primarily focus on a few areas deemed applicable to a large portion of Americans.

Tax Updates & Changes

Prior to the CARES Act, Steven Mnuchin, Secretary of the U.S. Treasury, announced that the tax filing and payment deadline for 2019 would be moved to July 15, 2020. This also results in estimated tax payments for 1st quarter 2020, which are also normally due on April 15th, being delayed until July 15th. Estimated tax payment due dates for the remaining quarters of 2020 remain unchanged for now.

One change the CARES Act has implemented is a brand new income adjustment (above the line deduction) called a Qualified Charitable Contribution. This deduction can be claimed for up to $300 in charitable donations to qualifying charitable entities. To be eligible for the deduction, the donation must have been in cash only (appreciated-asset donations do not qualify). Cash used to fund a Donor Advised Fund is not eligible either. To claim the deduction, the taxpayer must not itemize deductions, meaning they take the standard deduction.

If you have questions about anything tax related a result of the bill, we recommend you speak with your Financial Planner or CPA.

Rebate Checks

One area of the bill that many Americans will benefit from is the “Recovery Rebate”. These rebate checks are being issued in the form of a refundable credit against 2020 income. The goal for these checks is twofold: Put money in the hands of Americans who have lost some of their income, but also help stimulate the economy with consumers spending more money. Each individual taxpayer may receive up to $1,200 (Married couples filing jointly eligible for $2,400) based on income levels from their 2018 or 2019 tax return; whichever is last on file. Each dependent child that is 16 and under also qualifies the taxpayer for an additional $500 credit. These checks will be issued in the coming weeks, while those who have a bank account on file from a tax refund are expected to receive their Recovery Rebate via direct deposit.

Although the credit is pegged against 2020 income, income levels from your most recent tax return on file (2018 or 2019) are used for eligibility. To be eligible for the full rebate check, a married couple filing jointly must have adjusted gross income (AGI) under $150,000. For those filing head of household, AGI must be under $112,500. A single taxpayer’s AGI must be under $75,000 to be eligible for the full amount. For every $100 of income over the AGI threshold, the rebate check will be decreased by $5.

Example: Charlie and his spouse Karen last filed their taxes in 2018. They have 2 children, ages 14 and 19. Charlie and Karen file their taxes as married, filing jointly. They are eligible for a maximum rebate check of $2,900 (2,400 + 500). Their AGI on their 2018 tax return was $178,000. This means their rebate will be reduced due to being over the income threshold. Their rebate check would be reduced by $1,400 (178,000 – 150,000 = 28,000; 28,000/100 = 280; 280 * 5 = 1400). The rebate check received will be $1,500.

As mentioned earlier, the rebate check is in the form of a refundable credit against 2020 income. There is good news for those that made too much money in 2018 or 2019 and are not considered eligible for the rebate check. If they face hard times in 2020 with a large reduction in income, they may become eligible for the credit once they file their 2020 taxes in early 2021. Also, for those whose income increases in 2020 and may no longer qualify, they will not have to repay the amount they received in 2019. Please note that the Recovery Rebate is considered a tax credit; therefore, it is not taxable income.

Required Minimum Distributions (RMDs)

The CARES Act has suspended RMDs from applicable retirement accounts for 2020. Even better news is that individuals who turned 70.5 years old in the second half of 2019, and chose to delay their 2019 RMD until 2020 (under old RMD rules prior to the SECURE Act), can also suspend taking RMDs until 2021 as well. For those that have already taken their 2020 RMD, but would like to undo it, there may be an option. This option would be in the form of a “rollover”. Rollovers that are not performed trustee-to-trustee can be completed as long as the individual moves assets from one account to the other within a 60-day period.  Since it is now early April, an individual who took their RMD in early February or after may be eligible for this option. They would just need to simply make a contribution back into the account for the same amount as the RMD previously taken within 60 days of the distribution.

This suspension of RMDs also applies to beneficiaries who now own an Inherited IRA. Owners of an Inherited IRAs (who took ownership of the account prior to 2020) can stretch distributions from the account over the course of their lifetime. The account owner of an Inherited IRA must take an RMD each year following the year they acquire the account. Unfortunately, there is no way to undo the distribution and place the assets back into the account.

COVID-19 Distributions

The bill also introduced a distribution that can be taken in 2020 from an IRA or employer-sponsored retirement plan in wake of the COVID-19 outbreak. This distribution can be taken for an amount up to $100,000 for individuals that have been affected or impacted in some way financially by the COVID-19 pandemic. Those that are considered impacted by the COVID-19 outbreak must be diagnosed with COVID-19, had a spouse or dependent diagnosed with COVID-19, laid off from work, owned a business that closed or reduced hours during the pandemic, or meet other criteria deemed appropriate by the IRS. A perk to the distribution is that it can be “paid back” over the next three years starting from the date the distribution is taken. This means those that had to take a COVID-19 Distribution will indeed be able to make contributions to that account in excess of normal maximum contribution levels for a three-year period. 

This COVID-19 Distribution will avoid a 10% early withdrawal penalty for those that take the distribution under age 59.5. Another perk to this distribution is that the income can either be reported all in 2020, or spread evenly over three years (2020, 2021, 2022). From a financial planning perspective, spreading the distribution income over three years may be more appropriate for some individuals, as this might keep them in a lower tax bracket and be more efficient in terms of tax savings. For those on Medicare that choose to take the COVID-19 Distribution in 2020, and report all the income in the same year, it may cause their Medicare premiums to increase in 2022 due to a two-year look back period for IRMMA.

Federal Student Loan Payments

Another major change brought forth by the CARES Act is the suspension of Federal student loan payments through September 30, 2020. During this time, interest will not accrue on these loans. Be sure to contact your custodian to ensure automatic payments are suspended. Payments are optional during this time. The great news about this suspension of payments is that borrowers who are in route for student loan forgiveness can still count the suspension period as months of payments towards their forgiveness payment plan.

For a complete look at the bill in its entirety, please visit the following link:

Secure Act Bring Changes to Your Planning

Over the summer of 2019, the House of Representatives passed the bipartisan Setting Every Community Up for Retirement Enhancement (SECURE) Act. On December 19, 2019, the Senate passed the bill, and it was signed into law by the President on December 20, 2019.

The bill affects many Americans and may potentially result in the update of many financial plans here at Longview. The bill is long and covers many areas including the following:

  • Required Minimum Distributions from qualified accounts
  • Contributions to Traditional IRAs past the age of 70.5
  • Changes to the stretch provision in Beneficiary IRA accounts
  • Updates to exceptions of penalties for early distributions from accounts
  • The use of 529 accounts to pay off qualified education loans.

There is a lot to cover! In this post, we’ll cover updates to Required Minimum Distributions (RMDs) from qualified accounts, which include vehicles like Traditional and Rollover IRA as well as 401(K) and 403(B) accounts that are in your name.

Required Minimum Distributions

As many of you are well aware, the magic age of 70 and a half (70.5) signifies the start of Required Minimum Distributions – a time in which you have to distribute a portion of certain types of accounts. The amount distributed is based on the balance of the account at the end of the previous year and a divisor based on your age at the current year. Let’s break that down a little more using Steve as an example:

Steve is 74 as of January 1, 2020, and his birthday is December 2. On December 31, 2019, Steve had an IRA that totaled $1,085,000. With his birthday in December, that means that Steve will be age 75 as of December 31, 2020, which will make his RMD divisor 22.9. So, knowing those two numbers, this is how we determine Steve’s RMD.

$1,085,000/22.9 = $47,379.91

As you can see, Steve must take $47,379.91 by December 31, 2020, and report that distribution as income on his 2020 tax return. Failure to take the distribution means he would face a 50% penalty on the amount in which he failed to distribute. To get a better understanding of what your RMD may look like, check out the IRA Required Minimum Distribution Worksheet from the IRS.

So, what does this have to do with the SECURE Act? RMDs are still the same in that a portion will need to be distributed based on your age in the current year; however, the age in which an individual has to start RMDs is now age 72 but only for those turning 70.5 after December 31, 2019. So, for those born before or on June 30, 1949, sorry, you still have to take Required Minimum Distributions starting at age 70.5.

As for those born on or after July 1, 1949, you will not have to start taking RMDs until you reach age 72. Let’s use Sue as an example as to how the change in the law will work now:

Sue’s birthday is July 11, 1949. In her annual meeting in 2019, Sue’s advisor told her of her upcoming RMDs starting 2020, given the fact that she would not turn age 70.5 until January 11, 2020. With the SECURE Act now in place, her RMD does not have to start until at least 2021, which in turn may present opportunities to consider and implement from both a financial and tax planning perspective.

One thing to note about her first RMD that is very similar to the former distribution rules is that she will not officially have to start taking her RMD until April 1 following the year that she reaches her RMD age. Under the old RMD rules, while she would have turned 70.5 in 2020, her first RMD would technically not have to be taken until April 1, 2021. The only caveat is that she would have to take her 2020 and 2021 distribution both in 2021, which would raise the amount of tax she would have to potentially pay on her 2021 tax return.

With the new RMD rules, Sue doesn’t have to take her first RMD until April 1 in the year following her 72nd birthday, which would be April 1, 2022. Again though, like before, if she did move forward with that, she would need to take both her 2021 and 2022 RMD in 2022 and report both of them on her tax return. Sometimes, this may make sense, but before implementing that, we strongly encourage you to speak with your financial planner before to see if it makes sense from a taxation standpoint, because it could affect not only the taxes paid but also your Medicare premium in future years. 

Qualified Charitable Distributions

For many of our charitably inclined clients, we may make a recommendation for them to complete a Qualified Charitable Distribution (QCD). For those who are unaware of what this is, when an individual reaches age 70.5, they can take their RMD or a portion of it (up to $100,000) and have that money sent directly to a charitable organization. The amount that is contributed by way of QCD is not counted towards any income on the income tax return. This has become even more important over the past couple years with the recent Tax Cut and Jobs Act of 2017, which increased the Standard Deduction, thus for many Americans there isn’t a tax benefit from an itemization standpoint of donating to a charitable organization.

The QCD has created a new way of making charitable donations a de-facto tax benefit. Here’s an example: 

Let’s say that Joe is 75 and has to take an RMD of $50,000. Joe is also charitably inclined and would like to give $10,000 to his favorite charity, but will still take the Standard Deduction on his tax return. With a QCD, Joe can take $10,000 from his RMD, give that directly to the Charitable Organization and then only have to report $40,000 towards his income on the tax return.

The QCD has always coincided with age 70.5 and the RMD age. Going forward, under the SECURE Act, while the beginning RMD age has changed for some, the QCD age will remain at age 70.5, meaning that an individual may have a couple of years to give from their qualified accounts before their RMD start age of 72. This, in turn, not only contributes to the goals for those who would like to give to charity but may also lower future RMDs, thus potentially lowering future tax liability too. As with any distribution strategy from your accounts, please consult with your financial planner to determine the most appropriate action to take that is in line with your goals, as well as provides benefits for you both now and in the future.

Long-Term Care Insurance Premium Increases Expected for 2020

A recent article in Investment News reported that “roughly 40 to 45 states have approved ‘significant premium increases’” on many long-term care insurance policies. Author Greg Iacurci further reports that Genworth “received approval in Q1 to increase premiums an average of 62%.”1 This is nothing new given the premium hikes many policyholders received in 2017 and 2018, but the next round of hikes could be unprecedented. Some policies could see a 200% to 300% increase!

Premium increases will not be immediate. Most providers notify policyholders of the increase when annual premiums are due. So, policyholders may not see a rate hike notification for many months.

According to Genworth2, one of the largest issuers of long-term care insurance policies, “more people are keeping their policies than originally anticipated.” Increased cost to providers is also due in part to longer lifespans and the length of long-term care stays. This has led to an overall increase in claims, thus more money is being paid out by providers, and they are faced with having to cover these unanticipated claims.

Many policyholders will face a tough decision. When premium hikes are implemented, many insurance providers will provide a couple of options. Policyholders can maintain their coverage as is and pay the higher premium, elect a lower premium while cutting back on benefits, or allow the policy to lapse. The option for cutting back on benefits may allow policyholders to adjust their benefits paid amount, decrease their rate of inflation protection, shorten their benefit period, lengthen their elimination period, cancel riders on the policy, or some combination thereof.

John Hancock, may offer another option: elect a co-pay on your long-term care insurance costs. The co-pay would work very similar to the medical insurance co-pay process by allowing the policyholder to pay for a percentage of the expense while the insurance company pays the rest. It is not yet clear if John Hancock will make it available to existing policyholders or if the new co-pay election will only be available to newly issued policies. Given the nature of this new type of offering, state regulators will likely have to approve the option.

Before making a decision, talk to your financial advisor to see how the option fit your plan.

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The Power of Purpose and Meaning in Life

The following article is shared with written permission from author Lydia Denworth. She is a science writer and author of I Can Hear You Whisper: An Intimate Journey through the Science of Sound and Language, an investigation into hearing, sound, brain plasticity and Deaf culture inspired by the discovery that her youngest son was deaf. Her work has appeared in Scientific American MindParentsThe New York Times, The Wall Street JournalNewsweekRedbook and many other publications.  You can visit her website, on Facebook, and Twitter.

The feeling that one’s life has meaning can come from any number of things—from work (paid or unpaid) that feels worthwhile, from cherished relationships, from religious faith or even from regularly appreciating the sunset. While it does not much matter what gives you purpose, it does matter that you find it somewhere. A growing body of research has found that the feeling that one’s life has meaning is associated with a host of positive health outcomes. And now a new study of older adults published in Proceedings of the National Academy of Sciences goes even further by revealing that the sense that one is living a worthwhile life appears to be positively linked to just about every aspect of our lives, not just health. The new study also followed people over time and found that the more worthwhile they found their lives the more positive changes they experienced over the following four years.

“These associations seem quite pervasive, right across a whole spectrum of our experience,” says lead author Andrew Steptoe, a psychologist and epidemiologist at University College London who oversaw the study. “It’s not only related to health but to social functions, psychological and emotional experiences, economic prosperity, things like sleeping well and time spent doing different kinds of activities.”

The paper was part of an ongoing British study of older adults known as the English Longitudinal Study of Aging (ELSA), which Steptoe directs. The new results are based on data from more than 7300 adults over the age of 50 (the mean age was 67.2).  Every two years or so, participants sit for extensive interviews and a series of medical tests. They were asked to rate how worthwhile they felt their lives to be on a scale of one to ten. The average worthwhile rating was 7.41 though ratings were slightly higher in women than in men (7.46 vs 7.35). Importantly, the results are correlational, meaning they show an association between the worthwhile ratings and other aspects of life, but do not necessarily mean that one causes the other.

Nevertheless, the findings suggest that there is something essential about living a meaningful life. On many levels that’s not surprising. The concept of having a purpose in life dates to the Ancient Greeks at least. Contemporary thinking on the subject stems from the 1940s writings of physician Viktor Frankl, who believed that having a purpose in life helped him survive three years in Auschwitz. After the war, Frankl developed a set of 13 questions as a way to measure purpose in life. 

The ELSA study tested the viability of a similar set of questions that have been incorporated into regular surveys by the United Kingdom’s Office of National Statistics, its equivalent of the U.S. Census Bureau. Steptoe believes their strong findings speak to the value of assessing quality of life in this way on a national level.

One of the areas that stood out to Steptoe were the findings about people’s social lives. Higher worthwhile ratings were associated with stronger personal relationships (marriage was important but so was regular contact with friends) and with broader social engagement such as involvement in civic organizations, cultural activity and volunteering. People with high ratings were less likely to be lonely. “I’m struck by the consistency of associations between these feelings [of living a meaningful life] and social and cultural activity,” Steptoe says. “On the other hand, the people who had low ratings tended to spend a lot of time alone. They tend to watch television more and do more passive activities.” He believes the message is clear, particularly for older men and women, that it’s important to remain socially engaged, if at all possible. “It’s encouraging oneself to go out and about and continue to participate in society rather than withdraw from it.”

On the health front, those with higher worthwhile ratings had better mental and physical health. That translated into fewer depressive symptoms, less chronic disease, less chronic pain, and less disability. They also had greater upper body strength, walked, were less obesity, and had more favorable biomarker profiles such as white blood cell count, vitamin D, and high-density lipoprotein cholesterol (the good cholesterol). They engaged in more physical activity, ate more fruits and vegetables, slept better and were less likely to smoke. 

It is possible that strong social connections and good health contribute to people’s sense that their lives have meaning. But Steptoe and his colleague Daisy Fancourt also conducted a longitudinal analysis over four years. They found that people who were low in some measures in 2012 but who had higher worthwhile ratings were more likely to see improvements in those measures by 2016. In other words, someone who was physically inactive at baseline but gave high ratings was more likely to have become regularly active later on than someone with lower ratings. 

“I think it’s a two-way process,” says Steptoe. “The sorts of things we do are going to be influencing these judgments of the purpose and worthwhileness of what we do in life. But those things in turn are going to be either stimulating or inhibiting future activities. It’s a virtuous circle.”

Copyright Lydia Denworth 2019.

2017 Medicare Annual Open Enrollment

It’s the most wonderful time of the year! That’s right, Medicare’s annual Open Enrollment Period (you thought I meant the holidays, didn’t you?) Move over sweater weather, turkey and dressing, and time spent with loved ones. Here we are in the middle of that special time of year when current Medicare enrollees can make changes to their existing coverage for the following year. While the complexities of Medicare have been known to make enrollees feel nuttier than your favorite aunt’s fruitcake, we hope to simplify Open Enrollment for those currently enrolled in Medicare and allow you to ring in 2018 feeling confident in your health care coverage.

What is Open Enrollment?

Medicare’s annual Open Enrollment Period (also referred to as Fall Open Enrollment) extends from October 15th through December 7th and allows enrollees to make changes to their coverage for the coming year.

Changes Allowed During Open Enrollment

The chart below summarizes the coverage changes that are allowed during Open Enrollment. Note that any changes made during Open Enrollment will not become effective until January 1, 2018.

Current Coverage New Coverage
Original Medicare Medicare Advantage
Medicare Advantage Original Medicare
Part D A different Part D plan
Medicare Advantage A different Medicare Advantage plan

If you have been unable to acquire a standalone Part D plan or drug coverage through a Medicare Advantage plan because you did not enroll in drug coverage when you should have, note that during Open Enrollment you can also acquire prescription drug coverage for the first time.

Important: Proceed with caution if you are considering a change from a Medicare Advantage plan to Original Medicare and also plan to enroll in a Medicare Supplement Plan (also referred to as Medigap). Those who enroll in a Medicare Supplement Plan during their initial enrollment period (i.e. within six months of enrolling in Medicare Part B) are allowed to enroll in a Supplement plan without underwriting. However, applying for a Supplement plan after your initial enrollment period has passed could subject you to higher premiums, waiting periods, or a denial of coverage based on pre-existing health conditions.

Reviewing Your Current Coverage

If you have a Medicare Part D or Medicare Advantage Plan, you should have received a Plan Annual Notice of Change from your plan provider in September. The Notice details information about your plan for the coming year, such as changes to premiums, coinsurance, or prescriptions drugs covered under the plan’s formulary. You should review the Notice to understand how changes to the plan will affect you. Even if you feel that your current coverage will continue to meet your needs in the coming year, it may still benefit you to research other available plans. You may find that changes made to another plan would result in even better coverage for you.

Researching Other Plans

Prior to your search, gather information pertinent to your health care needs that will assist you in evaluating other plans. Prepare a list of health care providers, preferred hospital, preferred pharmacy, and drugs that you currently take (including specific drug names, dosage, and frequency).

Medicare’s Plan Finder tool will allow you to search for standalone Part D and Medicare Advantage plans (referred to as Medicare Health Plans on the site) with or without drug coverage that are available in your area. You should also input your specific prescription drug information to identify plans that cover the drugs that you take. When reviewing plans, consider factors such as premiums, deductibles, coinsurance costs, and whether or not your health care providers are included in the plan’s network (if searching for Medicare Advantage Plans).

The Plan Finder will also provide each Part D or Medicare Advantage plan’s star rating out of five stars. The ratings are provided by the Centers for Medicare and Medicaid Services (CMS) and are based on five criteria that include customer service and member experience.

If you identify a plan or plans that may better suit your needs, it is best to contact the plan directly to confirm the information found on the Plan Finder site prior to enrolling. You can enroll in a Medicare Advantage plan or Part D plan via the Plan Finder web site, or via telephone by calling the plan, or by calling Medicare at 800-Medicare (800-633-4227).

Finding Extra Help

You can visit for more information or call Medicare’s toll-free help line at 800-Medicare (800-633-4227) for additional information. Each state also has a State Health Insurance Assistance Program (SHIP) with counselors who are available to provide free, one-on-one assistance to Medicare beneficiaries and their families. Visit to search for contact information for your state’s SHIP.

Next Steps

If you decide not to make any changes to your coverage, you do not have to take any action and will be automatically re-enrolled in the same coverage for next year. If you do decide to change plans, it is not necessary to contact your Medicare Advantage or Part D plan provider or Medicare to notify them that you are cancelling your existing plan. You will be automatically disenrolled in your current Medicare Advantage or Part D plan before your new coverage becomes effective on January 1st, 2018.

What is Fee-Only, Fee-Based, and Commissions?

An October 2017 article published by Wall Street Journal columnist, Jason Zweig, highlighted the growing confusion around the term “Fee-Only” when referring to how financial advisors are compensated. The article, “Some Fee-Only Advisors Charge Commissions Too,” made note of several concerns:

  • Disciplinary actions by the CFP Board of six allegedly Fee-Only advisors who were receiving commissions
  • A 2013 investigation showing 11% of CFP® advisors at brokerage firms receiving commissions while branding themselves as Fee-Only
  • Discrepancies on firm ADVs versus their official brochure materials about their compensation method
  • Advisory firms branding as Fee-Only, when their advisors may not be

Longview wants to make it very clear. Longview Financial Advisors is a 100% Fee-Only firm. Every Longview advisor is a Fee-Only Advisor. We believe this is the most transparent and objective way of serving our clients with fewer conflicts of interest.

With the confusion around terms, what exactly does Fee-Only and Fee-based mean?

What is Fee-Only?

As Zweig noted in the article, Fee-Only has no “official regulatory or legal definition.” Below are a few definitions offered by several credible organizations and sources.

The National Association of Personal Financial Advisors (NAPFA) is the country’s leading professional organization of Fee-Only advisors. NAPFA offers this definition:

Fee-Only financial advisor is one who is compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. Neither Members nor Affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations. “Fee-offset” arrangements, 12b-1 fees, insurance rebates or renewals and wrap fee arrangements that are transaction based are examples of compensation arrangements that do not meet the NAPFA definition of Fee-Only practice.

The CFP Board, governing body for the CERTIFIED FINANCIAL PLANNER™ certification, offers this:

A certificant may describe his or her practice as “fee-only” if, and only if, all of the certificant’s compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage or performance-based fees.

Finally, Forbes contributor, David John Marotta, provides this:

Fee-only financial planners are registered investment advisors with a fiduciary responsibility to act in their clients’ best interest. They do not accept any fees or compensation based on product sales. Fee-only advisors have fewer inherent conflicts of interest, and they generally provide more comprehensive advice.

In a nutshell, a Fee-Only advisor does not sell products. They do not receive commission. There are no trails, kickbacks, referral fees, rewards, lockup periods, or surrender charges of any kind. No compensation is received from mutual fund companies or insurance companies. A Fee-Only financial advisor’s or firm’s compensation is derived directly from their clients. 100%. That’s it.

Furthermore, Fee-Only financial planning goes hand-in-hand with being a fiduciary. A fiduciary standard, when applied to a financial advisor, says the advisor has a legal duty to act in good faith and trust, placing your best interest above that of the advisor or their firm. The advisor is ethically and legally bound to act in this manner. You, as a client, must be made aware of any conflicts of interest that arise.

What is Fee-Based?

The term Fee-Based has muddied the compensation waters, and it is often time used by brokerage and insurance firms. The term sounds very similar to Fee-Only so it’s no wonder consumers are confused by the terminology, but there is a very real difference in Fee-Based vs. Fee-Only.

Fee-Based advisors can receive commissions, and those commissions are often referred to as “fees.” The commissions often come from sales of financial products, such as life insurance, annuities, and load based mutual funds. This creates an inherent conflict of interest. For example, is the product being offered to you the best fit for your financial need? Fee-Based advisors must be transparent in how those fees are received and are still required to act as fiduciaries.

What are Commissions?

A commission is a charge when purchasing an investment or selling a product, such as a mutual fund or annuity. A mutual fund commission is usually referred to as a load, and the load may be assessed when the buy is made (front-end load), when the security is sold (back-end load), or while the security is being held (level-pay load). For example, if buying 100 shares of a mutual fund at a price of $50 with a 4% front-end load fee, the investor would pay 4% of the $5,000 total cost, or $200, to the broker/advisor.

Receiving commissions does not prevent an advisor from acting as a fiduciary, but brokers only have to meet a suitability standard. This means the investment or product only needs to be suitable for the client’s financial need. The advisor only has to reasonably believe that the product meets the need; it does not have to meet the fiduciary standard thus creating an inherent conflict of interest between the broker and client.

In conclusion, there are advisors who fall under each of these three compensation models that act in a fiduciary manner. Unfortunately, there are advisors under each model that also do not honor the fiduciary standard. It’s up to you as the consumer to ask the questions about how your advisor is compensated.


Social Security Changes: How Do They Affect You?

In the previous two blog posts, Jeff Cedarholm shared his view on the changing investment landscape. Today’s post is focused on the changing landscape of Social Security. The expected lower market returns over the next 5-10 years and the changes to Social Security will make financial planning as important as it has ever been.  These changes don’t just affect those already receiving Social Security benefits; they affect anyone who will qualify for Social Security at some point in the future.

So what is new with Social Security and what does it mean for you?

By now, you’ve probably heard the concern over the sustainability of Social Security for the long term. It has been a subject well discussed and documented, especially over the last several years. In the summary of the 2015 annual trustees report for Social Security and Medicare programs1, the public is warned that given the current trajectory, Social Security reserves will run out in 2034. Based on this report, there are currently enough reserves that the interest earned on those reserves will continue to cover the difference between the employment tax that is brought in each year and the amount of benefits paid out each year until 2019. At that time, the reserves will have to be used toward the deficit. That is, until they run out in 2034. Once the reserves are gone, it is estimated that employment tax income will be sufficient to cover around 75% of expenses. After years of kicking the proverbial can down the road, the government decided in 2015 to take action to begin to improve the long term outlook for the Social Security program.

Insert the Bipartisan Budget Act of 20152 passed in November 2015. This act includes language that changes three filing strategies for Social Security, lowering future costs for the program, and reducing potential future benefits for many. While this certainly should not be considered a cure-all for the Social Security program, and the actual long term effects are still unknown, this is an indication that the government is looking at ways to lower future liabilities and improve the sustainability of the program. Let’s take a closer look at the changes:

  1. File-and-Suspend: This filing strategy allows a spouse to file for benefits at his/her full retirement age, which is currently 66, so that the spouse can obtain a spousal benefit. The taxpayer would then suspend his/her benefits, allowing for deferral until age 70. The taxpayer’s Social Security benefit would grow by 8% for each year of deferral between full retirement age and 70.

Let’s look at an example:

Assume that Sam and Sally are both 66. Sam has a higher benefit.  In order to maximize their benefits, Sam could file for his benefit, giving Sally the opportunity to file for her spousal benefit (half of Sam’s benefit), and then Sam could suspend his benefit, deferring it until age 70. This could result in Sam’s benefit at age 66 of $1800/month increasing to $2376/month at age 70. Using this strategy, Sally could receive $900/month in benefits based on Sam’s record versus her benefit of $750/mo. Using this strategy, they would be able to receive more benefit than they would have if Sally had just claimed her benefit and Sam had postponed his benefit or had taken it at full retirement age.

With the changes in the law, the file-and-suspend strategy can no longer be used after April 30, 2016. Instead, a taxpayer must file and receive benefits in order for the spousal benefit to be available.

  • Restricted Application: Filing a restricted application allows a taxpayer who has reached full retirement age to file for spousal benefits without filing for his/her own benefits. The taxpayer can then delay his/her benefits to age 70, allowing for an increase of 8% a year.

Let’s look at an example:

Tom is 68 and Jane is 66. Tom began taking his Social Security benefit of $1600/month at age 66. Jane could file a restricted application at age 66 to claim spousal benefits of $800/month and allow her benefit to continue to grow until she reaches age 70. If her benefit was $1900/month, she would begin receiving a benefit of $2,508/month at 70 after receiving $800/month for 4 years.

The restricted application strategy is still available for anyone who turned 62 by December 31st, 2015. Anyone who is 62 or older after December 31st, 2015 will be limited to the deemed filing rule, which states that you are applying for any benefits for which you qualify. This means that an individual cannot restrict their benefits to allow for growth, but instead would receive the higher of his/her personal benefit or the spousal benefit at the time of filing.

  • Lump-sum payout of suspended benefits: Before the 2015 Budget Act took effect, an individual who chose to file and suspend could request a lump sum payout of all of the suspended benefits instead of opting for the 8% increase in benefit between full retirement age and age 70. This do-over might prove to be a good option for someone who, after deciding to delay benefits, found out that he/she had an illness or other factor that may shorten their life or require a large sum of money. 

Taxpayers can still unsuspend benefits. The taxpayer’s benefit will be increased for the higher rate applicable for delaying past their full retirement age. However, the taxpayer no longer has the option to choose to receive the lump sum payout of the benefits accrued between full retirement age and the unsuspension age.

Let’s look at an example:

Sam decides to postpone his benefit and uses the file and suspend strategy. At age 68, he is told he has an illness that will shorten his life considerably and result in additional medical expenses of $15,000/year. Before the Budget Act of 2015, Sam could have received the accrual of his benefits between ages 66 and 68, an amount of $43,200, and started his Social Security payment, which would have been the payment he qualified for at age 66 – $1800/mo. That lump sum could be used to help pay for his increased expenses. Now, if Sam unsuspends his benefits at 68, he will be limited to just receiving his monthly Social Security benefit. The benefit will be indexed for the 2 years of deferral. So a payment of $1800/month at age 66 would now be $2088/month, but there would not be a lump sum payout.

(Please note this reinstatement of benefits is for the full time between age 66 and 68 because Sam chose to file and suspend. Simply delaying benefits without using the file and suspend strategy would have resulted in only 6 months of a retroactive benefit.)

Your view of this law change will likely depend upon your age. The closer you are to your Social Security full retirement age, the larger the pill may be to swallow. For those who are 50 or younger, the change may seem more attractive because the current forecast for reserve funds isn’t great enough to cover 100% of your projected Social Security payment at normal retirement age anyway. Regardless of your age and your view, it does affect you in some way.  As of now, there are still opportunities for those between the ages of 62-66 to be grandfathered in under the old law for the restricted application and file-and-suspend strategies. Those under 62 should focus on ways to maximize benefits under the new law. One of the easiest ways to do this is to plan on postponing benefits until age 70. Doing this still results in an 8%/year increase in benefits.

This is an area where we help clients. We are currently in the process of reviewing options and possible recommendation changes for our clients who are 62 and older and are not currently receiving Social Security benefits.

1 The 2015 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. House Document 114-51. 22 July 2015. Act of 2015. Pub. L. 114-74. 2 Nov. 2015.

Retirement and the Risks to Consider

Within the last month, we have had two meetings with new clients each of which are planning for retirement. Like many of our clients, neither of the two knew when retirement would begin. At our first meeting, as we discussed risks – specifically investment risks – one of the clients asked “So, how much risk do we need to take in retirement?” While we always complete their planning before providing a specific answer, the general response given to our new clients who ask the question is that you should only take as much risk needed to accomplish your short- and long-term goals. Usually their response guides us into a discussion about what those goals are which will serve as the framework of a customized ongoing plan.

The zinger really came in the second meeting when our client asked “So, what are the risks you see for us in retirement?”  This time I didn’t answer in order to gather my thoughts.  After some time to think, I have concluded that there are many, but four seem to more prominent than others. They are:  

Longevity Risk – Most people imagine their life in retirement at least as good as in their working years, including being economically as well off.  With Social Security and pension income, we know that clients can maintain a fixed source of income, but their lifestyle could suffer greatly if the steady capital inflow from their investments is eroded over time. In our initial planning process, we project lifespans out between 20 – 30 years and much will happen during that time!  The risk is that with ever better nutrition and medical care, retirement lifespans could last well beyond those projections and beyond that investment income.

Healthcare Costs – As a parallel to longevity risk, healthcare costs will continue to rise as we breeze through retirement.  Even if we don’t consider the high rate of healthcare inflation, it is estimated that most retirees will spend between $250,000 and $300,000 on health related expenses, including the cost of long-term care (or the insurance to offset that care).

Investment Risk – Many of the gurus in our profession are preaching of a future with lower returns than have been the average since 1982.  Even though we have had a bull market over the last five years, it has certainly been a reluctant bull.  And after last year’s gains, it appears the market has stolen returns from future years.  With stocks a little on the high side and bonds being very expensive, it is hard to see what will drive returns to their long term averages of 8 -9% over the next 20 years.  Add to that the conundrum of the massive number of baby boomers retiring and the outlook becomes pretty murky, at least based on our historical perspective.

Finally, as I said in the beginning, there are many financial risks for retirees to ponder.  However, the sneaky one, the one few consider is the risk of not enjoying retirement to its fullest because you are worried about all the other risks. A good spending plan, appropriate investing, and ongoing monitoring will go a long way towards mitigating all of these risks.

Retire with Purpose

“When would you like to retire?”

It is one of those questions we always ask when we begin working with a client and it is a question that is revisited throughout the relationship. Why wouldn’t it be? It is the one of the primary determinants of whether or not an individual will have enough assets to live on for the rest of his/her life.  But did you know it is also a possible determinant of how long a person may live?  According to a 2001 Social Security Administration Division of Economic Research paper, men who retire early (before age 65) also have a higher mortality risk. This is just one of several studies that indicate that early retirement could lead to a sooner death.

One debated cause of this linkage is that people don’t make plans for their life after retirement. Americans spend about 25% of a year at work or completing work-related tasks. That’s a large hole to fill at retirement and that honey-to-do list will only last for so long. So, if you are near retirement or thinking about retirement, remember to ask yourself, what do I want to do with the rest of my life? What makes me happy? What will keep my body and mind engaged? For some, the answer will come very naturally. For others, especially for those who have been very focused on their career, the answer to this question is a little more difficult.

Below, I’ve addressed five options that some of our clients have tried and how you may start planning for your new best life in retirement.

  1. Travel: Many of our clients immediately reply with “travel” when asked about their retirement plans. Some choose to make their own travel plans and travel with a spouse or family members, but we’ve also found that many participate in group tours. There are many group tours available, but if you are interested in going with a local group, check with your local senior center, art museum, ski club, country club or other interest group. This tactic not only will help you identify trips that you would most enjoy, but also help you meet new friends. Remember, relationships are an important part of living a long, happy life!
  • Hobbies:  Fill in the blank: I’ve always wanted to try___________________. Start there! Whether it is gardening, bird watching, knitting, woodworking, or some other hobby, almost everyone can fill this blank with something. There are lots of opportunities in your local community to participate in your new hobby; you just need to determine what interests you most.  Try a Google search or talk to a friend.
  • New career: For those who have truly made a career out of something they love, it is natural for them to begin to think of ways to grow in that career upon retirement. For others, a new and fresh idea is exactly what is needed.  Need help in creating a new business? Try a local small business development center, a women’s business center, or chamber of commerce for help.
  • Take a class:  I recently attended a conference and one of the speakers was a Stanford professor who specializes in aging and longevity. One very interesting point she mentioned in her presentation was that on average, life expectancy is increasing. In fact, she said that the majority of Americans born after 2000 will live to be 100 or older. She went on to say that as people live longer, dementia will become the number one health concern. While there isn’t much we can do about our own genetics, there is a lot we can do to stay mentally sharp for as long as possible. Taking a class in retirement is one way to do this. Local universities and senior centers are often great places to look for classes. Some libraries, like the Huntsville Public Library, also offer lifetime learning classes.
  • Volunteer: Volunteering is a great way to give back to the community and address interests you’ve always had but never found the time to focus on. There are many opportunities in your community. Most communities have some sort of volunteer center. For example, The Volunteer Center of Madison County and the Retired & Senior Program (RSVP) of Etowah County are agencies that act as a clearing house for all volunteer activities in the community. These types of organizations can link volunteers to the right non-profits. Nationally, the Senior Corps program of the Corporation for National and Community Service has been in existence since the early 60’s and acts as a center to train and guide volunteers toward specific projects that best suit their interests and talents.

Retirement is a big transition, and it isn’t just a transition out of a career, it is a transition into a new life.  So, think big! This is your opportunity to try something new or that one thing that you’ve always wanted to do.

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