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Book Review: How to Retire Happy

Jun 3rd, 2013
by jblankenship.
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How to Retire Happy

“The 12 most important decisions you must make before you retire”

Author Stan Hinden, who is the former syndicated Washington Post “Retirement Journal” columnist, has just released his Fourth Edition of this book.  The book is Hinden’s commentary and advice, as well as a sort of journal, as he and his wife Sara entered into and have been living in retirement over the past 17 years.  Hinden retired in 1996 at the age of 69, at which time he began writing the “Retirement Journal” column.  He was nominated for a Pulitzer Prize in Commentary in 1998 for his work.

This book is an excellent read for folks who are planning toward retirement or have recently retired.  Hinden has organized the process into 12 decisions, some of which include: “Am I Ready to Retire?”, “What Should I Do with the Money in My Company Savings Plan?”, and “Where Do I Want to Live When I Retire?”. Mr. Hinden then walks through each of the 12 decisions with his own personal insights and choices, as well as with expert recommendations and commentary on the subjects.

The book is a fairly quick read at 250 pages, and the writing style is simple and conversational.  The decision-points that Mr. Hinden discusses are thought-provoking, and he has been diligent to provide sources for additional review at the end of each Decision/Chapter.  Topics covered include income taxes, pensions, retirement accounts, Social Security, Medicare, long-term care insurance, and many other categories pertinent to retirees.

The author’s wife, Sara, became afflicted by Alzheimer’s Disease in 2007, which has resulted her needing to be placed in a residential nursing facility as the disease has progressed.  This was a particularly difficult section for me as I very much empathized with Mr. Hinden as he was faced with the difficult decisions associated with his wife’s condition.  In a similar fashion, the author discusses the issues that he faced with his own health after learning that he needed a four-way heart bypass shortly after his retirement.  These insights that are brought forth are very helpful though, as we all must consider that such decisions may likely be a big part of our own lives.

I will recommend this book to any and all folks who are looking for insights as they approach retirement.  It will definitely give you additional insight as you take on this next step in your life – what Hinden mentions is likely the “final quarter” of your life.  He points out though, that this final quarter needn’t “sound grim.  In any football game, the last quarter is often the most exciting.  The same can be true of retirement.  It is one more chance to add points on the scoreboard of your life.”

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

The ABC’s (and D’s) of Medicare

Mar 29th, 2013
by sraskie.
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images

With more and more baby boomers retiring, more and more people including the Boomers, and their children and families are going to have questions and concerns about Medicare. Questions can range from what Medicare is, what it does, what it doesn’t do, and the nuances that make up our nation’s health care for retirees.

Medicare was created in 1965 by the Social Security Act and was signed into law by Lyndon Johnson.

Currently, Medicare is funded via taxation and premiums paid by Medicare subscriber. Part A – which we will cover in a future article, is funded by a 2.9% tax on wages. Unlike Social Security tax that has a limit or cap on the amount of income that can be taxed ($110,100 in 2012 and $113,700 in 2013), Medicare has no such wage base. The 2.9% tax is on an unlimited amount of earnings.

Eligibility for Medicare typically starts for those who turn age 65 and are permanent citizens of the US. Persons are automatically enrolled at age 65 if they have yet to start collecting Social Security. Persons electing to receive Social Security benefits before their full retirement age (FRA), must enroll manually in Medicare at age 65. Persons can also be eligible for Medicare based on having a disability covered under Social Security for 24 months, end-stage renal failure (requiring dialysis), and amyotrophic lateral sclerosis (ALS – Lou Gehrig’s Disease). Finally, Medicare is available for covered railroad workers receiving Railroad benefits.

According to Medicare.gov, enrollment is set to hit 78 million people by 2030 – as the majority of baby-boomers will be enrolled.

Medicare is broken down into three parts: A, B and D. Wait a second. Didn’t we skip a letter? Yes. We’ll talk about Part C or Medicare Advantage a little later on. Next time, we’ll talk about Part A.

IRA Distributions Are Not Subject to the New 3.8% Surtax

Dec 12th, 2012
by jblankenship.
2 comments
Medicare

As you may be well aware, beginning in 2013 there will be a brand spanking new tax added to unearned income if your Modified Adjusted Gross Income is greater than $200,000 for Singles, and $250,000 for Married Filing Jointly.  Married folks filing separately are affected above a $125,000 threshold.  This surtax is to help bolster the Medicare system, and it applies specifically to unearned income.

What’s important to know is that IRA distributions (among other things) are not included as impacted by this new surtax.  This means that when you make significant IRA distributions (beginning in 2013), such as to convert to a Roth IRA or to take advantage of Net Unrealized Appreciation (NUA), this surtax will not be applied to your distribution.

Other types of unearned income that is specifically exempted from this surtax includes tax-free interest and other payouts from retirement plans such as 401(k) plans, deferred compensation plans, and pension plans.

Income that is subject to the new surtax includes interest, dividends, capital gains, annuities, royalties, and passive rental income.

None of these types of income are subject to the other brand spanking new tax – the 0.9% Medicare surtax on earned income.  This one is only applicable to wage income and income from self-employment, and it applies above the same income thresholds as those listed above.  Once an employee’s wages are above those levels, the additional 0.9% surtax will be withheld from the employee’s wages.  The employer does not have to pay a complimentary 0.9% as with all other Medicare tax payments.

For the self-employed, the surtax will be applied when you make your quarterly estimates or when you file Schedule SE at the end of the year.

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An Unexpected Result From Roth Conversion – Increased Medicare Premiums

Dec 5th, 2012
by jblankenship.
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Portrait of Increase Mather

Many folks took advantage of the one-time opportunity in 2010 to convert funds from traditional IRAs to Roth IRAs and subsequently spread the tax over the following two years, 2011 and 2012.  This was a very good option for some folks who wanted to do the conversion and reduce future tax costs.  However (and there’s always a however in life!), with the coming of 2013, many of these same folks are experiencing an unexpected result of the conversions: a significant increase in Medicare Part B premiums.

Beginning after 2003, Medicare Part B premiums have been partly determined by income – primarily higher income.  For 2013, the increased Part B premium begins for single folks with incomes above $85,000, married couples above $170,000.  The income used to calculate the Part B premium is always based on the most recent tax return, which in this case would be the 2011 tax return.

If you connect the dots, you’ll understand the reason this is now beginning to surface as an issue.  2011’s return is where the first half of those deferred Roth Conversions was reported, and so the increased income can cause a significant increase to Medicare Part B premiums.  It’s important to note that this impact is not limited to the 2010 conversions – any Roth Conversion can result in an increase to your Part B premiums in the future.

For example, let’s say Joe is an average retiree, with a pension income of $35,000 in normal years.  He’s 67 years old, having been on Medicare (Parts A & B) for the last two years.  Joe had a traditional IRA worth $200,000 in 2010, and he decided to opt for the Roth Conversion of the total account and two-year payment of the tax.  By doing this, he has to include $100,000 in his income for 2011 and 2012.  As a result, his income is increased to $135,000 for those two years; those two years are then used to determine the level of premium for Medicare Part B for 2013 and 2014.

For the past couple of years, Joe’s Part B premium has been less than $100 a month – not a pittance on his income, but still manageable.  Because of this increase to his income for 2011, his Part B premium will be increased to $209.80 per month in 2013 – double what it would have been, at $104.90.  The same will be true for 2014, and that rate will be set sometime in November, 2013.

The good news is that the increase is temporary, in these circumstances the individual’s premium should reduce again in 2015.  The bad news is that there’s nothing that can be done about it, barring a “life-changing event” that coincides with the increase in income.  If your spouse died or you left employment, for example, you could contact Social Security to have your situation reviewed and the possibly premium reduced, based upon income since 2011 (possibly projected income for 2013).

Listed below are the Medicare Part B premiums for married couples at various income levels:

Married Couples
Modified AGI is: 2013 Part B Premium
More than: But not over:
$170,000 $214,000 $146.90
$214,000 $320,000 $209.80
$320,000 $428,000 $272.70
$428,000 No Limit $335.70

And this table is for single folks:

Singles
Modified AGI is: 2013 Part B Premium
More than: But not over:
$85,000 $107,000 $146.90
$107,000 $160,000 $209.80
$160,000 $214,000 $272.70
$214,000 No Limit $335.70
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What Obamacare Will Do to Your Taxes

Jul 9th, 2012
by jblankenship.
1 comment
President Barack Obama's signature

So, now that the Patient Protection and Affordable Care Act (PPACA, aka “Obamacare”) has been upheld by the Supreme Court, we need to face up to the tax changes that are inherent in this piece of law.  Like it or not, the IRS is going to have a large role in enforcing the provisions of this law.  Listed below are some of the major impacts that we as taxpayers will experience.

Healthcare Deduction Limit

Before PPACA, through the end of tax year 2012, healthcare expenses are deductible to the extent that they are greater than 7.5% of your Adjusted Gross Income (AGI).  AGI is the bottom line on the first page or the first line on the second page of your Form 1040.

The change coming for tax year 2013 is that the limit is now going to be 10% of your AGI.  So, if you have an AGI of $80,000 and deductible healthcare expenses of $10,000 – in 2012 this would result in a healthcare deduction of $4,000 ($10,000 minus $6,000 – where $6,000 is 7.5% of $80,000).  In 2013, this deduction for the same expenses would be reduced to $2,000 ($10,000 minus $8,000 – where $8,000 is 10% of $80,000).

This is likely the tax change that will impact the most people – of nearly all tax brackets.  For 2013 this change will only impact filers under age 65 – those folks will experience the new limit beginning in 2017.

Medicare Wage Surtax

For single filers with incomes above $200,000, a new payroll tax will be applied to income above $200,000.  The same applies for couples with joint income above $250,000.  This payroll tax is equal to 0.9% of the income in excess of the $200,000 or $250,000 level.

Medicare Unearned Income Surtax

With the same levels as above ($200,000 and $250,000) applied to Modified Adjusted Gross Income (AGI), there will be an additional 3.8% Medicare surtax.  This is applied to the lesser of the taxpayer’s net investment income or the excess Modified AGI above the limits.

Modified AGI is defined in this case as AGI plus tax free foreign income.  Investment income includes all interest, dividends, capital gains, annuities, royalties and passive rent income, but does not include tax free interest or (very importantly) distributions from retirement plans.

Note: This is the tax that is often referred to as the “tax on the sale of your home”.  See the article Tax On the Sale of Your Home Email Myth for more details on why this is mostly bunk – there are real impacts to this bit of tax law, just not what is described in the email.

Flex-Spending Account Caps

Healthcare Flex-Spending Accounts will be subject to a cap of $2,500 in annual deductions with the new law.  Before there wasn’t a specific cap, but you were also required to use up the deferred amounts within 3 months of the end of the year.  The jury is still out on whether or not the “use it or lose it” provision will be removed with the new cap – recommendations have been put forth to allow taxpayers to carry over unused amounts, but none have made it to law as of yet.

Penalty for Uninsured

In addition to all of the above, folks who choose to remain uninsured will be subjected to a penalty of the larger of $95 or 1% of income above the threshold that requires the individual (or couple) to file an income tax return.  For a family in 2013, this penalty is capped at $285.  The cap for the penalty will increase gradually (albeit steeply) over the next few years to a maximum of $2,085 in 2016.

Folks in the lower strata of incomes (generally less than household income of around $96,000) will receive tax credits to help them pay for insurance coverage.  The way this credit works too complicated to go into here, but an example would be for a family of four with an income of $48,000 would receive a credit of roughly $11,000 toward healthcare insurance coverage.

Penalty for Companies Not Providing Insurance to Employees

If a company with 50 or more employees provides no insurance to its employees or the insurance provided is substandard or too costly, there is an additional penalty to the company.  The penalty is stiff: $2,000 times the number of employees, with a 30-employee offset.  This penalty will apply if even one employee goes outside of the company-offered plan to an insurance exchange for coverage.

Excise Tax on Medical Devices

Many medical devices, such as wheelchairs and prosthetics (an official list is forthcoming from FDA), will be subject to a new excise tax of 2.3%.  This will not be applied to items that are typically sold in a retail setting, such as eyeglasses, contact lenses, and hearing aids.

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The “Tax on Sale of Your Home” Email Myth

Aug 8th, 2011
by jblankenship.
7 comments
email
Image by Sean MacEntee via Flickr

If you have an email address (and let’s face it, who doesn’t?), you’ve likely received this email.  In case you haven’t received it, there’s an email that is being forwarded around the internet about a new tax on selling your home – I get at least one of these a month it seems. I’ve copied the text of one of the emails below. This article is to help you understand why the email is a misguided myth, partly grounded in truth but not applicable for most folks.

The email is usually forwarded at least a half-dozen times by the time you receive it, making it difficult to know where it started from.  In addition, the text of the email is often in large, bold, red font in places, such that you can almost feel the spittle coming off the page at you.

Here’s the email:

Will you ever sell your house?
Did you know that if you sell your house after 2012 you will pay a 3.8% FEDERAL sales tax on it?

That’s $3,800 on a $100,000 home etc.

When did this happen? It’s in the health care bill. Just thought you should know.

SALES TAX TO GO INTO EFFECT 2013 (Part of HC Bill)  Why 2013? Could it be to come to light AFTER the 2012 elections?

REAL ESTATE SALES TAX

So, this is “change you can believe in”?

Under the new health care bill – did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don’t kick in until 2013 If you sell your $400,000 home, the re will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Does this stuff make your November and 2012 vote more important?

Oh, you weren’t aware this was in the obamacare bill? Guess what, you aren’t alone. There are more than a few members of Congress that aren’t aware of it either

<web address deleted>

Why am I sending you this? The same reason I hope you forward this to every single person in your address book. VOTERS NEED TO KNOW. 

Okay, so here are the facts:

It is a fact that under the Patient Protection and Affordable Care Act of 2010 there is a new 3.8% surtax on unearned income for folks above certain income levels.  I wrote about this surtax in relation to Roth conversions last year, but I didn’t go into detail about this email myth – I hadn’t started receiving them with the frequency that I have lately.

So the kernel of truth in the email is that some home sales could be impacted by this new surtax.  The real truth though is that in the case of a home sale, if the taxpayer has lived in the home for 2 out of the previous 5 years, up to $250,000 of gain in the value of the home is exempt from taxation.  The exclusion of gain amount is doubled to $500,000 for a married couple filing jointly who both meet the “2 out of 5” test.

The other test that would have to be met in order for a home sale to be hit with the surtax is that you have Modified AGI in excess of $250,000 for married couples filing jointly, $125,000 for married couples filing separately, or $200,000 for single and head of household filers.  If you don’t have income above that level, the surtax would not apply to you at all.

In other words, the situation described by the email could come about if you had an income greater than the levels outlined above, and one of the two circumstances below is met for the home sale:

  • You own a home that you and your spouse have lived in for at least 2 out of the previous 5 years and the home has appreciated more than $500,000 in value (or $250,000 for single filers); or
  • You own a home that you have not lived in during the previous 5 years that has appreciated in value in any amount.
  • Note: If you lived in your home less than 2 years out of the previous 5, the exemption is pro-rated.  For example, if you lived in the home only 1 year out of the previous 5, half of the exemption would be available.

I doubt if many folks will come anywhere near meeting those circumstances.  It’s not impossible, but I think far less possible than the email leads you to believe, and the surtax certainly does not apply to ALL real estate sales.

Don’t get me wrong, I don’t want extra taxes imposed in these circumstances, either.  I do think people should know about this tax, but I want them to understand the tax in the correct context.  If you’d like more information on this myth, see what Snopes has to say about it.

Feel free to forward this link to anyone and everyone on your email list, so that the corrected word gets out.  Voters do need to know.

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Baby Boomers Start Medicare

Jan 7th, 2011
by jblankenship.
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good old larkey by anslatadamsAs of 12:01am EST on January 1, 2011, the very first Baby Boomer reached age 65… and that means that the era of Baby Boomers receiving Medicare has officially commenced.

It is estimated that, during the period when Boomers are reaching age 65, between now and roughly 2030, the number of folks on the Medicare rolls will double.  Presently there are approximately 40 million Medicare recipients, and that number is expected to be around 80 million in 20 years.

These incredible numbers will cause major challenges in funding the system – along with serious challenges in controlling the overall costs of healthcare during this period.  The rate of increase in the over-65 population will cause dramatic changes in the healthcare system in terms of capacity, costs, and controls.

The new healthcare law passed earlier this year created an Independent Payment Advisory Board, which is supposed to provide guidance on how to control Medicare spending.  This will have to be accompanied by system-wide strategies to bring down the costs of medical care.

The only alternative to reducing costs is to increase taxes, and we all know how bitter of a pill that is.

Photo by anslatadams

Again, No Social Security COLA for 2011

Oct 22nd, 2010
by jblankenship.
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400px-Cola-hit_gdr-colaNot surprisingly, the Social Security Administration has announced that benefits will again not receive an increase for 2011.  This makes two years in a row that there has been no increase.  Since 2010 ushered in the first ever zero COLA (since it was first put in place in 1972), this is now the first time that there have been two years in a row with zero COLAs.

Why?

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.  See How Social Security COLAs Are Calculated for details on the calculations.

In 2009, when the COLA was being calculated for 2010 benefits, the CPI-W actually decreased -2.2%.  So naturally, there would be no increase for that year.  However, now in 2010, there has been an increase in the CPI-W over the previous year, of +1.5%.  So why aren’t we seeing an increase for 2011?  Because the increase for 2010 was not more than the decrease we saw in the previous year.

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

History

roy and trigger by Traveling Fools of AmericaWay back in 1972 when the automatic COLAs were first enacted, inflation was a major fact of life.  Without question, every year you could count on inflation.  It was considered such an automatic thing that Congress initially set the rule that a COLA would only be applied if the CPI-W increased by more than 3% for the prior year, known as the 3% Trigger (and no, it doesn’t have anything to do with Roy Rogers’ horse).  As far as I can tell, the 3% Trigger was never applied, although it would have been applied in 1986 had the Trigger not been repealed in 1985 (inflation was waning in the 1980’s, so Congress dropped the Trigger).

When the automatic COLAs were put in place, the fact that a year of deflation could occur was accounted for – so that if there has been deflation, the amount of reduction must be overridden by future years’ inflation before an additional positive COLA is applied.  This is exactly the case for 2010 and 2011 – and will also be the case for 2012 if there has not been more than 0.7% additional inflation by the time the calculation is done in 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.  In the case that an increase is calculated for Medicare Part B premiums for 2011 (later this year), most (70%) of all folks paying this premium will not have to pay an increased amount, since the “hold harmless” clause requires that the net Social Security benefit received by the lowest-paid beneficiaries will not be decreased.

If you’re in the upper echelon of Social Security recipients, you’ll still have the increased Medicare Part B premium applied to you.

What it Means

In the end result, what this really means is that, at least according to the cost of the goods and services studied by the CPI-W, Social Security benefit payments are actually larger today (and will be for 2011) than they were in 2008.  Products and services that cost $100 at that time cost only $97.80 at the end of 2009.  And now, at the end of 2010, that same group of goods and services still only costs $99.30.  I know it’s not what you want to hear, but that’s what the index shows.

And if you think about it, it’s true.  Just take the price of gas for instance.  Back in 2008, the cost of a gallon of gas flirted with $4 at several points through the year.  In 2010, although it’s creeping back up, the price of a gallon of gas has rarely been over $2.75 (at least here locally).

Photo #1 by Wikimedia
Photo #2 by Traveling Fools of America

How to Apply for Social Security Benefits

Oct 15th, 2010
by jblankenship.
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i love cubicles by Tim PattersonThere are three methods you can use to apply for Social Security retirement benefits – but just in case you’re overwhelmed and don’t know where to start, here’s how to do it:

By Phone – call the Social Security Administration at 1-800-772-1213 between the hours of 7am and 7pm (they don’t say, but I’m assuming this is Eastern time) to set up an appointment to apply.  You can also call 1-800-325-0778 for TTY service, if you require it.

In Person – just show up at your local Social Security Administration office.  You can find the closest office by clicking this link and entering your ZIP code.  From what I hear, visiting the local office can be a hit or miss experience, similar to visiting the DMV to get your driver’s license renewed.  You could get right in with little wait, but more likely you’ll spend quite a bit of time “in queue”.  Here’s a tip though: if you can work it out, I understand that the day after Thanksgiving is the best day of all to visit the local SSA office.  They’re open and operating, but nobody expects them to be.  It’s worth a try.

Online – you can go to the Social Security website and there, right in the middle of the page, is a link to “Select Below to Apply For: Retirement Benefits”.  You can use this online application if you’re at least 61 years and 9 months of age, and you plan to begin your benefits within the next four months (you also live in the US or one of its commonwealths or territories).

If you’re already age 62 or better, you could begin receiving benefits as early as the month you apply.  In addition, if you’re at least 64 years, 8 months of age, your online Social Security benefit application will also include applying for Medicare.

Things you’ll need before you start the process:

  • Your date and place of birth and Social Security number;
  • Your bank or other financial institution’s Routing Transit Number and the account number, if you want the benefits electronically deposited.  You can get this information from a check or deposit slip (it’s those funky-looking numbers along the bottom edge of the check);
  • The amount of money earned last year and this year. If you are filing for benefits in the months of September through December, you will also need to estimate next year’s earnings;
  • The name and address of your employer(s) for this year and last year;
  • The beginning and ending dates of any active U.S. military service you had before 1968;
  • The name, Social Security number and date of birth or age of your current spouse and any former spouse. You should also know the dates and places of marriage and dates of divorce or death (if appropriate); and
  • A copy of your Social Security Statement.  Even if the earnings on your Statement are not correct or you are not sure if they are correct, please fill out the application. The Social Security Administration will assist you in reviewing and correcting your record after they receive the application. 
    Photo by Tim Patterson
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