Private Student Loans: Should I Refinance a Federal Student Loan?

By Saki Kurose | Student Loan Planning

As college costs continue to rise, the need for students and their parents to borrow money to get a college education has also increased. Americans now owe about $1.6 trillion in student debt, according to the Federal Reserve.

In general, there are two types of student loans: federal and private.  Federal student loans are issued by the government, whereas private student loans may come from different nonfederal lenders such as banks, schools, or credit unions.  

Are your student loans federal or private?  

Over the course of your studies, you may have taken out many loans.  Since your repayment strategy may depend on the type of loans you have, it is important to take an inventory of all your loans.  If you have federal loans, you can create an account on studentaid.gov and log in to see your federal loans.  To identify your private loans, you can get a free annual credit report from Equifax, Transunion, or Experian.  Since both federal and private education loans appear on your credit report, any education loans you see on the credit report that are not listed on studentaid.gov are private student loans. 

What are some examples of the terms you may see in private student loans?

The terms of private student loans are set by the lender and, therefore, may vary greatly.  The interest rate can be fixed or variable.  Also, although most lenders realize that students do not have the means to make payments, some may require repayment anyway while you are still in school.  Generally, private loans are more expensive than federal loans and may require the borrower to have a good credit record or a cosigner.  Having a cosigner may help reduce your interest rate, but you should watch out for the risks involved. For example, the promissory note may contain a provision that requires you to pay the entire balance in case of the cosigner’s death. 

Private loans are like any other type of traditional loans, such as a car loan or a mortgage. You need to be able to afford the monthly payments.  If you recently graduated from school, you may not have the financial means to make the payments.  Federal loans, on the other hand, may come with options for postponing or lowering your monthly payments. 

Therefore, if you are thinking about taking out student loans, it is generally better to apply for and exhaust all the federal student loan options before taking out private loans . 

When could it be better to have a private student loan?  

If you think you will have a stable job and are confident about your ability to make the required monthly payments, having a private loan with a lower interest rate could be beneficial.  If you originally took out federal loans, you can refinance the loans with a private lender and, if you can refinance at a lower interest rate, you may save a lot of money.  However, it is important to know that you cannot refinance your private loans into federal loans, which means that once you refinance your federal loans, you will permanently lose the benefits and options under the federal system that I will discuss in my next article.

Refinancing case study: Sarah, a physician

Let’s look at Sarah as an example. She is a physician making $250,000 a year and has a federal student loan balance of $250,000 with a 6% average interest rate*. Sarah has an excellent credit history and could take advantage of the historically low interest rates right now. She finds a private lender to refinance at 2.99%.  After refinancing, she would pay $2,413 a month for 10 years compared to $2,776 for the federal Standard 10-year repayment plan and save about $43,000 in total over the 10 years.  (*Note that the interest rate for some federal loans is 0% until December 31, 2020, so Sarah may want to take advantage of that and wait to refinance.)

Sarah likes the idea of saving $43,000. She feels comfortable about her ability to make the monthly payments of $2,413. That makes her a good candidate for private refinancing.  

However, is it possible that someone like Sarah could benefit from keeping her loans in the federal system?  In my next article, I will explain when and how Sarah and a medical resident, Jimmy, could benefit from keeping their federal loans. Spoiler: There are special protections and programs for federal student loan borrowers !

[A version of this article was also published on Kiplinger: With Private Loan Interest Rates So Low, Should You Refinance a Federal Student Loan?]

How Can Divorced Women Claim Social Security?

By Chris Chen CFP | Divorce Planning , Retirement Planning

When the Social Security Act passed in 1935, it included benefits for workers, but not for their spouses. At the time, women who did not work outside of the home could not qualify for Social Security retirement benefits. A sweeping series of amendments enacted in 1939 extended Social Security to spouses and minor children. Wives who had not earned a social security retirement benefit or whose retirement benefit was less than 50% of their husbands qualified for the first time.

Catching up with a changing society, another reform extended Social Security retirement benefits to divorced wives in the cases when the divorce happened after a marriage longer than 20 years. The word “spouse” replaced the word “wife” in the 1970s, allowing husbands to collect retirement benefits on their ex-wives record.

Later, the length of marriage required to qualify for benefits after a divorce was reduced to 10 years. When SCOTUS legalized same-sex marriage in 2015, survivor and divorce benefits extended to same-sex couples.

This short history of Social Security shows how it has evolved over time. Ex-wives and ex-husbands can now all receive retirement benefits based on an ex’s work record. However, qualifying conditions must be met.

The rules can be confusing and difficult to keep track of, especially for those who have had more than one marriage and divorce or those whose ex-spouse has died. 

Benefits for Divorced People

When a divorced spouse claims their benefit at full retirement age or later, they will qualify to receive 50% of their ex-spouse’s Primary Insurance Amount (PIA) , so long as they have not remarried before 60 years of age and do not qualify on their own record.

Let us take the case of Jack and Jill, who are divorced. Jack’s PIA is $2,800. In this example, Jill does not qualify for a retirement benefit on her own record. She files for her divorced-spouse benefit at her full retirement age of 66. She will qualify to receive 50% of Jim’s Primary Insurance Amount, $1,400, as her divorced-spouse benefit.

The earlier you claim your benefits, the less you will get, consistent with other Social Security benefits. Conversely, you will receive more if you claim when you are older. To maximize Social Security benefits, you will need to delay them until 70 years of age.

However, divorced people who claim on their ex-spouse’s record will not get more if they delay their benefits until 70 years of age . They maximize them at full retirement age, 66 to 67, depending on the year of birth.

It’s worth noting that when Jill’s own benefit is more than 50% of Jack’s, she will receive her Social Security retirement. She will not receive her benefit amount as well as 50% of Jack’s!

Sometimes people wonder how their age difference with their ex-spouse can affect their benefits. The good news is that the ex-spouse’s age when they claim is not relevant. As long as Jill claims at full retirement age, she will receive her maximum benefit independently of the timing of Jack’s claim.

Who Qualifies?

A person who claims his or her benefits based on a former spouse’s record must be single at the time. So unfair, you say? If Jill, in our example, has remarried, generally she could get 50% of Jack’s benefits, or her own, if her own is greater than 50% of their Jack’s.

Jack may be married or unmarried. It makes no difference. If Jack happens to be (re)married, Jill and the current wife could both get the 50% benefit from Jack’s record. For that matter, they can both get upgraded to the full benefit at full retirement age.

Suppose Jill, who receives the 50% benefit, remarries. In that case, her 50% benefit from Jack’s record stops, unless Jill’s new spouse also gets a divorced spouse benefit. That’s except if the remarriage occurs after age 60.

A marriage must have lasted for ten years or longer to claim Social Security retirement benefits on an ex-spouse’s record . Because of that requirement, sometimes people who think of divorce will delay until ten years of marriage are achieved. For example, if you’ve been married 9.5 years, it may be worth it to wait another six months.

Sometimes people are not sure when they actually got divorced. People often mark their court appearance date as the divorce date. In most states, however, the real divorce date is later than the court appearance. For example, in Massachusetts, it is 90 or 120 days later, depending on the type of filing.

More Marriages and Divorces

People sometimes ask: what if you had two or more ten-year marriages?

Then, it can become complicated. Those who have divorced more than once from marriages of ten years or longer can choose the higher of the two divorced-spouse benefits, so long as they are currently unmarried.

For example, let’s suppose that Sheryl was married to Patrick for 20 years and John for 12. Sheryl has now divorced for the second time and has remained single for more than two years since her last divorce from John.

Patrick’s PIA is $2,600, and John’s PIA is $2,400. Let’s suppose again that Sheryl doesn’t qualify for a retirement benefit based on her own record. However, she is at full retirement age (66 or 67, depending on the birth year).

When Sheryl files, she can receive half of Patrick’s PIA because it is higher than John’s. And, no, she cannot get both Patrick’s and John’s retirement benefits!

If Sheryl divorced less than two years before, she must wait until her last ex, Patrick, in this case, has filed for his benefit. The worker on whose record the retirement benefit is claimed, Patrick, must have reached 62 years of age.

If they divorced more than two years before, Patrick’s filing status is irrelevant to Sheryl’s claim. Unless Sheryl tells him, Patrick will never know if his ex has claimed.

Let’s go over the case of Mike and Marie. They were married for more than ten years and divorced for more than two. Mike and Marie are both 62 years old. She has not remarried. Because she is single, Marie qualifies for a divorced-spouse retirement benefit based on Mike’s record, whether or not Mike has filed. It’s worth keeping in mind that the earlier someone claims, the less they get!

If Mike has passed away, Marie receives a divorced-spouse survivor benefit based on Mike’s record, if she is currently unmarried or, if remarried, remarried after age 60.

In addition, Marie’s benefit will be 100% of Mike’s Primary Insurance Amount (PIA), the amount that Mike would have received at full retirement age (66 or 67). In the case of Mike dying, Marie’s retirement benefits are capped to full retirement age.

What if the same two people have married, divorced, remarried, and divorced again? In that case, the length of the two marriages can be added together (including the time in between) to reach the ten years qualifying minimum. That is if the second marriage (the remarriage) happens before the end of the calendar year following the divorce!!

We can make sense of this chaos. Say Mike and Marie were married seven years from May 2002 to August 2009. They remarried in December 2010 and re-divorced in November 2013, for three years. The total for the two marriages is ten years. Mike and Marie meet the 10-year requirement because their second marriage happened before the end of the calendar year after the first divorce. If instead Mike and Marie had remarried in January 2011, the ten-year clock would have been reset to zero. 

Pension Repercussions

What if Jill, the person applying for the divorced-spouse retirement benefit, also worked for an employer not participating in the Social Security system? For example, many state and municipal governments are exempt from the Social Security system. If Jill worked for a local government, she could qualify for a pension from her employer. Then, her divorced-spouse Social Security benefit would be reduced by 2/3 of the amount of her pension because of the Government Pension Offset rule. Depending on the size of her pension, Jill’s Social Security benefit may be zero.

How would that work? Jill currently receives a $3,000 monthly pension from a police department in Texas. She has divorced from Jack after a marriage that was longer than ten years. Jack’s PIA is $2,800. Jill’s divorced-spouse benefit of $1,400 would be reduced by $2,000 (2/3 of $3,000), which reduces the benefit amount to zero.

If Jack dies, Jill becomes eligible for a divorced-spouse survivor benefit. After the GPO reduction she will receive $800 ($2,800 – $2,000 equals $800).

Suppose the spouse with benefit also qualifies for a pension from an entity that doesn’t pay into social security. In that case, the Windfall Elimination Program kicks in. That reduces the spouse with benefit’s payments, and the ex-spouse’s benefit adjusts downward as well.

How To Claim

To claim a divorced spouse retirement benefit, you need the name and Social Security number of your ex-spouse. You should also have the divorce decree. If you don’t have it, you could retrieve the ex’s Social Security number on an old document, such as a tax return.

When you don’t have the ex’s Social Security number, you may need more information, such as his birth date and previous addresses. In this case, the Social Security Administration won’t make the process easy. 

 

Check our other article on Social Security by Phil Bradford

 

Should you cancel your LTC insurance?

By Chris Chen CFP | Financial Planning , Retirement Planning , Risk Management

Long Term Care (LTC)

LTC can be a stressful subject to discuss, especially when costs are addressed. The reality is that Long Term Care is expensive. According to Genworth, a prominent provider of Long Term Care insurance, the median national cost of a stay at an assisted living facility is $48,000 annually in 2018. The total long term care costs, over someone’s lifetime, ends up being much larger depending on where and how long a person will be needing it.

For example, the median cost of assisted living in New Jersey in 2018 was $72,780, according to Genworth. If someone were to stay at an assisted living facility for three years, the cost would be in excess of $200,000. Nursing home care could be even more expensive.

Aside from overall unpleasantness, a key issue with planning for LTC is the uncertainty. 70% of Americans will need it. But how much, and for how long? LTC is often the most unpredictable expense of retirement, and the least planned for.

Even insurance companies have difficulty ascertaining the cost. Large long term care insurance companies such as John Hancock have left the field and no longer offer LTC policies to the general public. Others, including Genworth and Mass Mutual, have been struggling with State Insurance Commissions to increase premiums. Recently, Genworth was approved to increase premiums by 58% in 22 States.

According to the Federal Government, Long Term Care is the range of services and support you will need to meet health and personal care needs over a long period of time when you are unable to provide it for yourself. LTC is not medical care, but rather assistance with the basic personal tasks of everyday life.

The fact is that most of us will require some form of long term care usually toward the latter part of our lives . Given the high probability, and the high level of expense, it is something that needs to be addressed in our financial and retirement plans.

We have plenty of statistics on how LTC affects us as a whole, but very few on how it will affect us individually. Are we going to be part of the 70%, or can we avoid it and be part of the 30%. We just don’t have a very good way to predict how much long term care we will need, when we will need it, and how much it will cost. This is precisely why long term care planning is necessary as part of normal financial or retirement planning.

Who Pays for Long Term Care?

People often assume that Medicare or Medigap (the supplemental coverage for Medicare), or even regular health insurance will cover the cost of their Long Term Care facilities.

Unfortunately, that is incorrect. Medicare is set up to cover only direct medical expenses, such as doctor and hospital visits, tests, and medicine. When it comes to issues of old age care, Medicare is not involved.

In general, most people without a plan who need Long Term Care will pay for it out of their own assets. Once there is no money left, Medicaid will usually take over. This approach works best for people who have enough assets to cover the other foreseeable circumstances in their future.

It is good to know that Medicaid is there, should we need it. However, planning for Medicaid to take over is a backup plan at best.

How do I protect my assets from nursing homes?

A close alternative to spending your own money and then letting Medicaid take over is actually to plan for Medicaid to take over. That involves creating a trust in which to put your assets so they can be protected in the event that long term care is needed. When that happens, the assets remain safely in the trust, and Medicaid pays for your long term care. You should keep in mind that Medicaid is taxpayer-funded, and as with other government programs, it is periodically under stress for funding. In other words, it is not easy to predict with certainty that such a plan would work, especially if it is much in the future.

Long Term Care Insurance

For others, purchasing a long term care insurance policy may be a better alternative. In exchange for the premiums, the insurance company commits to pay the amount contracted for. Effectively, the policy covers a significant percentage of the uncertainty generated by long term care. That amount can vary to take into account your own circumstances.

Who needs Long Term Care Insurance?

Long Term Care Insurance can help to preserve assets for other goals, including for legacy . It can also help you determine the level of care that you would like when you have a need for long term care.

From a tax viewpoint, it is worth noting that some of the premiums for most standard LTC policies available today may be deductible from taxable income within the limits specified by the IRS, especially for business owners. Also, up to certain limits, benefits are not taxed as income. Take this favorable tax treatment as a sign that Uncle Sam would like to encourage you to be covered (and not use Medicaid)!

The challenge with LTC insurance is that insurance companies have miscalculated the premiums required to cover their costs. As a result, premium increases, including the one mentioned earlier from Genworth, have shocked pre-retirees and retirees alike, resulting in a considerable debate about whether to drop LTC insurance policies altogether.

The financial impact of premium increases is real. It is a painful hit on a sore subject. And as with any price increase like that, the impulse is just to cancel.

However, canceling would be a mistake for many people. The cost of LTC must be covered somehow, and if not through insurance, it is usually through your own assets. However, it does provide an opportunity to reconsider the issue with your financial planner. Most people affected by price increases bought their policy many years ago. It would be beneficial to re-analyze the LTC need and the benefits of the policy. You may find out that you are over-insured, or underinsured. And then you can figure out a way forward on how to right-size your coverage.

According to Tara Bernard at the New York Times analyzing your LTC coverage can even lead to a renegotiation of the policy, especially if you are reducing the benefits.

Long Term Care insurance helps pay for long term care expenses, helps preserve your assets and your legacy. Also, a portion of the premium is potentially tax-deductible. So why are so many people resistant to traditional Long Term Care insurance?

First, as we mentioned before, it is expensive. Although, it is worth noting that the cumulative cost of LTC insurance premiums is often less than the cost of Long Term Care itself!
Second, the possibility that the insurance policy may not be used, as in the case of death happening suddenly, is enough to stop many people from acquiring Long Term Care insurance. In this paradigm, the thought of paying premiums for years, and not collecting a benefit would make the insurance a waste.

Don’t Waste the Premiums

To counter this objection, the insurance industry has created products that allow you to “not waste the premiums.” These products allow you to purchase an annuity or a life insurance policy with a special “rider” that allows their conversion to an LTC policy should the need arise.

These products allow you to get Long Term Care coverage if needed, and allow repurposing the funds in case the Long Term Care benefit is not used. The details of these products are beyond the scope 0of this post. Suffice it to say, that these alternatives can provide a lot of flexibility, at a cost, in a financial plan. For people who have significant assets that are not needed for their retirement plan, these alternatives may be worth considering.

Should I cancel my LTC insurance?

Because of the increases in premiums that are sweeping the LTC insurance industry, many people are wondering if long term care insurance is worth it and if they should cancel their policies . There is no easy answer to that question. The increased cost can be burdensome. But the other side to this question is if you cancel your insurance because of the premium increase, how are you going to pay for your Long Term Care expenses when they occur?

The answer is different for everyone. Being a financial planner and number geek, I believe that the answer for many resides in comparing the costs and the benefits. For most people that will result in keeping your insurance. If you are not sure, schedule a call with me, and we can review.

LTC can be a significant expense. As such, it needs to be factored into your overall retirement plan. The four approaches discussed (pay out of assets, Medicaid planning, traditional long term care insurance, and “not waste the premium” alternatives) all offer different benefits and should be matched to the right circumstance and individual preference.

In my experience, most people find it liberating to include LTC in a retirement plan formally, and know what is planned and how much is planned for. It then leaves greater flexibility to focus on the fun aspects of life!

If you need to figure out which option works best for you, schedule a conversation with me today!

 

Check our other posts on Long Term Care:

Planning For Long Term Care

Long Term Care Considerations for Retirement Planning

How Jill Can Plan To Pay for Long Term Care

 

Social Security

By Phil Bradford | Retirement Planning

Is Social Security Important

For most people, Social Security retirement benefits are a cornerstone of retirement income. Even for those who don’t rely solely on Social Security, it provides the foundation on which a financially happy retirement life is based.

Let us discuss some of its basic advantages for your post-retirement life along with clarifying a few things about Social Security.

Will waiting for more than 62 years help to receive more income?

You are usually entitled to receive Social Security retirement benefits at 62 years or older, if you have enough “work credits”. However, for your dependents, who are entitled to get benefits, it doesn’t fully depend on work credits.

A person needs to be a US citizen or a lawfully present person to claim the benefits. Coming back to the question, yes, waiting for a little more than 62 years can help you increase the percentage of monthly benefits you receive.

For example, if you wait till 63 years, you may receive about 8% more monthly benefits. Therefore, if you have other sources of income, it is wise to wait for a little longer even after your retirement for your to claim Social Security. The increased benefit that you get by delaying your Social Security claim can translate into significant additional income over your retirement life . You can maximize your monthly income if you wait till age 70 to collect your Social Security benefits.

Does Social Security help if the cost of living increases?

Many people are concerned about how to manage inflation post-retirement. Every year, the Social Security Administration decides how much to increase benefits because of Cost-of-Living increases.  The COLA or Cost-of-Living Adjustment has increased Social Security benefits by about 1.6% in January 2020. The maximum amount of your earnings that is subject to Social Security tax increased to about $137,700 for 2020 .

Can your Social Security income get suspended due to this pandemic?

It is a concern for many. But, the advantage of Social Security income is that your payments won’t be suspended due to the pandemic even if Social Security offices are closed to the public. The Inspector-General of the Social Security Administration has warned the public not to believe in such fraudulent letters or threats that Social Security income will get suspended.  The FTC also has warned people against believing similar frauds and Social Security scams related to the CoronaVirus pandemic. If required, you can communicate with your local Social Security Administration office over the telephone or fax to get the correct information.

Is Social Security just for your post-retirement life?

As you already know, Social Security income helps you with post-retirement income. Along with retirement benefits, you can get SSDI (Social Security Disability Insurance) protection and life insurance benefits.

According to the Social Security Administration,about 4.7% of people or their dependents claim Social Security disability benefits . The definition of Social Security itself states that it is a federal insurance scheme that provides benefits to pensioners as well as people who are disabled or unemployed.

However, to take advantage of disability benefits as well as unemployment benefits, you need to have worked for a certain number of years. The benefit amount is calculated on the basis of your pre-retirement paycheck and the age at which you’re claiming the benefit.

Also, as stated before, you may benefit from Social Security survivor benefits, too. How much benefit a survivor will receive depends on the age of the worker when he/she died along with his/her salary, along with the survivor’s age and relationship with the deceased person.

Of note, there are also Social Security spousal benefits. A person can get up to 50% of his or her spouse’s benefit at FRA or his/her own, whichever is higher.

In addition, divorced individuals may get Social Security retirement benefits on the basis of their ex-spouse’s record.

Is Social Security income taxable?

Depending on your other income, 0-85% of your Social Security retirement benefits may be taxable . In other words, 15%-100% may be tax-free.

Do you have to pay Social Security taxes even after retirement?

Unfortunately, income taxes still have to be paid in retirement. If you continue working past your Full Retirement Age or FRA, and have earned income, then you’ll have to pay Social Security taxes along with collecting your Social Security benefits. The additional taxes will help increase your monthly benefit depending on how much you had earned before and what amount you’re earning now.

You should note that if you collect Social Security before FRA and continue to work, your Social Security benefits will start at a lower level and may get reduced even more depending on your earned income. That is important because the lower level of benefits has a ripple effect throughout retirement. It may result in a significant reduction of your lifetime income. Hence, if you plan to work between 62 and your Full Retirement Age, there is an additional incentive to delay Social Security benefits.

Can your unpaid debt reduce your Social Security income?

Debt in retirement is a major concern for many people. However, usually, creditors or lenders can’t touch your Social Security payments. Therefore, your Social Security income will be untouched even if you have credit card debt or payday loan debt at retirement. But, certain debts, like federal debt, can reduce your Social Security payments. If you have unpaid federal taxes, the Treasury Department can levy a maximum of 15% of your Social Security benefit every month until the debt is paid off .

Therefore, it is advisable to repay your back taxes and other types of debts long before you reach Social Security retirement age. It is advisable not to resort to a payday loan because of its high-interest rates. However, if you’ve payday loans, it is better to repay them as soon as possible to avoid paying high interest. If your payday loans are legal, you can opt for payday loan debt consolidation or payday loan debt settlement to get rid of your debts. Also, try to repay your credit card debt as fast as possible so that you can save more every month towards a better financial future.

How can you increase your Social Security payments to the maximum?

Here are a few ways to maximize your Social Security income and secure your post-retirement life.

⦁    Try to work till 66 or 67 years to receive full payment. The longer you work, the greater your retirement benefit.

⦁    Try not to claim Social Security before 70 years of age. Delaying in claiming can help increase survivor’s benefits as well.

⦁    Increase your earnings as much as possible. In 2019, up to $132,900 were used to calculate your retirement payments. In 2020, it is $137,700.

⦁    Work for at least 35 years to get maximum Social Security benefits.

It should be clear now how important Social Security is for our post-retirement life. However, it is advisable not to rely only on Social Security income for your golden years. You should have other income streams post-retirement. If your company offers a 401(k) retirement account, then contribute into that account. You can also contribute into an IRA (Individual Retirement Account) to make your golden years financially secure.

 

This article may or may not reflect the views of Insight Financial Strategists.

8 Strategies For Financial Success

By Chris Chen CFP | Financial Planning

If you fail to plan, you plan to fail. That was the subject of a presentation I made at Sun Life Financial in Wellesley. This may sound like an old cliché, but it illustrates an essential aspect of personal finance: a financial plan is critical.

Regardless of age, marital status, or income, it is essential that you have a personal financial plan. Creating a strategy for financial success is easier than it sounds; you just need to know where to start. The eight financial management strategies below can serve as a roadmap for straightening out your finances and building a better financial future.

1. Develop a Budget

There are many reasons to create a budget. First, a budget builds the foundation for all your other financial actions . Second, it allows you to pinpoint problem areas and correct them. Third, you will learn to differentiate between your needs and your wants. Lastly, having a financial plan to cover expenses planned and laid out will give you peace of mind. Once done, be sure to stick with it!

2. Build an Emergency Fund

As part of your budget, you will also need to plan for an emergency fund. As current events remind us, we cannot anticipate the unexpected. We just know that the need for an emergency fund will come sooner or later . To cover yourself in case of an emergency (i.e., unemployment, injury, car repair, etc.), you need an emergency fund to cover three to six months of living expenses.
An emergency fund does not happen overnight. It needs to be part of your budget and financial plan. It also needs to be in a separate account, maybe a savings account. Or some in savings and some more in a CD. The bottom line is that it needs to be out of sight and out of mind to be there when needed.

3. Stretch Your Dollars

Now that you know what you need and what you want be resourceful and be strategic when you spend on what you want. For instance, re-evaluate your daily Dunkin Donuts or Starbucks habit if you have one. Can it be weekly instead of daily? If you eat out for lunch every day, could you pack lunch some days? Do you need a full cable subscription?

4. Differentiate between Good Debt and Bad Debt

It is important to remember that not all debt is created equal. There is a significant distinction between good debt and bad debt. Good debt, such as a mortgage, typically comes with a low interest rate, tax benefits and supports an investment that grows in value. Bad debt, such as credit card debt, will burden you with high interest rates, no tax benefits, and no hope for appreciation. Bad debt will actually reduce your standard of living. When looking at your financial plan, you want to make sure that you keep bad debts to a minimum. Now that I think of it, don’t keep bad debt to a minimum: make it go away.

5. Repay Your Debts

One of the most important steps to a successful financial plan is paying back your debts, especially the bad ones. Because debt will only increase if you do not actively work to pay it off, you should include a significant amount of money for debt repayment in your budget.
The fact is that paying off debt is a drag, and sometimes it is difficult to see the end of the tunnel. One way to accelerate the process of paying debt down is to pay strategically . When you pay more than your minimum payments, don’t spread it around all your debts. Concentrate your over-payment on a single debt, the one that’s closest to being paid off. It will make that payment go away faster. And when it’s gone, you can direct the liberated cash flow to the next one, and so on.

6. Know Your Credit Score

A high credit score will make it easier to get loans and credit cards with much more attractive interest rates . In turn, this will mean less money spent on interest payments and more money in your pocket. Take advantage of the free credit report that the credit companies must provide you free of charge annually. Make sure that there is no mistake in it.

7. Pay Yourself First

Set aside a portion of your paycheck each month to “pay yourself first” and invest in a savings or retirement account. Take advantage of the tax deferral option that comes with many retirement plans, such as 401(k) or IRAs. If you have just completed your budget, and you don’t know how to do it all, tax-deferred retirement accounts help you reduce taxes now . Also, think of the matching funds that many employers offer to contribute to your 401(k). They are actually part of your compensation. Don’t leave the match. Please take it.
In my line of work, people often tell me that they will never retire. The reality is that everyone will retire someday. It is up to you to make sure that you have financial strategies for a successful retirement.

8. Check Your Insurance Plans

Lastly, review your insurance coverage. Meet with your Certified Financial Planner professional and make sure that your policies match the goals in your financial plan. Insurance is a form of emergency fund planning . At times, you will have events that a regular emergency fund won’t be able to cover. Then you will be happy to have property or health or disability or long term care, or even life insurance. 

If you have any questions or require additional assistance, contact a Certified Financial Planner. He or she can help you identify your goals and create a financial plan to meet them successfully.

Starting your financial plan is an easy step. The hard part is implementing and moving to the next step. Don’t do it alone, and let me know if I can help.

 

 

What’s After The Bear Market?

By Chris Chen CFP | Financial Planning , Investment Planning , Portfolio Construction , Retirement Planning , Sustainable Investing

What's After The Bear Market?

For the month ending 3/20/2020, the S&P 500 has been down almost 32%. Maybe it is because it’s happening right in front of us, but, somehow, the drawdown feels worse compared to history’s other bear markets.

According to Franklin Templeton, there have been 18 bear markets since 1960 which is about one every 3.1 years . The average decrease has been 26.3%, taking a little less than a year from top to bottom.  

Financial planners often work with averages. But the reality is that each bear market will be different from the norm. At the time that I write this, the depth of this particular drawdown does not even rank with the worst in history. Sure, it may still get worse, but that’s where we are today. 

We may not want to hear about how things will get better, because the situation with the Covid-19 pandemic and its resulting prescription of social isolation and market downdrafts is scary. But, eventually, things will get better. 

Keep in mind that things may get worse before they get better. The count of people with the virus will almost certainly increase. If you don’t have a source yet, you can keep up with it over here. But eventually, the Coronavirus epidemic will run out of steam. We will get back to our places of work. Kids will go back to school. Financial markets will right themselves out. We will revert to standard toilet paper buying habits. We will start going out to eat again. Life will become normal again. 

Financially, the question is not just how bad will things get, but how long it will take for our nest eggs to rebuild, so we can put our lives back on tr

Historically, since WWII, it has taken an average of 17 months for the S&P 500 to get back to its peak before a bear market .

The longest recovery since we have had reliable stock market records has been the Great Depression. The longest recovery post-WWII was in the wake of the dot-com crash at the beginning of this century. That took four years. The stock market recovery following the Great Recession of 2008 and 2009 took only 3.1 years . 

Hence, it could take us a while before we make it back to the previous market peak. However, we may want to look at the data differently. This graph shows that, historically, we have needed to achieve a return of 46.9% to recover from a bear market .  According to Franklin Templeton calculations, these numbers can look daunting. However, they have been achieved and exceeded after every past downturn. While there is no guarantee, these numbers suggest that there will be strong returns once we have reached the bottom of the market. I like to think of this as an opportunity.  

With the time that it takes for investments to grow and get your money back, there is time to take advantage of higher expected returns. For those who have resources available, this means that there is time to deploy your money at lower prices than has been possible in recent months.

Those of us who have diversified portfolios and are not in a position to make new investments, the opportunity is to rebalance to benefit from a faster upswing. 

We know from history that every US stock market downturn was followed by new peaks at some point following.

Could this time be different? 

Of course, that too is possible.

I like to think that the future will be better. We will still wake up in the morning looking to improve ourselves, make our lives better, and achieve our goals. We are still going to invent new technologies, fight global warming, and struggle for a more equitable society. 

We are living through difficult times right now. Losses in our brokerage and retirement accounts are not helping. But we will get through this. Please reach out to me if you have specific questions or concerns.

Saving Taxes with the Roth and the Traditional IRAs

By Chris Chen CFP | Financial Planning , Retirement Planning , Tax Planning

How does the SECURE Act affect you?

By Chris Chen CFP | Financial Planning , Retirement Planning , Tax Planning

After several months of uncertainty, Congress finally passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019, with President Trump signing the new Act into law on December 20, 2019. The SECURE Act introduces some of the most significant changes in retirement planning in more than a decade.

The SECURE Act makes several changes to the Internal Revenue Code (IRC) as well as the Employee Retirement Income Security Act (ERISA) that are intended to expand retirement plan coverage for workers and increase savings opportunities. The SECURE Act also radically changes several techniques used for retirement and tax planning. 

Some of the key provisions affecting employer retirement plans, individual retirement accounts (IRAs), and Section 529 Plans included in the SECURE Act are as follows.

IRA Contributions

Starting in 2020, eligible taxpayers can now make Traditional IRA contributions at any age. They are no longer bound by the previous limit of age 70 ½ for contributing to a Traditional IRA.  As a result, individuals 70 ½ and older are now eligible for the back-door Roth IRA .

As an aside, anyone who satisfies the income threshold and has compensation can fund a Roth IRA.

In addition, graduate students are now able to treat taxable stipends and non-tuition fellowship payments as earned income for IRA contribution purposes . I have a graduate student, so I understand that their stipend income may not allow them to contribute to retirement. However, that is something that forward-thinking parents and grandparents can consider as part of their own estate planning.

Required Minimum Distributions

As our retirement age seems to push into the future steadily, so are Required Minimum Distributions under the SECURE Act. This provision, which applies to IRAs and other qualified retirement plans (401(k), 403(b), and 457(b)) allows retirees turning 70 ½ in 2020 or later to delay RMDs from 70 ½ years of age to April 1 of the year after a retiree reaches age 72 . In addition, the law allows people who own certain plans to delay it even further in the case that they are still working after 72. Unfortunately, the provision does not apply to those who have turned 70 ½ in 2019. Natalie Choate, an estate planning lawyer in Boston, says in Morningstar, “no IRA owner will have a beginning RMD date in 2021”.

This RMD provision is part of the good news in the SECURE Act. It will allow retirees more time to reach their retirement income goals. For many, it will enable better lifetime tax planning as well.

End of the “Stretch” IRA

Prior to the SECURE Act, the distributions on an inherited IRA could be “stretched” over the expected lifetime of the inheritor. That was a staple tool of estate and tax planning. 

No more. With a few exceptions, such as for the spouse, the “stretch” is now effectively crunched into ten years. Accounts inherited as of 12/31/2019 are now expected to be distributed over ten years, without a specific annual requirement.

The consequence of this provision of the Act is likely to result in larger tax bills for people inheriting . This makes planning for people who expect to leave IRAs, as well for inheriting them, more important than ever. 

Qualified Birth or Adoption Distribution

The new law allows a penalty-free distribution of up to $5,000 from an IRA or employer plan for a  “Qualified Birth or Adoption Distribution.” For a qualified distribution, the owner of the account must take the distribution for a one-year period starting on (1) the date of birth of the child or (2) the date when the adoption becomes final (individual must be under age 18). The law permits the IRA owner who took the distribution to pay it back to the plan or IRA at a later date. However, these distributions remain subject to income taxes.

Generally speaking, we at Insight Financial Strategists think that people in this situation should avoid availing themselves of this new wrinkle in the law. In our experience, a distribution from retirement accounts before retirement can have profound impacts on retirement income security. 

529 Plans

It may sound off-topic, but it is not. The SECURE Act also addresses 529 plans. For students and their parents, the SECURE ACT allows tax-free 529 plans to pay for apprenticeship programs if they are registered and certified by the Department of Labor.

This provision will be helpful for those people who have children headed to vocational track programs.

In a very partial solution to the student loan crisis, savings in 529 plans can now be used to pay down a qualified education loan, up to $10,000 for a lifetime . Technically, the law makes this provision effective as of the beginning of 2019. 

Given how students and parents scramble to meet the challenge of the cost of higher education, I do not forecast that most 529 plans have much left over to pay off loans!

Business Retirement Plans

(Part-Time) Employee Eligibility for 401(k) Plans – In most 401(k) plans, participation by part-time employees is limited. The SECURE Act enables long-time part-time workers to participate in 401(k) plans if they have worked for at least 500 hours in each of three consecutive 12-month periods. Long-term part-time employees who become eligible under this provision may still be excluded from eligibility for contributions by employers.

Delayed Adoption of Employer Funded Qualified Retirement Plan – Beginning in 2020, a new plan would be treated as effective for the prior tax year if it is established later than the due date of the previous year’s tax return. Notably, this provision would only apply to plans that are entirely employer-funded (i.e., profit-sharing, pension, and stock bonus plans).

403(b) Custodial Accounts under Terminated Plans are allowed to be Distributed in Kind – Subject to US Treasury Department guidance, the SECURE Act allows an individual 403(b) custodial account in a terminating plan to be distributed “in-kind” to the participant. The account distributed in this way would retain its tax-deferred status as a 403(b). 

Establish Open Multiple Employer Plans (MEPs) – Employers may now join together to create an “open” MEPs, referred to in the legislation as “Pooled Plans.” This will allow small employers to join together and share the costs of retirement planning for their employees, such as through a local Chamber of Commerce or other organization, to start a retirement plan for their employees. 

Increased Tax Credits – The tax credit for small employers who start a new retirement plan will increase from $500 to $5,000. In addition, small employers that add automatic enrollment to their plans also may qualify for an additional $500 annual tax credit for up to three years.

There are many more provisions in the SECURE Act. While some of them are useful for taxpayers, it is worth noting the observation by Ed Slott, a tax expert and sometimes wag: “whatever Congress names a tax law, it does the opposite .”  This is worth keeping in mind as you mull the implications of this law. With the SECURE Act now the law, it may be time to check in with your fiduciary financial planner and revise your retirement income and estate plans.

Year End Tax Planning Opportunities

By Chris Chen CFP | Financial Planning , Retirement Planning , Tax Planning

The Tax Cut and Jobs Act of 2017 (TCJA) was the most consequential tax reform package in this generation. It changed many of the ways that we think about reducing taxes.

According to the Tax Policy Center, we know that about 80% of taxpayers pay less income tax in 2018 than before the TCJA , about 5% pay more, and the balance of taxpayers pay about the same amount. On balance, the TCJA seems to have delivered on its promises.

A key item of the TCJA is that it increased the standard deduction, reducing the impact of the elimination of State and Local Taxes (SALT) under $10,000 and the elimination of personal deductions. As a result, about 84% of taxpayers claim the standard deduction and do not itemize. By comparison, about 56% of taxpayers itemized before the enactment of the TCJA. The vast majority of taxpayers are no longer subject to the Alternative Minimum Tax (AMT), since two of its key drivers, the deductibility of state and local taxes and personal deductions, are no longer a practical issue for most people. And in 2018, only 1,700 estates were subject to the federal estate and gift tax. So for most people, the TCJA has made taxes simpler to deal with. What’s there not to like about a simpler tax return ?

Source: Congressional Budget Office

Impact of the TCJA on the Federal Deficit

As predicted, the TCJA worsened the federal deficit bringing it to nearly a trillion dollars in fiscal year 2019. That was in spite of an increase in tax revenue due to the continuing improvement in the economic climate. Of course, the federal deficit continues to be driven by federal spending on the sacred cows of modern US politics: Defense, Social Security, and Medicare. Interest on the federal debt is also a major budget item that needs to be paid. While our continuing regime of low interest rates is helping control the interest on the debt, it is clear that the future may change that.

What will happen to tax rates?

Tax rates are lower now than they have been since the 1970s and 80s. Hence, industry insiders tend to think that tax rates have nowhere to go but up.  That is also what’s is predicted by the TCJA, which is largely designed to sunset in 2025. Should the American people turn on Republicans at the 2020 election, it’s possible that the TCJA will see a premature end. However, it seems that the possibility that the American people might elect a progressive in 2020 is largely discounted when it comes to tax rate forecasting: most people assume that tax rates will increase.

Year-End Planning

Political forecasting aside, there are still things that we can do to lower our taxes . It should be noted that many of the techniques in this article are not limited to the year-end. Furthermore, we all have different situations that may or may not be appropriate for these techniques. 

Tax Loss Harvesting

Even though we have had a pretty good year overall, many of us may still have positions in which we have paper losses. Tax-loss harvesting consists of selling these positions to realize the losses. This becomes valuable when you sell the equivalent amount of shares in which you have gains. So if you sell some shares with $10,000 in losses, and some with $10,000 in gains, you have effectively canceled out the taxes on the gains.

You then have to reinvest the shares sold into another investment. Be careful not to buy back the exact same shares that you sold. That would disallow the tax loss harvesting!

At the same time, it makes sense to review your portfolio and see if there are other changes that you would like to make. We are not fans of frequent changes for its own sake. However, periodically our needs change, the markets change, and we need to adapt.

Income Tax Planning

While tax loss harvesting is mostly about managing Capital Gains taxes, it is also important to keep an eye on income tax planning . This is a good time of year to estimate your income and your taxes for the year. When comparing your estimated Adjusted Gross Income with the tax tables, you will see if you might be creeping up into the next tax bracket. For instance, if you are single and your estimated AGI is $169,501 (and you have no other complexity), you are right at the 32% tax bracket (after you remove the $12,000 standard deduction).  In this example, that means that for every dollar above that amount you would owe 32 cents in federal income tax, and a little bit more for state income tax, if that applies to you.

If your income is from a business, you may possibly defer some of that income to next year. If your income comes from wages, another way to manage this is to plan an additional contribution to a retirement account. In the best of cases your $1,000 contribution would reduce your taxes by $320, and a little bit more for state taxes.

In some cases, you might have a significant dip in income. Perhaps if you have a business, you reported some large purchases, or you booked a loss or just had a bad year for income. It may make sense at this point to take advantage of your temporarily low tax rate to do a Roth conversion. Check with your wealth manager or tax preparer.

If your income does not straddle two tax brackets, the decision to invest in a Traditional IRA or a Roth IRA is still worth considering.

Charitable Contributions

By increasing standard deductions, the TCJA has made it more difficult for people to deduct charitable contributions . As a result, charitable contributions bring few if any tax benefits for most people.

One way around that situation is to bundle or lump charitable gifts. Instead of giving every year, you can give 2, 3 or more years worth of donations at one time. That would allow your charity to receive the contribution, and, potentially, for you to take a tax deduction. 

Pushing the bundling concept further, you could give even more to a Donor Advised Fund (DAF). With that option, you could take a tax deduction, and give every year from the DAF. That allows you to control your donations, reduce your income in the year that you donate, and potentially reduce income taxes and Medicare premiums. Consult your wealth strategist to ensure that taxes, income, and donations are optimized.

Retirement Accounts

First, it is important to review Required Minimum Distribution (RMDs). Anyone who is 70 ½ years of age or older is subject to RMDs. Please make sure to connect with your financial advisor to make sure that the RMD is properly withdrawn before the year-end.

The RMD is a perennial subject of irritation for people . Obviously, if your retirement income plan includes the use of RMDs, it’s not so much of an issue. However, if it is not required, it can be irritating. That is because RMD distributions are subject to income taxes that may even push you into the next tax bracket or increase your Medicare premium. There are, however, some ways that you can deal with that.  

For instance, if you take a Qualified Charitable Distribution (QCD) from your IRA and have the distribution given directly to a charity, the distribution will not be income to you. Hence you won’t pay income taxes on that distribution, and it will not be counted toward the income used to calculate your Medicare premium. However, it will fulfill your RMD, thus taking care of that pesky issue.

Generally, we advocate planning for lifetime taxes rather than for any one given year. Lifetime financial planning has the potential to result in even more benefits. It should be noted that many of the possibilities outlined in this article can be used throughout the year, not just at year-end. We encourage you to have that conversation with your wealth management team to plan for the long term!

Is A Health Savings Account Right For You?

By Chris Chen CFP | Divorce Planning , Financial Planning , Investment Planning , Tax Planning

It is health insurance plan signup season . Whether you subscribe to your employer’s health care insurance plan or you buy your own directly, it is the time of the year when you have to sign up all over again. Unless you have specific circumstances such as a change of employer, a divorce, or new baby, this is the one time in the year when you get to change your health care insurance plan.

If you have been keeping abreast of the popular financial media, you may have come across the Health Savings Account (HSA).  According to AHIP (America’s Health Insurance Plans), 22 million people had HSA accounts in 2018.  Financial Planners love HSA. It is potentially the most tax advantageous vehicle that exists.  Contributions to HSAs are pre-tax, the money is invested tax-free, and distributions are tax-free if used for health purposes. Triple tax-free. HSAs are even better than Roth retirement accounts !

The reality is that we all have health care expenses, and they can be substantial . Having the ability to pay with tax-free money is a critical advantage. If you have to pay a $100 hospital invoice, you might have to earn $150 or more first, pay Federal income taxes, Social security taxes, state income taxes, before you can have $100 to pay your bill. With an HSA, there is no income tax, you pay with $100 of your earnings. 

A Health Savings Account is effectively an alternative to the Flexible Spending Account (FSA) , the more traditional way to pay for health care expenses that are not covered by insurance. The FSA allows employees to save pre-tax from earnings, and then to spend it on health care expenses without paying taxes on the earnings.  Money in FSAs, however, is not invested, and it must be spent by year-end or be forfeited. It has to be spent, or it will be lost. HSA funds, on the other hand, can be invested, and funds from HSA accounts can be carried over into the future. Thus, HSAs can be spent in a way that is similar to other retirement savings accounts such as the IRA or the Roth IRA.

	IRA	Roth IRA	529	FSA	HSA
Contributions are pre-tax	Yes	No	No	Yes	Yes
Funds are invested tax-free	Yes	Yes	Yes	N/A	Yes
Distributions are tax-free (1)	No	Yes	Yes	Yes	Yes
Distributions can be taken in the future	Yes	Yes	Yes	No	Yes

1. If used as intended for retirement, education or health expenses respectively

What’s in it for the employer?

In order to contribute to an HSA, you must have chosen a High Deductible Health Plan with your employer. 

According to the IRS, for 2019, a high deductible is defined as $1,350  ($1,400 in 2020) for an individual or $2,700 for a family ($2,800 in 2020.) On top of this high deductible, annual out of pocket expenses (including deductibles, copayments, and coinsurance) cannot exceed $6,750 for an individual or $13,500 for a family. Those numbers increase in 2020 to $6,900 for an individual and $13,800 for a family. 

For employers, offering high deductible health insurance plans is more cost effective than other plans. Therefore, they will prefer that their employees sign up for high deductible plans. Many employers will contribute directly to HSA accounts to encourage their workforce to choose a high deductible health insurance plan.

Theoretically, if employees have to pay out of pocket or out of their HSA for their health care expenses, they will be more careful about their choices.  While the funds in the HSA remain available to be used for health care expenses immediately if needed, the designers of the HSA believe that the ability to carry over HSA balances to future years will motivate employees to be better health care shoppers when choosing treatments or, indeed, when choosing to be treated in the first place. The net result is that high deductible health plans help employers contain health care expenses, and shift the burden on their employees. 

From an employee’s point of view, high deductible plans can make a lot of sense . If you don’t believe that you will need (much) health care in the coming year, you can benefit from a lower cost plan, and from the savings and investment opportunity.  

Financial Benefit 

And how do you maximize the value of the HSA? By contributing to the maximum, and investing it. A dollar contributed may be worth many times its value in the future when invested.

The Internal Revenue Service allows individuals in 2020 to contribute up to $3,550 to their HSAs. Families may contribute up to $7,100.  Both individuals and families can benefit from a catch-up provision of $1,100 if they are over 55.

According to Debbie Taylor, a CPA and tax expert, many people make the mistake of not investing their HSA contributions and keeping them in money market. Because one of the key benefits of HSAs is that the contributions can grow tax-free , not investing them is a grievous and expensive mistake. 

However, it’s worth noting that an HSA may need to be invested differently from your retirement accounts , especially if you plan to use your HSA at different times than you might use your retirement accounts. Consult your wealth manager for more insight.

If you are choosing the high deductible plan to save money, but you are not able to contribute to your HSA, you are putting yourself at risk if you have an unforeseen health event. Not having enough saved to cover the cost of the health care you need means that you may have to go into debt until you have met your plan’s deductible. 

So, if you have a tight budget, please think twice before trying to save money with a high deductible plan. It may just backfire on you.

Unintended Consequences

A question that is often minimized at enrollment time is what happens to the HSA if you have miscalculated, and you happen to have a significant health care expense in the year that you are contributing? 

First, if it is a major event, you may consider using funds in your HSA account. However the health care insurance will eventually kick in and cover most of the cost. So as a subscriber to a high deductible plan, you are still protected from the catastrophic consequences of an unexpected health issue. While you may not harvest all the benefits of the HSA, and you will likely lose the cost savings of choosing a high deductible plan, you are protected from financial disaster.

What if it is not a really major event, just a somewhat major event like, say, a trip to the emergency room for a temporary issue that you will easily recover from?

In that case, you also have the option to use your funds in the HSA to pay for those expenses. Your contributions will have been pre-tax as with an FSA. You will not have enjoyed much investment growth. Your distribution will still be tax-free. You are giving up the future benefits of the HSA, but you are dealing with your more immediate issues. Basically, your HSA will have functioned like an FSA. You will also lose the savings benefits of choosing a lower cost high deductible plan over a higher cost low deductible plan.

What if instead, you decide to pay for your trip to the emergency room out of pocket with post-tax savings and save your HSA for the future, as your wealth manager told you that you should? The real cost of your $5,000 trip depends on your income and tax bracket. If you happen to be in the 32% Federal tax bracket and you live in Massachusetts, the cost of the $5,000 emergency room trip will be around 58% higher.  

HSAs provide some tremendous benefits that should be considered by everyone who is looking to enhance their health care and their retirement situation. However, the decision to choose a Health Savings Account should be based on more than just taxes and the cost of your health care insurance. It is important to consider the very real costs of unforeseen events and to be realistic about your health insurance needs.