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Archive for the ‘Employment Benefits’ Category

Like a deer caught in headlights, individuals faced with too many choices in their company-sponsored plan freeze up and may end up taking no action for their retirement.  They may end up making costly choices – or worse, no choices – for their retirement savings dollars.

Common costly choices typically include buying too much company stock or a mutual fund representing the same industry of the employer or loading up on small cap or growth stocks and avoiding bonds.  Even young investors (under age 30) have as high a probability as older workers of not choosing any equity funds and only choosing a money market or bond fund for the bulk of their retirement savings.

Recent research completed by Columbia Business School and the University of Chicago Booth School of Business indicates that workers who are faced with too many investment options end up making decisions that can adversely impact their retirement.  Often individuals will either make asset allocations that are unbalanced or choose to do nothing and leave their savings in cash and money markets.

This research highlights the need for individuals to seek out help from professionals who can offer guidance in allocation and rebalancing decisions.

Unfortunately, company sponsors do not have the staff, time or resources to provide this type of service.  And sponsors – who are indeed acting as trustees for the participants in their plans – may simply believe that they are “all set” because the investment firm offering the investment menu can provide the needed help through their toll-free customer service lines or websites.

People need tailored help and guidance which is not something that either employers or investment firms are prepared to offer.

While not discussed specifically in this study, the increased use of auto-enrollment in company plans and Target Date funds has helped.  At least individuals are “paying themselves first” by employers automatically enrolling them.  And target date funds can at least offer a glide path with preset rebalancing decisions to the asset allocation mix.

But these one-size fits all solutions may not be best for everyone.  This is where a fiduciary adviser can help out.

And this is why Clear View Wealth Advisors offers customized help for plan participants.  Through one of my flat fee financial planning programs, individuals can receive customized help in choosing a proper mix of funds from among the plan choices and receive guidance on periodic rebalancing actions.

To see details of the benefits study, go to www.BenefitNews.com or click here.

Help with Retirement Planning or 401ks is a Click Away with Clear View

Get Personal Help with Your Retirement Plan Choices

 

 

Retirement Plan Helpline:  978-388-0020

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It’s easy to get tripped up in retirement.  I’m reminded of the expression by the octogenarian to the recent newlywed fretting about life but rejecting out of hand the advice of his experienced senior:

A long time ago I was where you are now.  And later you’ll be where I am now.  But just as you haven’t been your age before, I’ve never been old before.

So for new retirees who “not been there or done that” it’s a whole new world filled with possibility and pitfalls.

Transitioning

Most retirees have an imperfect vision of retirement at best.  And if it hasn’t been discussed or communicated, it could be vastly different from that of your spouse.

Finding meaning in a post-work world can be a real challenge.  If your identity has been wrapped up in what you do, then you might now feel lost.  Your social networks might change.  Your activities might change.

It’s important to reassess your values and envision how you want to live in this next chapter of your life.

Initially, there may be more travel to visit family, friends or places.  You may want to tackle that “bucket list.”

But to live a truly fulfilling and rewarding retirement may require you to take stock in yourself, your values and what gives you meaning.  You may benefit from working with a professional transition coach or group that can help guide you through this period of rediscovery.  One such resource can be found here at the Successful Transition Planning Institute.

Lifestyle Budget

Typically, most retirees may take the rule of thumb bandied about that you will need from 60% to 70% of your pre-retirement income to live on in a post-retirement world.  This is because it is assumed that many expenses will drop off:  business wardrobe, commuting to work, professional memberships, housing, new cars, etc.

The reality is far different.  According to research conducted by the Fidelity Research Institute 2007 Retirement Index, more than two-thirds of retirees spent the same or higher in retirement.  Only eight percent spend significantly lower and about 25% spend somewhat lower. The Employee Benefit Research Institute  reported in its 2010 Retirement Confidence Survey that while 60% of workers expected to more than half of retirees didn’t see a drop in retirement expenditures while 26% of this group reported that their spending actually rose.

It all depends on your goals, lifestyle and what curve balls life throws at you.  If you have adult children who end up in a financial crisis of their own caused by job loss, health issues or divorce, you may be spending more than you expected to help out. Maybe the home you live in will require higher outlays for maintenance or to upgrade the home so you can live there independently. In reality all of that travel and doing things on your bucket list will cost money, too.  So it’s more the rule than the exception to expect spending to increase while you’re still healthy to get up and go.

Over time, the travel bug and other activities will probably decline but even after that these may be replaced by other expenses.

Healthcare

There is an old saying that as you get older you have more doctors than friends.  This is a sad reality for many including my parents.

My father is on dialysis and has complications from diabetes.  His treatments probably cost Medicare (and ultimately the US taxpayer) more than $30,000 each quarter as I figure it.  He takes about 13 prescriptions each day and enters the dreaded “donut hole” about mid-year each year. At one time their former employers (a Fortune 500 company) provided medical insurance benefits to retirees but that became more and more cost prohibitive for their employer and for my parents as premiums, co-pays and deductibles rose.  So now they rely on a combination of Medicare and Blue Cross/Blue Shield and a state program called Prescription Advantage.

As private employers and cash-strapped state and municipal governments tackle the issue, you can expect to pay more for your health care in retirement.

Wealth Illusion

It’s not uncommon to feel really rich when you look at your retirement account statements.  (Sure, the balances are off where they may have been at the peak but it’s probably still a large pot of money). The big problem is that retirees may have no comprehension about how long that pot of money will last or how to turn it into a steady paycheck for retirement.

In reality the $500,000 in your 401k or IRA accounts may only provide $20,000 per year if you plan on withdrawing no more than 4% of the account’s balance each year. Then again if you take out more early on in retirement, you could be at risk of depleting your resources quickly.

Misplaced Risk Aversion & The Impact of Inflation

So as you get older, you’ll be tempted to follow the rule of thumb that more of your investments need to be in bonds. Although this may seem to be a conservative approach to investing, it is in fact risky.

Setting aside that this ignores the risks that bonds themselves carry, it is ignoring the simple fact that inflation eats away at your purchasing power.  Even in a tame inflationary world with 1% annual inflation, a couple spending about $80,000 a year when they are 65 will need over $88,000 a year just to buy the same level of goods and services when they turn 75.  Given the potential for higher inflation in the future that may result from a growing economy and/or current monetary policy, investments need to be positioned to hedge against inflation with a diverse allocation into stocks and not just bonds even when in retirement.

The other risk is trying to play catch up.  As a retiree sees the balances on his accounts get drawn down, he might even be tempted to “shoot for the moon” by investing in illiquid investments like stocks in small, thinly traded markets or in sectors that are very speculative.

Ball games are one by base hits and consistency on the field and at the plate.  Home runs are dramatic but not a sure thing.

Underestimating How Long You’ll Live

We all want a long and productive life.  Many will even say that they don’t want to live to be a burden to their families.  But here again the reality is that most folks do a bad job of guessing how long they’ll live.  A report by the Society of Actuaries notes that 29% of retirees and pre-retirees estimate that they’ll outline the averages but in fact there is a 50% chance of outliving them.

So while they may have enough resources to carry them through the average life expectancy, they will not have enough when they live longer than the averages. And if a couple attains the age of 65, there is a better than 50% chance that at least one of them will live into their 90s.

Given the fact that most women become widows at the age of 53 (Journal of Financial Planning, Nov. 2010), this has a big impact on the availability of resources for retirement.  Too often, a short-sighted approach to maximize current retirement income from a pension is to choose the option that pays the highest but stops when one spouse dies. All too often this puts the widow who may live longer without a reliable source of income to provide for her.

Conclusion

Too often people underestimate how long they will live in retirement, how much they will actually need for living in retirement and how to invest for a sustainable retirement paycheck using appropriate product, asset and tax diversification.

Many people do not save enough for their own retirement.  The social safety net providing support for old age income and healthcare may not be enough to maintain a desired lifestyle.  Women need to understand the risk of living long into retirement and manage resources accordingly.  And because more than 40% of Americans are at risk of retiring earlier than expected because of job loss, family care needs or personal health, there is a real need for proper planning to address these issues.

While retirees will benefit from having a good plan and road map before the final paycheck ends, it’s never too late to start. And for the newly retired with the time to address these issues, now’s as good a time as any to speak to a qualified professional who can help.

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November is around the corner. Besides worrying about turkey dinners and seating arrangements for Thanksgiving, it’s that time of year again to review your health care options.

If you’re retiring, already retired or have an elder parent in this category, you should get familiar with the options available for health coverage.  Since most health care dollars are used by seniors for doctors, medical services and prescriptions, it’s important to get this right to avoid burning a hole in your pocket.

Most seniors are familiar with Medicare.  For a small monthly premium, the government-managed plan will cover a range of medical and doctor services.  This is usually through Medicare Parts A and B.  Some seniors also enroll in Medicare Part D (for Drugs or for Donut hole) which covers the cost for prescriptions (at least those outside of the dreaded donut hole.

Medicare Advantage (MA) is Medicare Part C.   These are plans offered by private insurance companies and are approved with Medicare to provide consumers with all Medicare services. The government pays the insurer a set amount to provide the services of Medicare Parts A and B.  Many of these plans also offer drug coverage.  In this combination, you will not need to buy separate drug plans or a Medicare supplement known as MediGap.

Beginning now and going through December 31, you (or your parents) have an opportunity to enroll or change coverage.

Things to Consider

  • Medicare Advantage May Cost Less:  These plans must cover the same services that traditional Medicare offers.  In many cases, there are additional services offered in Medicare Advantage.  Usually this includes vision and dental coverage. The premium for many plans averages around $40 per month which is less than the $96.40 for standard Medicare Part B.
  • There are restrictions: Some plans offer extra services that you may never use (such as gym memberships).  These plans operate like HMOs or PPOs and require that you follow the rules about referrals from your Primary Care Physician (PCP) or using doctors, labs and hospitals that are within the network.  Otherwise, you could be responsible for higher out-of-pocket costs.
  • Compare plans: Use the services available at www.medicare.gov and click on “Compare Health Plans.” If you’re considering a plan that includes drug coverage, it’s helpful to have a list of your prescriptions and the formulary from your current Part D provider available to help with the comparison.
  • Health Care Reform: One of the ways that the government expects to pay for health care reform is by reducing the amounts that are paid out to Medicare Advantage plan sponsors which have typically been receiving an average of 14% more for each enrolled beneficiary than it costs using traditional Medicare.  While this may impact future services offered by some MA providers, your coverage cannot change in mid-year no matter what.  And you can always re-enroll with a traditional plan at the next annual enrollment period.
  • Restrictions for Those with Kidney Disease and Using Dialysis: If you have end-stage renal disease (ESRD), you typically cannot join a Medicare Advantage plan.  There are exceptions for those who have been enrolled in a MA before diagnosis.
  • Remember What’s Not Covered: Long-term care or “custodial care” is not covered by Medicare and most health insurance plans.  If you’re living abroad, Medicare will not cover you either. Under limited circumstances, it may pay for medical services while you are traveling.  You should check with the Medicare resources website at www.medicare.gov.

For more help on this topic, send me an email (steve@ClearViewWealthAdvisors.com) or call 617-398-7494.

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Both dependent care and medical flexible spending accounts are funded with pre-tax deductions from your paycheck. Both have a “use or lose” policy if the funds deducted are not used in the calendar year for which the election was made.

Typically, a person can only make the election to have these deductions taken at the time of their hiring or during the annual enrollment period every company offers for their employees to make changes to their health and welfare benefits. (There are other times as well during certain “life events” such as marraige or birth of a child when benefit elections can also be changed.)

Since the election to make these deductions are made for a full year, one must be very cautious about the amount chosen. If you don’t use the funds towards eligible expenses in the time period allowed, you cannot get the money back.

For those with young children or elder parents needing day care, the dependent care FSA can be useful.  The maximum amount that can be set aside is pegged at $5,000 each year. With the costs of child care and adult day care being what they are, it is not likely that an employee will end up not using the full amount set aside so maxing out makes sense.

However, the dependent care program only allows a person to receive funds already in their FSA account, regardless of how much the person has already paid out in dependent care expenses. For example, if a person elects the $5,000 maximum to be withdrawn over the course of the year, after 3 months there is only $1,250 in the account. Even though the person has already paid more than that to the child care provider, they can only receive the balance.

With the medical flexible spending account, however, a person can be reimbursed at any time during the year up to the annual
amount elected to have withdrawn
.  Thus, the person can receive funds from the FSA prior to the funds actually having been withdrawn from their paycheck.

Let’s assume you know you are going to have a surgical procedure in January and your cost will be about $5,000, so you elect to have $5,000 deducted towards the medical FSA during the open enrollment period. In February, you pay your $5,000 portion. Even though you have only about $800+ in your FSA account, you can submit a reimbursement claim for the full $5,000 that you paid out.

It is prudent to review what your expected medical expenses may be in the upcoming year, verify that they are eligible FSA expenses with your employer’s FSA administrator, and then make the election. It can’t hurt to underestimate, so you may have to pay some expenses with after tax dollars, but that’s still much better than giving away money because you overestimated and you lose what you had deducted and not used.

Some examples for using a medical FSA are when you incur orthodontia expenses and dental procedures for which you have a high deductible and/or co-pay. Regular doctor office visit co-pays, which are not usually exceptionally expensive, are eligible for FSA reimbursement. If you go often enough, even saving a few tax dollars can be beneficial.

Using the FSA is a great tool to enforce a disciplined savings program to cover expenses that are expected to be incurred anyway during the year.  And by doing it through a tax-deferred program at work, you’re ultimately reducing the cost by your marginal income tax rate so that your savings stretch out to buy you more services. (For someone in the 20% marginal tax bracket, for example, one would have to earn $1.25 to have enough cash to pay for $1.00 of services after the impact of taxes.)

By taking some time to project your personal expenses, you can ultimately benefit with Uncle Sam’s help.

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