Financial Ducks In A Row • Independent financial advice: IRA, Social Security, income tax, and all things financial

Posted in: #noTOP, 2016 tax year, income tax, irs.
Tagged: income tax · irs

Charitable Contributions from Your IRA

Dec 21st, 2015

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contributed cat Once the PATH Act (Protecting Americans Against Tax Hikes) is signed into law, at long last the ability to make a direct contribution from an IRA to a qualified charity will be permanent.

For background – a Qualified Charitable Distribution (QCD) is when an individual (age 70 1/2 or older and subject to Required Minimum Distributions from his or her IRA) makes a distribution from his IRA directly to a qualified charity. This distribution can be used to satisfy the Required Minimum Distribution for the year. The distribution is limited to $100,000 for each year per individual.

The real advantage of this option is that the owner of the IRA doesn’t have to claim the distribution as taxable income on his or her tax return. Any other distribution of pre-tax dollars typically must be claimed as ordinary income, increasing taxes because of the additional income.

In addition, having the increased income can cause other tax credits and deductions to be reduced (since the Adjusted Gross Income is greater). Medical expense deductions, limited to the amount above 10% of your AGI, is one such deduction that is impacted this way. For example, if you had deductible medical expenses in the amount of $10,000 for the year and your AGI is $75,000, you are allowed to itemize $2,500 in medical expenses ($10,000 minus $7,500, 10% of your AGI). If you took a distribution from your IRA to satisfy RMD in the amount of $10,000, your AGI would increase to $85,000 and therefore reduce your deductible medical expenses to $1,500 ($10,000 minus $8,500, 10% of your AGI). Because of this differential, since the QCD is not counted as income at all, this is much preferred to taking a distribution, counting it as income and then making the deductible contribution.

This QCD has been available for several years, but has always been limited to a year or two and renewable by Congress (it has always been renewed, sometimes retroactively). Most recently the provision expired at the end of 2014 and has not been available in 2015 (until the law is signed). Because of this late extension of the provision, often taxpayers don’t know whether the provision will be allowed until very late in the year, and have often already taken their RMD earlier. The PATH Act takes the action of making this option permanent. Now you can plan and make the QCD at any time in the year and know that it’s going to be available.

If you already took your RMD for the 2015 tax year there is no way to undo this fact, but you could still make another distribution directly to a qualified charity if you like. Or you could donate your RMD in cash to the qualified charity, increasing your income by the distribution and then taking the charitable contribution deduction on your tax return.

Posted on Dec 21st, 2015

by author: jblankenship.

Posted in: #noTOP, 2015 tax year, IRA, QCD, required minimum distribution, rmd.
Tagged: IRA · QCD · required minimum distribution · rmd

The Power of Compounding

Dec 18th, 2015

by sraskie.

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Many individuals understand the power of compound interest. They understand that compound interest means money or interest earned on interest received. That is, if I earn 5 percent interest annually on one dollar, in one year I’ll have $1.05, but in two years, I’ll have $1.1025, not $1.10.

Granted, this may not seem like a lot; and it isn’t. But on several thousand or hundred thousands of dollars it really starts to add up. This post is mainly for those individuals who haven’t heard of this concept or haven’t started utilizing it to their advantage. Mainly, I’m addressing millennials and college students.

Those individuals in the cohort I’m address have one powerful thing on their side: time. We’ve written before on this blog about the power of time and starting to save early. We showed the comparing of someone starting right away either during or right after college and another start 20 years after college – perhaps in their 40s.

The post showed that the individual that started early, ended up having to save less, but earned more in the long run as compared to the late starter – due to starting early and the power of compounding.

So if you’re in college or consider yourself a millennial, consider starting to save today in an IRA, your employer’s 401(k), or a non-qualified investment account. Additionally, there’s also another way to take advantage of compounding – and that is continuing to invest in your human capital.

Investing in your human capital means continuing education such as a designation, advanced degree or personal development through reading books or taking courses in an area of study. This compounding of knowledge can help boost your income which will then allow you to save more and have more both now and for retirement.

To get started, consider exploring your employer’s plan. Try to save at least 10 percent of your gross income, and aim for 15 to 20 percent. The sooner you start and the higher percentage you choose the better. You won’t miss it. From there, consider opening and contributing to an IRA. In addition, explore options that may increase your human capital such as a Master’s Degree, PhD or other coursework.

However, carefully consider if the expense of such a degree or coursework will compound for you. What I mean is it’s important to analyze whether or not the advance degree make sense financially. If the advanced degree will cost five to six figures, but return very little in regards to financial increase, you may consider another route. While I am in favor of education, the last thing an individual wants to do is wind up six figures in debt without a significant financial return on that investment.

Finally, consider giving of your time and resources to others. Your generosity and advice to others compounds in ways you may not see physically (such as monetary or other rewards) but it will reward you holistically and potentially spiritually. After all, is anyone really self-made? I would argue no. They had help from others along their journey – both seen and unseen. And with some luck as well, they were able to make the most of what they were given. So will you; and then it will continue to compound.

Posted on Dec 18th, 2015

by author: sraskie.

Posted in: fee-only, fiduciary, financial planning, investing, saving.
Tagged: financial planning · investment · retirement savings

6 Strategies for Social Security Benefits That Are Still Available

Dec 16th, 2015

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Earlier this fall the Bipartisan Budget Act of 2015 was passed. This was important to folks looking to maximize Social Security benefits because two of the primary strategies for maximization were eliminated with the passage of this legislation. You may be wondering if there are any strategies left to help maximize benefits – and as it turns out, there are still a few things you can do. Four of these strategies apply to anyone, while the last two only apply to married couples. (Note: if you were born in 1953 or before, you have more options available to you as a result of the grandfathering of some rules. See The Death of File & Suspend and Restricted Application for more details.)

Delay

Delaying benefits beyond age 62 or your full retirement age (FRA) continues to provide a strategy for increasing your benefits. In fact, this strategy alone is likely the most beneficial of all strategies dealing with maximizing benefits. The chart below represents the increase in benefits that you can expect by delaying from one age to the next.

Age	Increase Year-over-Year
Age	FRA=66	FRA=67
62	–	–
63	6.67%	7.14%
64	8.34%	6.67%
65	7.68%	8.34%
66	7.15%	7.68%
67	8.00%	7.15%
68	7.41%	8.00%
69	6.90%	7.41%
70	6.45%	6.90%

You may be wondering why the increase is less than 8% in the years following Full Retirement Age. This is because when you earn the 8% per year delay credit, that credit is applied to your Full Retirement Age amount. If you compare the amount you’d receive at 66 with the amount you would receive at age 70, the increase is 32% – 8% per year for four years. But each year-over-year increase is being compared to the prior year, not the FRA year.

Do-Over

Another option that has undergone a change over the years is the “do-over”. This is where you file for Social Security benefits and then change your mind and withdraw your application. In order to do you, you must pay back all benefits received to-date, and you can only do this within the first 12 months of receiving benefits. You also are limited to enacting this strategy only once in your lifetime.

Even with the limits, the do-over might be useful. For example, if you are delaying your benefits to age 70, and you have reached age 69. If you wanted to, you could apply for Social Security benefits now, and receive benefits for just less than a full year, having the money available to you to do as you wish during that time. Then, assuming nothing has changed about your life (health outlook is still good, no reason to believe you wouldn’t live a long, full life), you could pay back the money that you’ve been receiving for the past 11 months and withdraw your earlier application. Then you could re-apply for benefits as of your 70th birthday, with an increased amount.

On the other hand, if something happened during the intervening year and you decided you wanted to keep the benefits you’ve received for the year, just keep them and continue receiving benefits at the same level.

The example uses the ages of 69 and 70, but you could enact this strategy at any age from 62 onward. For example, you could file at age 65, wait 11 months, then withdraw your application and pay back the benefits. Then you could re-apply immediately, wait a year, two years, or four more years to re-apply.

Earning More Than the Limits

When you are receiving Social Security benefits and you are younger than your Full Retirement Age, earning more than certain limits can result in Social Security’s withholding some benefits – potentially even eliminating the current benefits you’re receiving. But the other thing that happens when these benefits are withheld is that you will eventually receive credit for those withheld months. This means that your filing date will be reset when you reach Full Retirement Age – increasing your available benefits. This strategy only applies while you are younger than FRA. After FRA you can earn as much as you like and no benefits will be withheld.

For example, if you started receiving Social Security benefits at age 62 and earned enough during the four years prior to reaching FRA to have four months’ worth of benefits withheld each year, a total of 16 months’ benefits were withheld. When you reach FRA, your filing date will be re-set from your age 62 to age 63 and 4 months (16 months later). This would have the effect of increasing your benefit by 9.49% from the age 62 amount. So if you were receiving $750 per month, the increase would bring your benefit to $821.

If your own benefit is being withheld due to over-earning, any other benefits paid on your record (such as spousal or other dependent’s benefits) will also be withheld. Unfortunately those withheld benefits are not credited back to your dependents later – they are gone for good.

Suspending

Although the Bipartisan Budget Act of 2015 (BBA15) made major changes to the “suspend” option, it can still be a viable strategy for some folks. In the past, suspend was usually considered a complement to “file” – you only heard of “file and suspend”. But in the new world after BBA15, you might find it advantageous to use a suspend strategy under certain circumstances. This is often referred to as “start-stop-start”.

For example, Steve is about to reach age 62, his wife Janice is 59, and they have an adopted son Joel, age 13, who is in their care. Steve’s PIA is $2,000. Steve can start his Social Security benefits at 62, which will make both Janice and Joel eligible for benefits based on Steve’s record. Janice can receive $762 monthly as a mother’s benefit, Joel can also receive $762 (these are less than 50% due to the family maximum limit). Steve will also receive $1,500 for his own benefit. The household total will be $3,024.

When Joel reaches age 16, Janice’s mother’s benefit will cease, and Joel’s dependent benefit will increase to $1,000. Steve is now age 65. When Joel reaches age 18, his dependent benefit will cease as well. Steve, now at age 67, could suspend his benefit, delaying for 3 years to pick up the delayed retirement credits. If he does this, his benefit at age 70 would have grown to $1,860 (from his reduced $1,500).

At the same time, when Steve suspends his benefit, Janice could start her benefit, providing some additional income during that period of time. The only thing that could not be done at that stage is for Janice to take a Spousal benefit, since Steve’s benefit is suspended.

This way Steve has maximized benefits for his own family circumstance early on, and then increases his benefit for later in life via suspending. As long as Steve isn’t working and earning more than the minimums (see above) this should work out just fine.

Adding Spousal Benefits Later

Another option that might be helpful for a couple is to time the filings so that one spouse can delay receipt of spousal benefits until later.

Taking the case of Steve and Janice above – when Steve suspends his benefits at age 67, Janice is age 64. Her PIA is $800, and so if she starts her benefit at exactly age 64 she could receive $693, a reduction of just over $100 from her PIA. Then, when Steve reaches age 70 and files for his own benefit again (Janice is now 67), Janice can add the Spousal Benefit to her reduced benefit.

The Spousal Benefit for Janice would be calculated as: 50% of Steve’s PIA ($1,000) minus Janice’s PIA ($800) which equals $200. This is the Spousal Benefit “excess” that will be added to Janice’s reduced benefit of $693, for a total of $893.

Maximizing Survivor Benefits

For a couple with similar PIAs and close ages, it may make sense to take one benefit earlier and the other later. This is to maximize the Survivor Benefit while receiving the most benefits early on in the process.

Take for example Beth, age 62 and Samantha, age 60, married for 3 years. Beth has a PIA of $2,200, and Samantha’s PIA is $1,800. Since their PIAs are fairly close in amount to one another, it is likely that neither would ever receive a spousal benefit based on the other’s record. Therefore we are mostly looking at two separate individuals’ records, with the difference being that one of the benefits will continue on in the event of the death of the first member of the couple.

Since Samantha’s PIA is smaller, it may make sense for her to file for her Social Security benefits at the earliest age, 62. This will result in a reduction of her benefits to approximately $1,300, but she will receive this benefit right away, and will receive it (with annual COLAs applied) until either she or Beth dies.

Beth, on the other hand, having the larger PIA, should delay receipt of benefits as long as possible in order to maximize her own benefit and the amount of benefits available as a Survivor Benefit to Samantha in the case if Beth should die first. Beth would receive approximately $2,904 if she delays to age 70 – and upon her passing, Samantha would receive this amount as well (Samantha’s benefit would cease at that time).

Posted on Dec 16th, 2015

by author: jblankenship.

Posted in: Social Security, social security benefits, Social Security spousal benefit, social security survivor benefits.
Tagged: Social Security · social security spousal benefit

How to Take a Loan from Your 401k

Dec 14th, 2015

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loan You have this 401k account that you’ve been contributing to over the years, and now you’ve found yourself in need of a bit of extra cash. Maybe you need to cover the cost of a new furnace, or possibly you have some extra medical bills that need attention, and you don’t have the extra cash to cover. Whatever the reason, a loan from your 401k might be just the ticket.

A 401k (or other employer-based plan like a 403b, 457, etc.) is unique from an IRA in that you are allowed to borrow against the account. An IRA can never be borrowed against, any withdrawals are immediately taxable.

Before we go into the specifics of taking a loan from your 401k, since I’m a financial planner I have to put a word of warning out: Borrowing from your 401k should be considered a “last resort” option, when you’ve exhausted all other options. This is because when you take a loan from your 401k you are side-tracking your retirement savings due to the fact that you have to divert income toward paying back the loan. The end result is that instead of growing steadily via your payroll deductions, after the loan is paid back you’ll be pretty much where you were before.

The good news is that taking a loan from your 401k may be one of the most cost-effective loans available, since you’re effectively borrowing from yourself. The downside mentioned above should be factored into the cost, but if you’re really up against the wall and have no other options, you can do much worse than a loan from your 401k.

Taking a loan from your 401k

All 401k (and other qualified retirement plans) have the option of allowing participants to take a loan against the account. (Some administrators restrict the option, so you’ll want to check with the rules of your plan.) The way this works is that you determine the amount you want to borrow (there are limits, see below) and then complete the paperwork to arrange the loan.

At the time of the loan, you also must make arrangements for the payback. Typically this is handled the same way as your normal contributions to the account, via payroll deduction. There will be a particular interest rate applied to the loan, often referred to as tied to a rate index, such as “Prime plus 2%”.

Then your loan repayment period of time is set as well. The longest you can spread out your repayments is five years from the loan origination. You could choose a shorter period of time if you like.

In addition, if you are unable to complete the loan repayment schedule as planned, you may have to recognize the loan withdrawal (or remaining balance) as a distribution of taxable income. Plus, if you’re under age 59 1/2 this could also require a 10% penalty for early withdrawal, unless you meet one of the other early withdrawal criteria.

Loan repayment may be suspended for up to one year in the event of the employee’s taking a leave of absence, but the original loan repayment schedule will remain intact.

If you leave your employer, typically you are required to either pay off the loan completely (immediately). If you are unable to do so, you will have to recognize the outstanding balance as a distribution as described above.

What are the limits?

I mentioned earlier that there are limits to the amount that you can borrow in a loan from your 401k. The maximum amount that can be borrowed at any one time is 50% of your vested account balance, or $50,000. This means that if your 401k balance is $200,000, the most you can borrow at any one time is $50,000. On the other hand, if your account balance is $50,000, you can only borrow $25,000 (50%).

If your 401k balance is less than $20,000, you are permitted to take up to $10,000 or 100% of your vested 401k balance, whichever is less. So if your vested account balance is $7,500, the most you could borrow is 100%, $7,500. If the account balance is $18,000, the most you could borrow would be $10,000.

Posted on Dec 14th, 2015

by author: jblankenship.

Posted in: 401 k, 401k, qrp, qualified retirement plan.
Tagged: 401k · 401k loan · 403b · qrp · qualified retirement plan

Your Year End Financial Checklist

Dec 11th, 2015

by sraskie.

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As 2015 winds down it may be an ideal time to consider wrapping up (pun intended) some loose ends regarding your finances and getting ready to welcome 2016 financially prepared. Here’s a list of things to consider as 2015 comes to an end.

Have you made your maximum IRA contribution for 2015?

If you have yet to contribute the maximum to your IRA there’s still time. Individuals under age 50 can contribute $5,500 while those 50 and over can contribute $6,500. Individuals have until they file their 2015 taxes or the 2015 tax deadline (whichever comes first) to make their 2015 IRA contributions. Expecting a Christmas bonus? Your IRA is a good place to put it.

Consider increasing the amount you contribute to your 401(k).

If you’re not already maxing out your employer plan contributions ($18,000 if you’re under 50 and $24,000 if you’re 50 or older) consider increasing the amount you contribute. Many individuals get annual raises yet fail to give themselves a raise for retirement. An easy way to do this is simply save a set percentage (such as 10, 15, or 20 percent) and your contributions will automatically increase with raises.

Are you taking advantage of all your employer’s benefits?

Take some time to look at all the benefits your employer offers. This may be health and fitness plans, flexible spending accounts, and other benefits. Very often employers will provide these benefits at significant discounts as well as tax savings to employees.

Pay it forward.

For years you’ve read about us ranting about paying yourself first. But also consider looking back at your year and what you’ve accomplished and been blessed with. Then consider paying it forward. Give to others in need, volunteer to an organization that needs it, bring happiness to someone’s life.

Set financial goals.

Take some time to sit down and write sown some financial goals you’d like to accomplish in 2016. This could be becoming debt free, or simply paying down one debt at a time. Other goals may be to establish an emergency fund, save more for retirement or start a college savings plan. Goals aren’t goals until they’re written down and acted on.

Review your risk management.

This is a great time of year to review your auto, home, life, health, and disability insurance. Check to make sure your liability limits are high enough on your auto and home insurance. Look into your deductibles. If you have an older vehicle not worth much, consider raising or eliminating your deductibles to save premium. Take some time to do a video inventory of your home. In case of a total loss, you’ll have access to a video file of all of your belongings, making it easier to inventory those items if lost due to fire.

Review your life and disability insurance. In the event of your death, will your family have enough to keep living comfortably? Consider disability insurance if you don’t have it. Statistically, you’re more likely to become disabled during your working lifetime than you are to die prematurely. Hedge this risk with disability insurance to protect your income.

Talk with a financial professional.

Some of the items mentioned above may be confusing or even daunting to undertake. That’s where you can leverage the knowledge of a competent financial professional. An independent, fee-only fiduciary advisor can provide guidance on many if not all of the above issues while remaining legally bound to act in your best interest. A few hours and a few hundred dollars can set you up to meet 2016 with the confidence to achieve your financial goals.

Posted on Dec 11th, 2015

by author: sraskie.

Posted in: #noTOP, budgeting, fee-only, fiduciary, financial planning.
Tagged: fiduciary · financial planning · retirement plan

Social Security Ground Rules

Dec 7th, 2015

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(In celebration of the release, here is an excerpt with some extras, from A Social Security Owner’s Manual, 4th Edition.)

There are certain rules that will be helpful to fully accept as facts while you learn about your Social Security benefits. If this is your first reading of the list, skim through before moving on. Don’t expect to fully understand these rules on the start – but keep in mind you may need to refer back to this list of Ground Rules from time to time so you can keep things straight.

Basic Social Security Rules

The earliest age you can receive retirement benefits is 62.
The earliest age you can receive Survivor Benefits is 60 (50 if you are disabled).
Filing for any benefit before Full Retirement Age will result in a reduction to the benefits.
Your spouse must have filed for his or her retirement benefit in order to enable you to file for Spousal Benefits. This benefit may be suspended if the “suspend” is or was done prior to April 30, 2016.
File & Suspend and filing a Restricted Application are two distinctly different things. *Both of these options were curtailed significantly with the passage of the Bipartisan Budget Act of 2015 (BBA15).
- File and suspend to allow another person (spouse or dependents) to receive benefits based on your record is only allowed by April 30, 2016.
- Restricted Application is only available if you were born before 1954.
- See The Death of File & Suspend and Restricted Application for more details on each of these.
The earliest age you can File & Suspend is your Full Retirement Age. This applies whether you are suspending under the new rules (after BBA15) or the old rules.
The earliest age you can file a Restricted Application is your Full Retirement Age. *This option is only available if you were born before 1954. See the article referenced above for more details.
You cannot File & Suspend and file a Restricted Application at the same time. For some reason, many folks I hear from believe that in order to file a Restricted Application they must first File & Suspend. This is not true, if you File & Suspend you will not be eligible to file a Restricted Application. Read on for more details.
While technically allowed, there is very little accomplished if both spouses File & Suspend. Typically one spouse will File & Suspend and the other will file for Spousal Benefits based upon the first spouse’s record.
Only one member of a married couple can file a Restricted Application. The exception to this rule is for divorced spouses who remain unmarried – and are both over Full Retirement Age.
If you have filed for your own benefit prior to Full Retirement Age and are therefore receiving a reduced benefit by filing early, when you file for a Spousal Benefit you will never receive the full 50% of your spouse’s Primary Insurance Amount. This is due to the fact that the reduction to your own benefit from filing early continues to apply to your total benefit when the Spousal increase is added.
For every month after Full Retirement Age you delay filing for your own retirement benefit, you will accrue Delayed Retirement Credits, increasing your future retirement benefit when you file for it.
There is no increase to Spousal Benefits if the spouse delays filing for Spousal Benefits beyond his or her Full Retirement Age.
There is no increase to Survivor Benefits if the surviving spouse delays filing for the Survivor Benefit beyond his or her Full Retirement Age.

Posted on Dec 7th, 2015

by author: jblankenship.

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Posted in: Bipartisan Budget Act of 2015, Social Security, Social Security Owner's Manual, social security retirement, Social Security spousal benefit, social security survivor benefits.
Tagged: BBA15 · Social Security · social security spousal benefits

5 Ways to Avoid Overspending for the Holidays

Dec 4th, 2015

by sraskie.

1 comment

Tis the season! With just over three weeks until Christmas day arrives there’s still plenty of time to get your Christmas shopping done and be able to do so without breaking your budget. To help individuals manage their Holiday spending, here are five tips to keep your Holidays budget from exceeding your limits.

Set a budget. This can be done by setting a budget per family you are giving to, or per child in your home. In addition, you could also set a budget regarding how much you’ll give to charity as well.

Stick to your budget. A budget is not any good if it’s not adhered to.

Avoid using credit cards to make your Christmas purchases. This gets a lot of folks into trouble and is truly the gift that keeps on giving in the form of excessive interest on the credit card balance. Only use your credit card if you know you’ll be able to pay it off at the end of the month. Another option is to be proactive. Many banks and credit unions have “Christmas Accounts” allowing money to be set aside to plan for Holiday expenditures.

Consider giving your time. This could be donating your time to a charitable cause, or investing more time to your family. Additionally, consider giving the gift of experiences. This could be mentoring a young person or new business owner.

Consider making your gift. Ideas could range from a photo collage of fun experiences with loved ones to more formal crafts if you’re so inclined. Stuck about an idea? There are several areas to look such as the Internet and Pinterest.

These are just a few ideas to help reduce the stress of overspending this Holiday season.

Posted on Dec 4th, 2015

by author: sraskie.

Posted in: #noTOP, fiduciary, financial planning, spending.
Tagged: financial planning

Our Investment Philosophy

Nov 30th, 2015

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Photo credit: nan

One 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.

Posted on Nov 30th, 2015

by author: jblankenship.

Posted in: diversify, fiduciary, financial planning, investing, investment, investment diversification.
Tagged: diversification · investing · investment philosophy

What Do Minimums Really Mean?

Nov 27th, 2015

by sraskie.

2 comments

Some 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.

Posted on Nov 27th, 2015

by author: sraskie.

2 comments already - add to the conversation!

Posted in: fee-only, fiduciary, financial planning.

Inter-Family Loan Topics

Nov 23rd, 2015

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Photo credit: Photos.com

Often, 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.

Posted on Nov 23rd, 2015

by author: jblankenship.

Posted in: fiduciary, financial planning.

Buy Term and Invest the Difference?

Nov 20th, 2015

by sraskie.

5 comments

A 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.

Posted on Nov 20th, 2015

by author: sraskie.

5 comments already - add to the conversation!

Posted in: fee-only, fiduciary, financial planning, life insurance, Roth IRA, roth ira.
Tagged: buy term invest the difference

Social Security Bend Points for 2016

Nov 16th, 2015

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When 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).

Posted on Nov 16th, 2015

by author: jblankenship.

Posted in: #noTOP, 2016 tax year, bend point, primary insurance amount, Social Security, social security benefits.
Tagged: bend point · primary insurance amount · Social Security · social security benefits

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

Nov 11th, 2015

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Recently 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.

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. 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.

Posted on Nov 11th, 2015

by author: jblankenship.

Posted in: #noTOP, 2016 tax year, cola increase, cost of living adjustment, Earnings Limits, Social Security.
Tagged: cola increase · cost of living adjustment · earnings limits · Social Security

Medicare Premium Part B Premium Increase for 2016

Nov 9th, 2015

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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
Social Security	Single	Joint	2016 Medicare Part B Premium
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.

Posted on Nov 9th, 2015

by author: jblankenship.

3 comments already - add to the conversation!

Posted in: #noTOP, 2016 tax year, Medicare, medicare part b.
Tagged: medicare · medicare part b

The Death of File & Suspend and Restricted Application

Nov 2nd, 2015

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The 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.

[graphiq id=”lmKpKnihBsh” title=”Social Security Beneficiaries” width=”600″ height=”514″ url=”https://w.graphiq.com/w/lmKpKnihBsh” link=”http://time-series.findthedata.com/l/56644/Social-Security-Beneficiaries” link_text=”Social Security Beneficiaries | FindTheData”]

Posted on Nov 2nd, 2015

by author: jblankenship.

207 comments already - add to the conversation!

Posted in: #noTOP, Deemed Filing, res, restricted application, Social Security, Social Security spousal benefit.
Tagged: Deemed Filing · restricted application · Social Security · spousal benefit

Advice I Would Give My Younger Self

Oct 30th, 2015

by sraskie.

5 comments

Last week marked the 30^th 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.

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.

Don’t be afraid to live frugally. It’s not how you spend that will impress people, it’s your character.

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.

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.

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.

Drive your 1985 Pontiac Sunbird until it completely dies. You’ll save so much by not having a car payment. See point number 2.

Hold off on applying for a credit card. There’s plenty of time and you don’t need one now.

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.

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.

You will have regrets. Don’t dwell on them. Learn from them.

You will learn a lot by failing. Get ready for some whoppers.

Try your best to think before you speak or act. This will benefit you more than you know.

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.

When you move to Springfield, Illinois, look up a guy by the name of Jim Blankenship. Trust me on this one…

Posted on Oct 30th, 2015

by author: sraskie.

5 comments already - add to the conversation!

Posted in: fee-only, fiduciary, financial planning.
Tagged: financial planning

Get some now, get more later

Oct 26th, 2015

11 comments

Note: 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.

[graphiq id=”3GQQ2SZjuE5″ title=”Average Social Security Payout per Month” width=”600″ height=”520″ url=”https://w.graphiq.com/w/3GQQ2SZjuE5″ link=”http://time-series.findthedata.com/l/56643/Average-Social-Security-Payout-per-Month” link_text=”Average Social Security Payout per Month | FindTheData”]

Posted on Oct 26th, 2015

by author: jblankenship.

11 comments already - add to the conversation!

Posted in: #noTOP, fil, file and suspend, restricted application, Social Security, Social Security spousal benefit.
Tagged: file and suspend · restricted application · Social Security · spousal benefit

SOSEPP – Fixed Annuitization method

Oct 19th, 2015

1 comment

Photo credit: coop

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.

Posted on Oct 19th, 2015

by author: jblankenship.

Posted in: 401k, 403 b, 72t, Early Distribution, IRA, qrp, qualified retirement plan, retirement plan.
Tagged: 401k · IRA · SOSEPP

SOSEPP – Fixed Amortization Method

Oct 19th, 2015

1 comment

Photo credit: malomar

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.

Posted on Oct 19th, 2015

by author: jblankenship.