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Our Investment Philosophy

investingOne of the most important parts of your overall financial plan is the investment plan. The investment plan is made up of three distinct parts: present value, projection of future inflows and outflows, and allocation. It is allocation that we’re most interested in with this article.

Allocation is the process of determining the “mix” of your investment assets: stocks, bonds, real estate, etc. as well as domestic and international categories. Allocation is determined by the philosophy that you choose to follow with regard to investment management. Our philosophy is summed up as follows:

  • Diversify
  • Reduce Costs
  • Pay Attention to Economic Signals
  • Maintain Discipline – Stick To Your Plan

Now, there are three primary schools of thought that are often relied upon to develop an Investment Philosophy: technical analysis, fundamental analysis, efficient markets hypothesis.

Technical Analysis is the review of charts of stocks and funds, with the belief that patterns within the action of a stock can provide insight into the future actions that the stock will experience. The theory is that investor behavior can be predicted based upon volume and stock price fluctuations, and given the prediction of this behavior, Technical Analysts purportedly take advantage of “knowing” what the future will bring. I’ve always likened Technical Analysis to palm reading…

Fundamental Analysis is where the data about a stock – the price-earnings ratio, expected growth rates, earnings projections, etc. – is studied in order to determine the “correct” price intrinsic within the stock. This intrinsic value is then compared to the trading value (present price) of the stock, and if the intrinsic value is higher than the trading value, this represents a buying situation; a selling opportunity exists if the intrinsic value is lower than the current price.

The third school of thought, Efficient Markets Hypothesis (EMH), explains away the benefits supposed by the Fundamental Analysis theory. With EMH, as the name implies, it is assumed that the market itself is very efficient with regard to the dissemination of information. In other words, when a piece of new information is made available about a stock, that information is quickly and efficiently spread to all interested parties, allowing for little, if any, opportunity for arbitrage. In today’s connected world, this spreading of information occurs at the speed of light.

For example, let’s say that Acme Motor Company is coming out with a new model of car, widely expected to be the savior for the company. As a result, Acme stock is highly valued, compared to recent history, in anticipation of this new model. During the testing of this new model, it has been determined that there are serious flaws in the design – turns out using aluminum foil for the engine block wasn’t such a good idea – and now the new model will not only be drastically delayed, it may be canceled altogether. If this new information were known only to a select few (outside the company), then those folks could take advantage of the situation, and short-sell the stock in anticipation of it’s expected fall in value. The Efficient Markets Hypothesis takes the stance that this kind of information is spread SO quickly that the opportunity for arbitrage is effectively wiped out.

So that explains how EMH addresses Fundamental Analysis – how does this help build our investing philosophy? How does the investor take advantage of the marketplace to their benefit? To answer these questions, we first need to take a walk – a Random Walk, specifically. “A Random Walk Down Wall Street”, by Burton Malkiel, first published in 1973 and now in its Ninth Edition, describes the activity of the stock market as a “Random Walk”. This is due to the observation that short-run changes in stock prices cannot be predicted, but rather are quite random.

Let me say that again: Short-run changes in stock prices cannot be predicted, but rather are quite random. It is for this reason that I often don’t pay much attention to the day-to-day fluctuations in the Dow or the S&P 500 – what I’m more interested in is the long-run direction of the market, which is illustrated by some very sound statistics. Specifically, I pay attention to the broad views of the domestic and world economies, including manufacturing, GDP, and jobs information; interest rates and inflation; as well as money supply and market valuations (for example, the forward view of price-earnings ratios of the broad indexes), among other things.

Against this backdrop of factors, the present momentum of the markets is also considered, since it is more likely that the market will continue in the direction that it has maintained over the previous 18 to 24 months than not.

So, how does all of this fit together? Let’s look at the four points of our investment philosophy again:

  • Diversify – by utilizing broad market indexes, covering all points of the marketplace both domestic and international as well as fixed income and equities, we are automatically diversifying across market capitalization, company, industry, and country. It just doesn’t make sense to choose a narrow band of investments when you can take part in the success of the overall economy – the global economy.
  • Reduce Costs – index mutual funds are the most cost-efficient investment vehicle in the industry. Expense ratios are well below 0.5% for most of these investments and often is less than 0.1%. In addition, Exchange Traded Funds (ETFs) are also the most tax-efficient investment options available that invest in the unrestricted equity and bond markets.
  • Pay Attention to Economic Signals – when viewing forward-looking economic conditions, it is necessary to context the various signals together, considering the impact on your present investment elections. As indicated previously, short-run trends are difficult if not impossible to predict, but longer-run trends tend to have certain signals that indicate they’re on the horizon. Paying close attention to these signals can help with long-term decision making with regard to your investments.
  • Maintain Discipline – Stick to Your Plan – this goes hand-in-hand with the view that short-run trends cannot be predicted. In addition, short-run trends typically have little impact on the overall investment plan, provided that you maintain discipline and do not stray from the plan. The worst thing you could do is panic in a short-run market action and abandon your plan. The whole point of having a plan is to help you to get through those panicky times with confidence.


What Do Minimums Really Mean?

bite-out-of-money1-300x2241Some financial planning firms require clients to have a certain amount of money before the firm will work with them. Common minimums may range from $250,000 to over $1 million. Generally the reason why firms have minimums is to either attract a certain clientele, provide economies of scale or both. But what do minimums really mean?

To answer that question, think of it this way. Is a minimum really saying “You’re not important until you have a certain amount of money to invest.”? Additionally, is the firm really concerned about their clients if the firm has minimums? It would appear that they are more concerned with money first, clients second.

Granted, I may be being a little hard on firms that have minimums. But what about the folks just starting out? Who is teaching them how to get to their first $250,000? How do they become educated to increase their savings and bring their investments into the six and seven figure range? Once they achieve a certain threshold are they now worthy of the firm’s advice?

Some potential ways to avoid this conflict (yes, it is a conflict of interest) are for individuals to look for fee-only firms that also (or only) charge by the hour.  This way the individuals can still receive advice and education on how to grow their nest egg (if that’s the goal) without worrying that they don’t have enough assets to qualify as clients.

Additionally, individuals should inquire as to the value they are getting (this is true even for those clients working with firms that have minimums). If what they’re being charged for only includes investment advice and management, they should consider looking elsewhere. Firms charging for both investment management and financial planning advice are “double dipping” and arguably over-charging their clients – another conflict of interest.

Finally, both individuals and firms should look at the fees they are charging. For investment management anything over 2 percent of assets under management (AUM) is ludicrous. Even pushing 2 percent is high. Generally, firms and clients should be around 1.5 percent at the highest, and lower if possible. Think of it this way, a firm may be fee-only, but a 1.5 percent charge for money management still reduces returns by that amount (not including fund expenses).

Another way to look at it is this: 1.5 percent of $1 million is $15,000 annually. This amount is more on higher amounts invested. The value must justify the cost.

Inter-Family Loan Topics

familyOften, the topic of Inter-Family Loans comes up in my discussions with clients. Many times a parent wishes to help out a child with the purchase of a home, or some other financial goal – but they don’t want to just hand over the money with no responsibility attached. Inter-family loans can be a good way to approach this topic – the child continues to have fiscal responsibility, and the parent is able to earn a bit on the loan, while still feeling as if they’re in a “helping” position with the child. Below are a few items to think about, along with the additional topic of co-signing loans with family members.

Should I lend money to a family member?
Lending money to a family member may seem like the right thing to do. After all, what could go wrong? Your son, sister, father, or cousin really needs your help, and there’s no question that he or she will pay you back.

Or is there? Lending money to anyone, even someone you trust, is risky. No matter how well-intentioned the borrower is, there’s always the chance that he or she won’t be able to pay you back, or will prioritize other debts above yours.

When deciding, consider these tips:

  • Don’t lend money you can’t afford to lose. If you make the loan, will you still be able to meet your savings goals? If the loan isn’t paid back, will the financial effect be negligible or substantial?
  • Avoid becoming an ATM. Relatives (especially your children) may ask you for a loan because it’s convenient, but they may be able to obtain the money easily elsewhere. Explore other options with them first.
  • Think through the emotional consequences. Will you be able to forgive and forget if loan payments are sporadic or if the loan isn’t paid in full? How hurt will you be if your relative freely spends money (on a vacation, for example) before paying you back?

If you decide to go through with the loan, make sure expectations on both sides are clear. Discuss all terms and conditions and consider putting them in writing. You may even want to draft a formal loan agreement. At the very least, settle on the amount of each loan payment and the date by which the loan must be paid in full. Open-ended obligations inevitably lead to misunderstandings.

On the other hand, don’t feel guilty if you decide to turn down your family member’s loan request. It’s hard to say no, but it’s still easier than repairing a damaged relationship if things don’t work out.

Is it a good idea to cosign a loan?
At some point, you may be asked to cosign a loan for a friend or relative who is unable to qualify for one independently. While it’s noble to want to help someone you care about, think carefully about the consequences. Some people readily agree to cosign a loan because they believe it won’t affect their own finances, but unfortunately, that’s not the case.

When you cosign a loan, you’re guaranteeing the debt. The lender requests a cosigner because they want more than the primary borrower to be responsible for the payments – so a cosigner becomes responsible in the event the primary borrower doesn’t pay. Legally speaking, this means that you’re equally responsible for paying back the loan. If the primary borrower misses a payment, the lender can ask you to make the payment instead. If the borrower defaults on the loan, you may have to pay off the outstanding loan balance as well as cover late fees and collection costs, if any. In many states, creditors can even try to collect the debt from you before trying to collect from the borrower.

You should also keep in mind that when you cosign a loan, it becomes part of your credit history and may negatively affect your ability to get credit if the borrower makes late payments or defaults on the loan. And when you apply for credit, lenders will generally include the monthly payment for the cosigned loan when calculating your debt-to-income ratio, even though you’re not the primary borrower. This ratio is one of the most important factors lenders use when making credit decisions, so the outstanding loan debt could make it harder for you to obtain a mortgage, buy a car, or secure a line of credit.

Cosigning a loan is risky enough that the federal government requires creditors to issue a notice to all cosigners that explains their obligations. If, after careful consideration, you decide to cosign a loan, make sure you also get copies of the loan contract and the Truth-In-Lending Disclosure and thoroughly read them. Monitor the loan as closely as possible (you may want to ask the loan officer to contact you in writing if the borrower misses a payment), and occasionally review your credit report so that there are no unfortunate surprises down the road.

Buy Term and Invest the Difference?

3503494291_651161974f_nA topic often argued in the financial service world, especially in the life insurance sector, is whether or not an individual should buy term and invest the difference or buy a cash value life insurance policy. How this argument generally goes is on one side you’ll have someone arguing that an individual should buy a cash value life insurance policy. This individual (generally a commissioned salesperson) will argue that buying a cash value life insurance policy (such as whole life) is a better option for a client since it generates cash value over time and “forces” the client to save. Often they’ll argue that the client wouldn’t save for retirement otherwise.

On the flip side of that argument you’ll have someone (perhaps from our office) suggest the client should buy term life insurance and invest the difference in price from the whole life policy and the term life policy in a qualified savings plan such as a Roth IRA. Before we look at some numbers let’s look at how whole life and Roth IRAs work. We choose to compare these two vehicles as both are considered to have tax-free growth, tax-free withdrawals (assuming the whole life policy is not a MEC) and pass tax-free to heirs at death.

Whole life policies are life insurance policies with a cash savings component. Generally, premiums are level and fixed throughout the policy duration – which is to usually to age 100. In the early years of the policy more of the premium paid funds the cash value account (since the cost of insurance is low) and in the later years less goes to the cash account and more premium is used to fund the cost of insurance.

As long as premiums are paid, the coverage lasts the client’s entire life. Should the client live to age 100, the policy endows and the client will actually receive the entire death benefit, consisting entirely of their own cash value. Should an individual need or want cash from the policy, they are allowed tax-free loans or withdrawals. Death benefits are passed to the beneficiary tax-free.

Roth IRAs allow an individual to save up to $5,500 ($6,500 if age 50 or older) annually. After-tax money goes into the Roth and the money grows tax deferred and qualified distributions are tax-free. The Roth IRA also passes to the beneficiary tax-free.

A key difference between the two products is access to funds. For example, if the client wanted to cancel or surrender the whole life policy in the early policy years, they would incur a surrender charge and forfeit a percentage of the cash value. Surrender periods can last up to 10 years.

Roth IRAs allow access to the principal at any time without penalty. This is because the principal has already been taxed. Earning may be subject to taxes and penalties, depending on the client’s age. Another big difference is one vehicle is life insurance and the other is a tax-qualified retirement plan. They should be kept separate.

Using quote information from a nationally known insurer we gather two quotes; one 30 year term and one whole life. The term quote was for a 35 year old male as was the whole life quote. The 30 year term premium was $80 monthly and the whole life premium was $660 monthly. The face amount for both was $500,000.

The difference between the two policies is $580. Of course, our 35 year old male cannot exceed $5,500 annually ($458.33 monthly) to his Roth IRA so we use the monthly contribution of $458.33. This still leaves over $121 for him to save or invest elsewhere (maybe a 529 for his kids?). So the term is $960 annually and the whole life policy is $7,920! By the way, the salesperson makes about 50% commission on each policy.

From the Roth IRA we assume a 5 percent rate of return over a 30 year time horizon. We also do not assume any indexed contribution increases. In 30 years the client has $381,449 in his Roth. Arguably this would be more considering indexed increases. However, this is quite a bit less than the $500,000 death benefit in the whole life policy should the client pass away.

The 30 year term has now expired. The client is still paying $660 monthly to his whole life policy. However, less premium dollars are funding the cash account and more are funding the cost of insurance. We would argue that at this age, the client could reasonably “self-insure”. That is, use funds from the Roth to fund burial and final expenses; a strategy planned and used by many term insurance holders. In addition, they don’t have the monthly expense of life insurance premiums from a whole life policy.

Let’s assume that the client retires right at 65 and no longer makes any Roth contributions. Withdrawals are now tax-free from the Roth. Let’s also assume that the client decides to not take any withdrawals. If the money in the Roth at age 65 simply sits and continues to earn 5 percent over the next 35 years (until the client is age 100) the Roth grows to $2,104,078 or $1,600,000 more than what he’d receive from the whole life policy. Should the client die right at age 100 his heirs receive the amount tax-free, just like they would in the life policy. And, earnings in the inherited Roth continue to grow tax-free. Life insurance death benefits, while initially tax-free, receive no tax-free benefits on the growth of the original death benefit.

Let’s look at another option. Let’s assume the client has access to a Roth 401(k). Now he can save the entire $580 per month. Using our new monthly contribution to the Roth 401(k) he has saved $482,710 by age 65. If he lets it sit until age 100 (we assume he rolls over to a Roth IRA before age 70 to avoid RMDs) his amount at age 100 is $2,662,635.

This is pretty strong evidence that buying term and investing the difference does make sense for most individuals.

Social Security Bend Points for 2016

very bendyWhen the Social Security Administration recently announced that the maximum wage base and the Cost-of-Living Adjustment (COLA) would remain unchanged for 2016, they also announced the bend points that are used to calculate both the Primary Insurance Amount (PIA) for Social Security benefits. In addition, the Family Maximum Benefit (FMax) bend points for 2016 were also announced.

Wait a second! You may be wondering just why the bend points are changing when there was no increase to the COLA? Excellent question, as it shows you’ve been paying attention. This is because the bend points are based upon the Average Wage Index, which adjusts annually regardless of whether the numbers go up or down, whereas the COLA and the maximum wage base only goes up. Bend points can go down from one year to the next – it’s only happened once, in 2009, but it could happen again. For more on how the bend points are determined, you can read this article: Social Security Bend Points Explained.

Primary Insurance Amount Bend Points

The bend points for calculating individuals’ Primary Insurance Amounts (PIA) for 2016 will be $856 and $5,157.  These are used to calculate your PIA from your Average Indexed Monthly Earnings (AIME). The SSA indexes your lifetime earnings and takes the top 35 years, dividing by 420 (the number of months in 35 years). The bend points are then applied to determine your PIA. An example would be – if your AIME calculates to $5,500, then

The first $856 is multiplied by 90% = $770.40
The difference between $5,157 and $856 is multiplied by 32% = $1,376.32
The excess above $5,157 is multiplied by 15% = $51.45

The Primary Insurance Amount (PIA) is the sum of these three – $770.40 + $1,376.32 +$ 51.45 = $2,198.13, rounded to $2,198.10.

Family Maximum Benefit Bend Points

When calculating the FMax benefit amount, the bend points for 2016 are now set as well. These points are $1,093, $1,578, and $2,058. These bend points are also applied to your PIA to determine the maximum amount of benefits that can be paid based upon one individual’s record – such as Spousal Benefits, Survivor Benefits, and other dependents’ benefits. Continuing with our example from above, where we calculated the PIA for this individual to be $2,198.10,

The first $1,093 is multiplied by 150% = $1,639.50
The difference between $1,578 and $1,093 is multiplied by 272% = $1,319.20
The difference between $2,058 and $1,578 is multiplied by 134% = $643.20
The excess above $2,058 is multiplied by 175% = $245.18

The results are summed up ($1,639.50 + $1,319.20 + $643.20 + $245.18 = $3,847.08 rounded down to $3,847.00) to produce the FMax benefit amount. For the individual with the PIA of $2,198.10, the maximum amount that can be paid based upon this record is $3,847.00.

WEP Maximum Impact

From the first bend point we also determine the maximum impact that the Windfall Elimination Provision (WEP) can have for an individual reaching age 62 in 2016. Since the maximum WEP impact is 50% of the first bend point, if you will be 62 in 2016 the maximum dollar amount of WEP impact for reducing your PIA is $428 (50% of $856).

No Social Security COLA for 2016; Wage Base Unchanged as Well

no colaRecently the Social Security Administration announced that there would be no Cost of Living Adjustment (COLA) to recipients’ benefits for 2016.  This is the third time in 7 years that there has been no adjustment.  In 2010 and 2011 we saw the first ever zero COLA years since the automatic adjustment was first put in place in 1972. That dark period of time actually resulted in two years in a row with zero COLAs, after 38 years of increasing adjustments.


The Cost of Living Adjustment (COLA) is based upon the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.  If this factor increases year-over-year, then a COLA can be applied to Social Security benefits. This is an automatic adjustment, no action is required of Congress to produce the increase when there is one.  See How Social Security COLAs Are Calculated for details on the calculations.

When the COLA was being calculated for 2016 benefits, the CPI-W average for the third quarter of 2015 (233.278) actually decreased versus the third quarter 2014 average (234.242), a reduction of -0.41%.  So by definition there can be no increase for the coming year.  Depending upon how the average goes in the third quarter of 2016, there may or may not be a COLA increase for 2017. If the increase (assuming there is an increase) to the CPI-W is less than the decrease we saw for 2015, there will again be no COLA increase. If the increase is anything more than the 2015 decrease, there will be an automatic COLA increase for 2016.

Since the calculations (begun in 1972) thankfully did not provide for a reduction in benefits when the change in CPI-W was negative, any negative change must be overridden by increases before additional COLA increases will be factored in.  This is what happened in 2011 – even though we had an increase in the CPI-W from 2009 to 2010, the CPI-W was still a net negative from 2008 to 2010, and therefore there was no COLA for 2011.

Medicare Part B Impact

Medicare Part B premiums also increase regularly, albeit by a different scale.  The Part B increase is based on the cost of healthcare, which is different from the CPI-W.  As you may have read elsewhere, since there is no COLA increase for 2016 most (70%) of all folks paying this premium will not have to pay the increased amount, since the “hold harmless” clause requires that the net Social Security benefit received by most beneficiaries will not be decreased.

If you are not paying for your Medicare Part B premiums via withholding from your Social Security check, you will see an increase in your Medicare Part B premium – from $104.90 to $123.70 – which was a positive outcome from the BBA2015. Instead of the 52% increase originally calculated, this increase was limited to an increase of “only” 17.9% for 2016. Also, if you start Medicare in 2016, you’ll get to pay the brand-new increased Part B premium.

Wage Base and Earnings Limits Remain Unchanged as Well

In addition to the lack of an increase to benefits, the reduction in the CPI-W also resulted in a freeze of the Social Security taxable wage base. This is the amount of W2 or self employment income that is subject to Social Security taxation for the calendar year. In both 2015 and 2016 this wage base is $118,500. The last time this changed was from 2014 to 2015, when the wage base increased from $117,000 to the current $118,500.

A substantial earnings year (for the purpose of eliminating WEP) will also remain at the same level as 2015 – $22,050 for 2016.

Lastly, the Earnings Test limits for Social Security will also remain the same in 2016 as they have been for 2015. For folks who are receiving Social Security benefits that are younger than Full Retirement Age, the Earnings Test limit is $15,720, and $41,880 if you will reach age 66 in 2016.


Medicare Premium Part B Premium Increase for 2016


Note: these numbers have been finalized for 2016 at slightly less than originally reported. Apologies for any confusion.

As we discussed in a previous post, with the lack of a Cost of Living Adjustment coming for Social Security recipients benefits in 2016, for most Medicare Part B participants the premium will remain unchanged at $104.90 in 2016.  However, approximately 30% of Part B participants will see an increase to their premium for 2016 – and originally this amount was going to be a 52% increase. Lost in all of the hullabaloo around the elimination of File & Suspend, a part of the Bipartisan Budget Act of 2015 helped to reduce that increase, which will be “only” 16% for 2016.

Instead of increasing to nearly $160 per month, the Medicare Part B premium will only increase to $121.80 per month for most of those affected. This change was taken care of in part by spreading the additional cost over the coming five years at a $3 per month surcharge for anyone who 1) starts Medicare between 2016 and 2021 and 2) anyone who is receiving Medicare Part B but paying the premiums directly rather than via withholding from Social Security.

Everyone gets to take part in some of the pain, though. Even though you may not see an increase to your monthly premium, your deductible is on the rise as a result of Medicare revenue shortfalls, but not as much as was originally expected. In addition to the premium increase for some recipients, all Medicare Part B recipients will experience an increase to the deductible. Originally this was to increase to $223 per year (from the current $147), but under BBA2015 the increase to the annual deductible was only $19, to a total deductible of $166 for 2016.

How may I be affected?

It depends on your income tax filing status, your household income on your tax return, and whether or not you’re receiving Social Security benefits and having your Part B premium deducted from the monthly check. (Incidentally, if you are receiving Social Security and are not having the Part B premium deducted but are paying directly, you should change this asap to avoid paying extra!)

If you’re delaying your Social Security benefits while paying your Part B premium directly, this increase will affect you. Plus, regardless of your Social Security filing status, if you’re in the upper income levels (see below) you’ll see an increase to your Part B premium (plus the $3 surcharge) as well.

The lowest Medicare Part B premium is found for folks who have an income of less than $85,000 (single) or $170,000 (married filing jointly). At income levels above that, the Part B premium increases.

The table below outlines the premium amounts for the various income levels and filing statuses:



Social Security Income Tax filing status 2016 Medicare Part B Premium
Single Joint
Receiving and Part B premium deducted Income $85,000 or less Income $170,000 or less $104.90
Receiving and Part B premium NOT deducted or not receiving Income $85,000 or less Income $170,000 or less $121.80*
Not applicable Income between than $85,001 and $107,000 Income between $170,001 and $214,000 $170.50*
Income between $107,001 and $160,000 Income between $214,001 and $320,000 $243.60*
Income between $160,001 and $214,000 Income between $320,001 and $428,000 $316.70*
Income $214,001 or more Income $428,001 or more $389.80*

* These premiums reflect the $3 surcharge on top of the regular Part B premium for each income level.

The Death of File & Suspend and Restricted Application

deemed filing benchThe Bipartisan Budget Act of 2015’s Aftermath

Note: the original text had a placeholder date of May 3, 2016 as the final date for File & Suspend. This date has been finalized as April 30, 2016 and the text below corrected. — jb

With the passage of the Bipartisan Budget Act of 2015, an era of flexibility in Social Security claiming strategies comes to an end. Long gone is the ability for one spouse to delay benefits while the other collects benefits based on the first spouse’s record. Also gone is the option of collecting spousal benefits while delaying your own benefits to accrue the delay credits. We’ll go over the actual changes below, based upon your date of birth – because some of the provisions will remain for a while, and could be useful if you’re the right age.

Born in 1953 or earlier

If you were born in 1953 or earlier, that is, if you reach or reached your 62nd birthday in 2015 or before, some of the provisions are allowed for you as a “grandfathering” phase-in, albeit with some changes.

Suspending benefits – This option is still available to you, although there are some limits. If you’re already suspending your benefits or if you suspend your benefits before April 30, 2016, your suspension of benefits will continue to allow your spouse to collect Spousal Benefits while your own benefit accrues the delay credits. A child of yours under age 18 (or 19 if a full-time student in elementary or secondary school, or any age if disabled) can also collect benefits based on your record while your benefit is suspended.

In addition, if you’ve already suspended or will suspend by April 30, 2016, you will continue to have the option of changing your mind and receiving retroactive benefits to any point at or after your suspension date.

You will still have the option to suspend benefits at any point after April 30, 2016, but the treatment of your suspended benefits will be different. The new way suspended benefits works is that not only your own benefit is suspended, but also all benefits paid on your record are suspended as well. This means that if you suspend your benefits, your spouse and children will not be allowed to receive a benefit based on your record while your benefit is suspended.

Of course, since you must be at least at FRA to suspend benefits, this means that effectively this option is only available for persons who will reach age 66 on or before April 30, 2016 – so your birthdate must be April 30, 1950 or earlier to utilize File & Suspend in the old fashion. If born after April 30, 1950, the new suspend rules will apply to you (see below for more information).

Restricted Application – If your spouse has filed for benefits and you were born in 1953 or earlier, you may have the option of filing a restricted application for Spousal Benefits based on your spouse’s record, allowing you to delay receipt of your own retirement benefit to a later date. This is allowed based upon the fact that your spouse has filed – if your spouse has suspended receipt of benefits, the new suspend rules will apply unless the suspend was complete before April 30, 2016 as described above.

If your spouse was born in 1953 or earlier as well, he or she can still file a restricted application for Spousal Benefits upon reaching Full Retirement Age, allowing your spouse to collect the Spousal Benefit while delaying his or her own benefit to a later age as well. If your spouse was born in 1954 or later however, the new rules for deemed filing will apply, effectively eliminating the restricted application option (see below for more details).

Born in 1954 or later

This is where the biggest changes come in. File & Suspend is effectively eliminated for most strategies, and the expansion of the deeming rule eliminates the restricted application altogether for folks in this age group.

Suspend – You are still allowed to suspend benefits when you reach Full Retirement Age, but the suspension of benefits now applies not only to your own benefits but also to any benefits payable to your spouse or children.

You may start your benefits at any time at or after age 62 and suspend receipt of benefits at or after FRA. Your spouse and/or children may receive the auxiliary benefits during the period of time that you are actively receiving benefits, but if you suspend your benefits your dependents will also cease to receiving benefits until you restart your own benefits.

There are cases when this might make sense, such as if you have young children who could receive benefits for a period of time and then later you want to suspend to accrue additional delay credits (perhaps after the children have reached age 18).

Deemed Filing – in the past, deemed filing only applied if you were under Full Retirement Age. Not so under the new rules. If you were born in 1954 or later, when you file for any benefit you are deemed to file for all benefits for which you are eligible. This means that you cannot file a restricted application for spousal benefits in order to delay filing for your own benefit (an option under the old rules). Now, if you file for your own benefit or a Spousal Benefit, you have effectively filed for all benefits (if you’re eligible for additional benefits).

Effectively due to deemed filing, you will not be allowed to separate your benefits at any age if you’re eligible for more than one type of benefit.

So what is left?

After all the changes, are there any options left for filing strategies? Of course, but they’re definitely limited.

If you were born in 1953 or before, you have all of the same options available to you that you had before. However, you must act quickly if you were planning to implement a File & Suspend strategy, and this is only going to be available to you if you will have (or had) your 66th birthday on or before April 30, 2016 (you were born on or before April 30, 1950). If you fit this category, you can still File & Suspend and your dependents can receive benefits based on your record while your own benefit accrues the delay credits.

If you were born after April 30, 1950, you have the option (as outlined above) to suspend benefits at Full Retirement Age to accrue delay credits, but any dependent benefits (spousal or children’s) will also be suspended at that point until you re-file (unsuspend) your benefits.

A version of separating your own benefits from Spousal Benefits is available under the new rules, illustrated by the below example:

Jeffrey, age 60 is married to Pamela, age 59. Jeffrey’s projected Primary Insurance Amount (the amount he’ll receive when he reaches Full Retirement Age, which is 66 years, 4 months) is $2,200. Pamela’s PIA is projected as $1,000.

Pamela can file for her own benefit at age 62, which will result in her benefit being reduced to 72.5% of her PIA since her Full Retirement age is 66 years, 6 months. Her resulting benefit will be $725 per month. Since Jeffrey is at this point only 63 years of age and has not filed for his own benefit, Pamela is not eligible for a Spousal Benefit, so deemed filing does not apply to her.

Therefore, Pamela must (may?) wait until Jeffrey files for his retirement benefit before she files for the Spousal Benefit. If Jeffrey files for his own benefit at his Full Retirement Age (66 years, 4 months) or any time on or before Pamela reaches her FRA (66 years, 6 months), Pamela can then file for the unreduced Spousal “excess” Benefit to be added to her own reduced benefit.

The way the excess Spousal Benefit is calculated is to subtract Pamela’s PIA ($1,000) from 50% of Jeffrey’s PIA ($1,100), for a resulting excess Spousal Benefit of $100. If Pamela is at least at FRA this amount will be added to her reduced benefit for a total monthly benefit of $825.

If Pamela becomes eligible for the Spousal Benefit at any time before her FRA, the $100 excess benefit will be reduced, and then added to her benefit. So if, for example, Jeffrey files for his own benefit at his FRA (when Pamela is 65 years and 6 months old), her excess benefit will be 83.33% of the maximum, meaning:

Jeffrey’s PIA ($2,200) times 50% ($1,100) minus Pamela’s PIA ($1,000, resulting in $100) times 83.33% equals $83.33

Therefore, in this example we would take the reduced Spousal Benefit amount of $83.30 (rounded down) and add Pamela’s own reduced benefit of $725 for a total of $808.30.

There are other strategies available to be sure, and we’ll cover those in future articles. For now, just know that the landscape for benefit filing strategies is drastically limited from what we had available previously.

Advice I Would Give My Younger Self


yck78e9cELast week marked the 30th anniversary of the date Marty McFly traveled 30 years into the future, from 1985 to 2015. A lot has happened in the past 30 years. Smartphones are part of our regular vocabulary, millions of individuals do their shopping online, and markets are still unpredictable.

Naturally, I’ve changed over the last 30 years. And if I had a DeLorean that could take me back in time I’d try to impart some wisdom on my younger self. Unfortunately, the closest thing I have to a DeLorean is a silver mini-van (with sliding rather than gull wing doors) lacking a flux capacitor. My hope is that younger readers can benefit from what I am about to tell my younger self.

  1. From the moment you start earning money, save 10% of what you make. Whether it’s mowing lawns or stocking shelves you have the gift of time to your advantage; and you never get it back.
  1. Don’t be afraid to live frugally. It’s not how you spend that will impress people, it’s your character.
  1. When you go on dates, it’s OK to pick up the tab; but it’s also OK if you go Dutch. It’s also OK to if you don’t spend any money on a date. Sometimes a simple stroll through a park along a river will do more for a relationship than a movie.
  1. Give to others who need it, and do it without fanfare. Random acts of kindness and generosity compound more powerfully that you could ever imagine.
  1. One of the smartest financial decisions you made was waiting to go to college. You didn’t know it at the time, but you weren’t ready. A few years of maturity will prepare you to be a better student, and you’ll appreciate college and your instructors more.
  1. Drive your 1985 Pontiac Sunbird until it completely dies. You’ll save so much by not having a car payment. See point number 2.
  1. Hold off on applying for a credit card. There’s plenty of time and you don’t need one now.
  1. I know it hurts to hear this but your parents were right. You may know everything now, but as you age you’ll get dumber. That’s a good thing.
  1. Money doesn’t buy happiness. You need some to live comfortably, but after a certain point, your happiness with having more money increases at a decreasing rate. If this is confusing, sit in the front of the class when you take Economics 101 in college.
  1. You will have regrets. Don’t dwell on them. Learn from them.
  1. You will learn a lot by failing. Get ready for some whoppers.
  1. Try your best to think before you speak or act. This will benefit you more than you know.
  1. Success is not defined by what you have or what you do. It’s defined by who you are. Count your blessings. Three of them eat dinner with you every night. Be grateful for everything you have.
  1. When you move to Springfield, Illinois, look up a guy by the name of Jim Blankenship. Trust me on this one…

Get some now, get more later

moreNote: with the passage of the Bipartisan Budget Bill of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.

When you have reached Full Retirement Age (FRA – age 66 if you were born between 1946 and 1954), you have the option to file for Spousal Benefits separately from your own benefit. This is known as a restricted application – and is often referred to as “get some now, get more later ”. Of course, you must either be married to another Social Security recipient who has filed for benefits, or you have divorced after 10 years of marriage to someone who is at least 62 years of age. If divorced, either your ex must have filed for benefits or at least two years has passed since your divorce.

In order to get your Spousal Benefit now and then get more benefits later, you will need to file a restricted application for spousal benefits when you have reached Full Retirement Age. Typically you should file for this benefit a few months in advance (SSA says up to 3 months in advance) and instruct them to begin your Spousal Benefit when you reach FRA.

An important factor in this process is that you have not filed for any benefits previous to the restricted application. That means you could not have filed for your own benefit earlier. In addition, if you were receiving SSDI (Social Security Disability Income) up to Full Retirement Age, this option is also not available to you.

Do Not File and Suspend

You also would not file and suspend. For some reason, many folks get this confused, thinking that they need to file and suspend and then file a restricted application. If you file and suspend, that takes away your option to file a restricted application – since one of the requirements for a restricted application is that you have not filed for benefits previously. Even though you would not be receiving benefits (having suspended) the action of file and suspend is actually filing for your own benefits. Therefore, if you file and suspend, you are not allowed to file a restricted application for spousal benefits.

Probably the reason for the confusion is that many times if both spouses of a married couple are wishing to delay benefits to age 70, in order for one member of the couple to file a restricted application for spousal benefits, the OTHER member of the couple may need to file and suspend.

In the case of a divorced couple, there is no need for file and suspend at all if the divorce was finalized at least two years ago. This is known as independent entitlement to spousal benefits, and so no one would need to file and suspend to allow for a restricted application for either member of the former couple.

Lissette wants to delay her own benefit as long as possible. She is reaching Full Retirement Age soon, and has been divorced for more than two years after her marriage. In order to take advantage of the “get some now, get more later ” option, when Lissette reaches FRA, she will file a restricted application for spousal benefits. As is often the case with a divorced individual, Lissette visits her local SSA office and brings along the documentation of her marriage, divorce, and her ex-husband’s Social Security number. With this information, Lissette can file a restricted application for Spousal Benefits.

Later, when Lissette reaches age 70, she can file for her own benefits, which will have maximized due to the delay credits adding 32% to her PIA.

Your Spouse Will File and Suspend

On the other hand, Carol, age 65 is looking forward to using the “get some now, get more later ” option when she reaches age 66, her Full Retirement Age. Ronald, her husband, is reaching his FRA of age 66 3 months after Carol. Ronald also wants to delay his benefit to maximize it at age 70.

When Carol reaches age 66, since Ronald has not yet filed for any benefits, she is not yet eligible for the restricted application. If she filed for benefits now, that would take away her option to file a restricted application when Ronald has filed for his benefits. She also would NOT file and suspend – as explained earlier, this would eliminate her option to file a restricted application.

So three months after Carol’s 66th birthday, when Ronald reaches FRA, Ronald files and suspends his benefit – he doesn’t want to receive the benefit now, he wants to delay as long as possible. He only files and suspends now in order to allow Carol to file a restricted application. Since Ronald has filed (file & suspend) Carol is now allowed to file a restricted application for spousal benefits.

It could have gone the other way – Carol could have filed and suspended at her FRA and then 3 months later Ronald could have filed a restricted application for Spousal Benefits. But this wouldn’t have worked out as well since Ronald’s PIA is $2,200 and Carol’s is $1,500. The Spousal Benefit for Carol (based on Ronald’s record) is $1,100; if they did it the other way the Spousal Benefit for Ronald (based on Carol’s record) would only have been $750.

SOSEPP – Fixed Annuitization method


Photo courtesy of Joshua Hibbert via

When calculating your Series of Substantially Equal Periodic Payments (SOSEPP), provided for under §72(t)(2)(A)(iv) of the Internal Revenue Code, one of your choices is the Fixed Annuitization method.

Calculating your annual payment under this method requires you to have the balance of your IRA or 401(k) account and an annuity factor, which is found in Appendix B of Rev. Ruling 2002-62 using the age you have reached (or will reach) for that calendar year. You will then specify a rate of interest of your choice that is not more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB).

Once you’ve calculated your annual payment under the Fixed Annuitization method, your future payments will be exactly the same until the SOSEPP is no longer in effect. There is a one-time opportunity to change to the Required Minimum Distribution method.

For more details on the Series of Substantially Equal Periodic Payments (SOSEPP) see Early Withdrawal of an IRA or 401(k) – SOSEPP.

SOSEPP – Fixed Amortization Method

Photo courtesy of Devin Rajaram via

Photo courtesy of Devin Rajaram via

When calculating your Series of Substantially Equal Periodic Payments (SOSEPP), provided for under §72(t)(2)(A)(iv) of the Internal Revenue Code, one of your choices is the Fixed Amortization method.

Calculating your annual payment under this method requires you to have the balance of your IRA account. With this balance you then create an amortization schedule over a specified number of years equal to your life expectancy factor from either the Single Life Expectancy table or the Joint Life and Last Survivor Expectancy table, using the age(s) you have reached (or will reach) for that calendar year. The amortization table must use a rate of interest of your choice, but the chosen rate cannot be more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB).

Which table you use is based upon your circumstances. If you are single, or married and your spouse is less than 10 years younger than you, you will use the Single Life Expectancy table. If you are married and your spouse is 10 years or more younger, you may choose to use the Joint Life and Last Survivor Expectancy table.

Once you’ve calculated your annual payment under the Fixed Amortization method, your future payments will be exactly the same until the SOSEPP is no longer in effect. There is a one-time opportunity to change to the Required Minimum Distribution method.

For more details on the Series of Substantially Equal Periodic Payments (SOSEPP) see Early Withdrawal of an IRA or 401(k) – SOSEPP.



Photo courtesy of Paula Porto via

The Required Minimum Distribution method for calculating your Series of Substantially Equal Periodic Payments (under §72(t)(2)(A)(iv)) calculates the specific amount that you must withdraw from your IRA, 401k, or other retirement plan each year, based upon your account balance at the end of the previous year. The balance is then divided by the life expectancy factor from either the Single Life Expectancy table or the Joint Life and Last Survivor Expectancy table, using the age(s) you have reached (or will reach) by the end of the current calendar year. This annual amount will be different each year, since the balance at the end of the previous year will be different, and your age factor will be different as well.

Which table you use is based upon your circumstances. If you are single, or married and your spouse is less than 10 years younger than you, you will use the Single Life Expectancy table. If you are married and your spouse is 10 years or more younger, you may choose to use the Joint Life and Last Survivor Expectancy table.

For more details on the Series of Substantially Equal Periodic Payments (SOSEPP) see Early Withdrawal of an IRA or 401(k) – SOSEPP.

Early Withdrawal of an IRA or 401(k) – SOSEPP

by Shiny Things

This particular section of the Internal Revenue Code – specifically §72(t)(2)(A)(iv) – is the most famous of the 72(t) provisions. This is mostly due to the fact that it seems to be the ultimate answer to the age-old question “How can I take money out of my IRA or 401(k) without penalty?”

While it’s true that this particular code section provides a method for getting at your retirement funds without penalty (and without special circumstances like first-time home purchase or medical issues), this code section is very complicated. With this complication comes a huge potential for costly mistakes – and the IRS does NOT forgive and forget!

A Series of Substantially Equal Periodic Payments, or SOSEPP is just what it sounds like. You withdraw a specified amount from your IRA or 401(k) every year. The specified amount is not always the same (hence “substantially” equal) but the method for determining the amount is the same year after year. You start your SOSEPP at some age before 59 ½ years of age (or the age that you would otherwise qualify for penalty-free withdrawals), and you must continue those payments for the greater of 5 years or until you reach age 59 ½.

In order to set up your Series of Substantially Equal Periodic Payments (SOSEPP), you must use one of the three methods prescribed by the IRS: Required Minimum Distribution method, Fixed Amortization method, and Fixed Annuitization method (follow the links for more information on each method).

Once chosen, your method can not be changed under most circumstances. There is one situation that provides for a one-time change to your payments, but otherwise the SOSEPP can’t be changed without “busting” the activity. This means that every year the SOSEPP is in effect, you must take exactly the amount in your schedule from your retirement account, no more and no less. Making a change to your withdrawal schedule will result in your owing the 10% penalty retroactively on all payments received to that point, plus interest (this is where the IRS does not forgive).

In addition, once you’ve begun your SOSEPP, you must continue that payment schedule until the later of five years or you reach age 59 ½. Again, this is an area where the IRS doesn’t forgive or give any leeway: if you take additional distributions one day before your five years or 59 ½th birthday, the action will “bust” the SOSEPP, and you’ll be liable for 10% penalty on all distributions from your IRA plus penalties. Obviously this sort of an arrangement should not be taken lightly, and you must keep excellent, flawless records on your withdrawals.

Other facts about SOSEPP:

  • You can split your IRA into more than one account, and apply your SOSEPP against only one account, thereby reducing the balance against which your payout method is calculated. This splitting typically is not available for a 401(k) plan, although you could rollover a portion of the 401(k) to an IRA and use a SOSEPP against either account, as long as the plan administrator allows.
  • You can have more than one SOSEPP going at a time, using separate IRA or 401(k) accounts and different payout methods for each.
  • Your periodic payment will likely change under the minimum distribution method, as it recalculates annually based on the account balance at the end of the prior year.

The Hot Stove Analogy

hand-on-oven-burnerWe’ve all been there. Cooking dinner around the stove and mistakenly touch the burner or element with our finger. Instantaneously and instinctively our hand immediately withdraws from the heat and we quickly look to see if we need to run it under cold water or worse, grab the bandages.

Individuals can have a similar instinctive reaction when they are burned by the market. When the market is highly volatile they’re gut reaction may be to pull their hand away quickly and easing the pain by selling and getting out.

It would seem almost malapropos to keep a hand on the hot stove knowing that doing so will result in further pain and injury. And it would be unthinkable to place the other hand on the stove so both are feeling the heat.

Naturally, no one likes to lose money. When markets go down it is perfectly understandable for individuals to not want to subject themselves to further loss and the pain of seeing account values decline. However, for many individuals, especially those with long time horizons, it can be perfectly sane to keep their hand on the stove (invested in the market). Perhaps a bold few will have the audacity to put both hands on the stove (invest more money when markets are down).

Some individuals may want to consider a lukewarm approach by having multiple burners going, yet set to different settings (diversification). This way, when one burner is really hot (say, stocks are plummeting) they can place their hands on a different burner (a different, less-correlated asset such as bonds or REITs) and still stay close to the stove, without getting burned.

The 52% Medicare Premium Increase by the Numbers

increaseBy now if you’re a Medicare recipient I’m sure you’ve heard all about the potential 52% Medicare Premium increase coming in 2016 for some recipients. This is due to a virtually-unknown (until recently) part of the law that allows no increase to Medicare premiums if there is no COLA adjustment to Social Security benefits being currently received. This happened in 2010 and 2011 when there was no COLA added for Social Security recipients – it just wasn’t the headline grabbing 52% number.

As a result of this lack of increase for 70% of all Medicare Part B recipients, all other Medicare Part B premium payers must pick up the slack. The increase to premium is projected to be a maximum of 52% – from $104.90 to $159.40.

Who is impacted?

Primarily only those people who are over age 65, receiving Part B Medicare coverage and who are not currently receiving Social Security benefits will be impacted. Anyone who is currently receiving Social Security and having the Part B premium deducted from their check will have the same premium for 2016 as they have in 2015, since there is no COLA projected. (Note: If you’re receiving Social Security and NOT having the Part B premium deducted from your check, you’re also going to be impacted – you should change this right away to avoid the unnecessary increase!)

Many people have delayed receipt of Social Security benefits past age 65 in order to maximize the Social Security benefits that they’ll eventually receive. Delaying from age 65 to age 66 will result in an increase of benefits by 7.14% for most recipients. Delaying beyond age 66 will result in an increase to benefits of 8% for each year of delay.

Dave is reaching age 65 right now, but has always intended to delay his Social Security benefit to at least age 66. The decision of whether to start taking benefits now (to avoid the 52% premium increase!) versus delaying becomes a matter of running the numbers.

This $54.50 increase is made up completely if Dave’s benefit would have been $763.30 per month or more at age 65. For any higher benefit, the result is that much better.

For another example, Greta, who is reaching age 70 late next year and has not started receiving Social Security would only consider filing for benefits now if her age 66 benefit (the benefit against which the delay increases are calculated) would have been less than $681.25. If Greta’s age 66 benefit was, for example, $700 per month, delaying for another year to her age 70 would result in an additional increase of $56 per month – more than the Medicare increase.

Lastly, if you’re nearing (within a few months) of a milestone that you intended to file for benefits –such as if you intended to file in January – you might consider filing early now if it’s that important to you. In the long run the delay of a few months would not have a large impact (three months would be an increase of 2%) and if it helps you to sleep at night then all the better. I’d still counsel that the 2% extra is worth enduring the increase to the Medicare Premium though – especially if you’ve delayed this long in order to maximize benefits for yourself and perhaps for a younger spouse’s future survivor benefits.

Effect Is Temporary

The last thing to keep in mind with all of this is that the effect of this Medicare Part B premium increase are temporary. After COLAs are again added to Social Security benefits, the Medicare premiums will even out again. That’s how it happened after the non-increases of 2010 and 2011: in 2010 for some folks the Medicare premium increased from $96.40 to $110.50, and in 2011 for some folks it increased again to $115.40 (19.71% in all!). In 2012, when COLAs were once again included for Social Security benefits, everyone’s Medicare Part B premium fell back to $99.90 a month (except for the folks in higher tax brackets, which is an entirely separate set of numbers to consider).

Now is the time to act though – because to avoid the increase your benefit must have started in November or earlier. Start in December and you’ll get the premium increase anyway.

Separation From Service On or After Age 55

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55-kings-parade-by-dumbledadDid you realize that there is a provision within the Internal Revenue Code that allows you to start taking distributions from your 401(k) plan before you reach age 59½?  This little-known section of the code, §72(t)(2)(A)(v), can be a real dandy if you happen to fit the requirements. The primary requirement is that you separate from service with the employer at or after age 55.

Note: although we will refer to the 401(k) throughout this article, this code provision applies to all ERISA-qualified, employer-established defined contribution plans, which includes 401(k), 403(b), 501(a), and others.

Here’s how it works:  if you are working for a company and are participating in the company’s 401(k) plan, should you leave employment with that company at any time during or after the year in which you reach age 55, there will be no penalty for taking distributions from the plan.  Normally, any distribution (other than specifically-qualified distributions) prior to age 59½ will result in the 10% penalty being applied, in addition to regular income tax.

It is important to note that these distributions only qualify when received from a company-established defined contribution plan – NOT an IRA account.  Just to be clear:


In order to maintain this penalty-free distribution, the funds must not be rolled over into an IRA.  This is a critical distinction that you need to understand – a mistake would take away this option completely.  Be certain that you completely understand how this works before starting a distribution, as it could be costly to make a mistake.

Lastly, the Pension Protection Act of 2006 made one additional change to the code:  The age limit is reduced to 50 for retiring police, firefighters, and medics. Retirees from those specific jobs can take a penalty-free distribution from their accounts when they leave employment at or after age 50.

As with all defined contribution plans, normal income taxes will still apply.

Book Review – Choose Your Retirement

choose your retirementThe latest book by Emily Guy Birken – Choose Your Retirement – is unlike any other book I’ve read on the subject. Birken takes the time to walk the reader through all of the decision-points that likely will confront you. She spends time acknowledging all of the factors that often face future retirees, including all of the emotional factors that plague us.

Author Birken, who you may recognize from her many writing gigs with well-known personal finance outlets including Wisebread, PT Money, Money Crashers and Yahoo! Finance, has really done well with this book, in my opinion. The book provides practical step-by-step guidance and counsel for navigating the internal mental scripts that different personality types face when saving – Money Avoidance, Money Worship, Money Status, and Money Vigilance. Most everyone fits into one of these categories – and each category has it’s own pitfalls and benefits. This book takes you through each script type to help you understand the barriers that you are likely facing as you plan for and approach retirement.

In Part II Emily takes time to work through debunking the common myths that pervade the retirement planning landscape.  Among the topics here are myths about how to estimate how much money you’ll need in retirement, as well as myths about Social Security, Medicare and healthcare.

The last section of the book is where the rubber meets the road. The author covers in ten chapters some of the very important topics that most retirement books leave behind, including things like retiring abroad or retiring in place (where you live now), changing careers in retirement (because retirement doesn’t mean stop!), and leaving a legacy.

The last section of the book is in my opinion what really sets this book apart from the field. These categories are covered in-depth, with practical advice for things that you don’t typically see in a retirement book. Ms. Birken does a great job with this part of the book – like, for example, the concept of undertaking more education in retirement. Did you know you can use a 529 plan to fund your own education on a tax-advantaged basis?

All in all, I think Emily, who I am privileged to have met and spent some time with at a recent FinCon conference, has really done a great job with this book. It’s also an excellent complement to her first book, The 5 Years Before You Retire. I recommend this book for any and all who are looking to retire soon, it’s a practical book with worksheets built in, and you’ll earn back your investment quickly with the sage advice.

Beyond – Beyond 401k and IRA

As a follow up to my post last week Beyond 401k and IRA, I discovered this week that I had neglected to point out a relatively new option that is very well worth considering.

This option was brought to my attention by my friend and colleague (and fellow GPN member) Lisa Weil of Clarity Northwest Wealth Management in Seattle, WA: as of late last year with the issuance of IRS Notice 2014-54, there is the option of over-funding your 401k with after-tax dollars, and then rolling over those monies to a Roth IRA when you leave employment.

The way it works is that after you max out your regular deducted 401k contributions, plus your company provided the matching funds, there is usually quite a bit of headroom available within the annual funding limits. You can (if your 401k administrator allows) make after-tax contributions to your 401k up to the limit of $53,000. This limit includes the “regular” contributions of $18,000 and your employer matching dollars. If you’re over age 50 the limit is $59,000 due to the catch-up.

When you leave employment, you can rollover your pre-tax contributions, employer contributions, and the growth in the account to a traditional IRA; THEN, you can take these after-tax contributions and rollover to a Roth IRA. Sort of a super-charged Roth IRA contribution method.

This is an excellent place to put your additional savings dollars after you’ve maxed out all of the other options. You need to be careful about the rollover when you retire, and your plan administrator also has to allow these after-tax contributions. If the administrator doesn’t currently allow the extra contributions, the plan can be amended to allow the extra contributions.

I applaud Lisa for pointing this out – and it shows once again that the rules for retirement plan contributions are complicated and constantly changing, and it pays to question everything as you go. I wrote about the change with Notice 2014-54 late last year in the article A New Way to Fund Your Roth IRA – and had forgotten about it when I wrote the article last week.

Thanks again, Lisa!

An Emergency Fund for Retirement

Photo courtesy of Thomas Lefebvre on

Photo courtesy of Thomas Lefebvre on

Many individuals have heard about having an emergency fund while working and saving for retirement. Generally, the rule of thumb has been to keep 3 to 6 months of non-discretionary living expenses on hand in case one loses their job, becomes disabled, or an unforeseen emergency occurs. But what about those individuals who are nearing or already retired? What should their emergency fund look like? Do they even need one?

One of the bigger risks that pre-retirees and retirees face in retirement is sequence risk. Sequence risk is generally defined as the risk of even lower portfolio returns due to making withdrawals from a retirement account when the market has experienced a downturn.

In other words, a retiree experiences sequence risk when their retirement account drops in value due to market volatility, and they make a withdrawal (or withdrawals) after the account has dropped in value. Another way to put it would be similar to an individual saving for retirement in their 30s, yet selling at the market bottom and “locking in” their losses.

Understandably, this can be disastrous for any retiree who has a goal of their money outlasting them in retirement. There are a few things pre-retirees and retirees may consider to help with reducing sequence risk.

  1. Consider having 1-2 years of living expenses in a savings account. This can help reduce the strain on the retirement account when markets are down by living off of the money in the “emergency fund” for retirement. Additionally, an individual may consider funding the emergency savings with money from the retirement account when markets are up in any given year. That is, sell from the assets classes that are up to replenish the cash account.
  1. Consider longevity insurance (an annuity). By purchasing longevity insurance an individual can transfer some of the sequence risk to the insurance company providing the annuity. In the event that their non-annuitized portfolio drops in value due to market volatility, the individual can take some comfort in knowing they will not have to withdraw as much from their assets since they will be receiving a guaranteed income stream from the annuity.
  1. Consider reducing spending temporarily. If possible, the individual can delay consumption until their portfolio improves. Granted, not everyone can afford to reduce spending (such as for health care, housing, etc.). But some individuals may find it to their advantage to put the vacation off a year, not dine out as much, or delaying discretionary purchases until their financial picture improves.
  1. Optimize your Social Security. There are many advantages and nuances an individual or couple can consider when applying for and taking Social Security benefits. By taking advantage of the options available, individuals may be able to maximize their income from Social Security (essentially an annuity) and help provide more guaranteed income during volatile market times.