Planning for Known — and Unknown — Health Care Costs in Retirement

June 1, 2015 — Sam H. Fawaz

The issue of health care costs in retirement — and planning for them well in advance of retirement — is becoming a centerpiece of any retirement planning discussion.

A recent study by Employee Benefit Research Institute (EBRI) projected that in 2014, men and women who wanted a 90% chance of having enough money to cover out-of-pocket health care expenses in retirement would need to have saved $116,000 and $131,000 respectively by age 65.1 This is a sobering goal when you consider that just 42% of workers in their 50s and 60s report total savings and investments in excess of $100,000.2

Part of the problem with putting a price tag on retiree health care expenses is that every situation will vary depending on an individual’s health, the type of health care coverage they carry, and when they hope to retire. That said, EBRI has identified some “recurring expenses,” or standard elements of cost that can be estimated and planned for in advance as well as “non-recurring” expenses that are less predictable but tend to increase with age.

Recurring vs. Non-Recurring Expenses

Using data gleaned from the Health and Retirement Study (HRS) — a longstanding, highly respected study of representative U.S. households with individuals over age 50 — EBRI was able to categorize utilization patterns and expenses for two separate types of health care services:

  • Recurring services — include doctor visits, prescription drug usage, and dentist services. Since these services tend to remain stable throughout retirement, it is possible to calculate an average out-of-pocket expense among individuals age 65 and older of $1,885 annually.3 Projecting forward, and factoring in the following assumptions: a 2% inflation rate, a 3% rate of return on investments, and a life expectancy of 90 years, EBRI estimates that one would need $40,798 at age 65 to cover the average out-of-pocket expenses for recurring health care needs throughout retirement. It should be noted that this calculation does not include expenses for any insurance premiums or over-the-counter medications.
  • Non-recurring expenses — include overnight hospital stays, overnight nursing home stays, home health care, outpatient surgery, and special facilities. Unlike recurring expenses, the cost of most non-recurring services increases with age. For example, average annual out-of-pocket expenses for nursing home stays are estimated at $8,902 for those in the 65 to 74 age group, $16,948 for those aged 75 to 84, and $24,185 for individuals aged 85 and up.3

Yet because the likelihood of utilizing these services and the degree to which they will be needed is largely unknown, projecting the savings needed to cover these costs throughout retirement is an elusive exercise. However, by thinking about the total out-of-pocket savings goals of $116,000 for men and $131,000 for women cited earlier in terms of recurring and non-recurring costs may help retirees and those nearing retirement in their planning efforts.

Bigger Picture Planning

As financial planners, we often recommend taking a holistic approach to calculating income needs in retirement, factoring in such costs as taxes and debt payments along with other typical expenses including health care. In addition to the out-of-pocket health care calculations discussed above, consider what you think you might have to pay in annual premiums if you were to apply for health insurance today. Lastly, and perhaps most important, add in an allowance for inflation — both general and health care inflation.

Your financial planner can help get the retirement income planning discussion started and — as part of that exercise — can work with you to put some numbers around your health care planning needs.

This article offers only an outline; it is not a definitive guide to all possible consequences and implications of any specific saving or investment strategy. If you would like to review your retirement plan, investment strategy or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

1Employee Benefit Research Institute, news release, “Needed Savings for Health Care in Retirement Continue to Fall,” October 28, 2014.

2Employee Benefit Research Institute, 2014 Retirement Confidence Survey, March 2014. (Not including the value of a primary residence or defined benefit plans.)

3Employee Benefit Research Institute, “Utilization Patterns and Out-of-Pocket Expenses for Different Health Care Services Among American Retirees,” February 2015.

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How Do I Know If My IRA Contributions Are Tax Deductible?

May 18, 2015 — Sam H. Fawaz

Contributions to a traditional IRA are tax deductible if you don’t already participate in an employer-sponsored retirement plan. For 2015, the maximum you can contribute to an IRA is $5,500. If you are age 50 or over, you can make an additional “catch-up contribution” of $1,000.

If you do participate in an employer-sponsored plan, your contributions still can be fully or partially deductible, up to certain income thresholds. For 2015, those limits are between $61,000 and $71,000 for single filers and $98,000 and $118,000 for married couples filing joint returns.

If you are ineligible to make deductible contributions to a traditional IRA, you may want to investigate a Roth IRA. Contributions to a Roth IRA are made with after-tax dollars and are not tax deductible, but distributions are tax free. Be aware that there are income thresholds to contribute to a Roth. For 2015, those limits are between $116,000 and $131,000 for single filers and $183,000 and $193,000 for married couples filing joint returns.

You can find more information on the IRS website.

If you have questions about your current IRA’s or if you would like to discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

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Return on College

March 15, 2015 — Sam H. Fawaz

Let’s say you’re giving your niece or grandson some advice on which major to select in college. Do you tell them to get an art degree, or take courses in social sciences? Or should they focus on business and finance?

The decision should not ignore their natural abilities and interests, of course. But if they’re looking for the best return on their tuition dollars, then they might consider spending their time in the computer sciences and math buildings.

This information comes from a report published by PayScale.com, which helps people manage their careers and figure out what they’re worth on the job market. PayScale’s research team tracked the median salary for people who completed its salary survey online. They then compared the 20-year earnings of people following different careers with what was earned, on average, by competing workers with a high school diploma but no college degree. Then they subtracted the cost of 4 years of college tuition, to arrive at a return on investment figure—the additional money the degree provided. Advanced degrees like law and medicine were excluded; the survey focused on bachelors degrees.

The results were striking. Business and finance majors came away with a respectable $331,345 average return on investment (ROI) over 20 years, but they actually finished a distant third on the list, just ahead of sales, marketing and public relations ($318,212). The highest ranking majors, by this metric, were computer and math, whose degree-holders saw a net return on their tuition investment of $584,339 over the 20 years after graduation. These nerdy individuals nosed out the architecture and engineering graduates, whose average ROI came to $561,475.

Life, physical and social sciences majors fared somewhat less well, earning almost exactly $250,000 more than their high school diploma competition. Graduates with an arts, design, entertainment and related degree came in last in the survey; they are expected to make a little over $125,000 as a result of their college training.

Interestingly, the PayScale website also tracks the average return on tuition investment for different colleges. Graduates of Harvey Mudd College in Claremont, CA can expect to earn nearly $1 million over the 20 years after graduation, with a typical starting salary north of $75,000—with a 4-year college investment of $237,700. Numbers 2-10 on the rankings include the California Institute of Technology ($901,400 earnings, $221,600 cost); The Stevens Institute of Technology in Hoboken, NJ ($841,000; $232,000), the Colorado School of Mines in Golden, CO ($831,000; $112,000); Babson College in Wellesley, MA ($812,800; $230,200); Stanford University ($809,000; $233,300); the Massachusetts Institute of Technology ($798,500; $224,500); Georgia Institute of Technology ($796,300; $86,700); Princeton University ($795,700; $217,300); and the Virginia Military Institute ($767,300; $95,700).

You can look up your own alma mater here: http://www.payscale.com/college-roi/

If you would like to talk about college planning or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

http://www.payscale.com/college-roi/

http://www.bloomberg.com/news/articles/2015-03-05/the-career-with-the-biggest-financial-payoff?hootPostID=293b20e2f9470947cb0facdcea7f70ea

TheMoneyGeek thanks guest writer Bob Veres for writing this post

Posted in College Planning, Financial Planning, General. Tags: , . 1 Comment »

Is America in Decline?

March 7, 2015 — Sam H. Fawaz

In 1945, the U.S. made up more than half of the world’s total gross domestic product (GDP), which basically means that half the world’s economy took place inside U.S. borders. Today that figure is just under 22%.

Does that mean America is in decline?

There seems to be a bull market in doomsayers these past few years, as we’re all reading arguments that the U.S. is slowly losing its grip on global preeminence. The rhetoric today sounds a lot like the hand-wringing back in the 1980s when Japan was allegedly taking over the global economy, and before that, when the Soviet Union had more missiles and a Sputnik circling over our heads.

There’s no easy way to define the overall quality of an economy, but probably the most thorough assessment comes out each year via the World Economic Forum’s Global Competitiveness Rankings. The most recent report ranked 144 countries around the world, including Qatar (16), Moldavia (82), Namibia (88), Lesotho (107) and the unhappy states of Chad (143) and Guinea (144), whose citizens eke out their lives on per capita incomes of $1,218 and $564 a year, respectively.

The survey looks at 12 “pillars” of economic competitiveness, including labor market efficiency, the quality of primary education and higher education, infrastructure, the strength of institutions, innovation, business sophistication, technological readiness and the sophistication of the financial markets. Each of these categories are broken down into dozens of subcategories, which are separately evaluated. For instance, when looking at the strength of each country’s public institutions, the World Economic Forum researchers consider whether people in a given country have strong property rights and intellectual property protection, whether there is corruption and the routine payment of bribes, whether the citizens enjoy judicial independence and a solid legal framework, and how well investors enjoy shareholder protection.

In the most recent survey, the U.S. ranked third overall, with an overall rating of 5.5 on a scale of 1-6. Ahead of it were Switzerland (5.7) and Singapore (5.6). China, the country that you most often hear cited as the all-powerful up-and-coming economy, ranked 28th, two rungs below Saudi Arabia, one rung above Estonia. Brazil and India, which are sometimes mentioned as powerful competitors to U.S. economic hegemony, are ranked 57th and 71st, respectively.

The point of the rankings is to show which countries have created the healthiest (or, in the cases of Chad and Guinea, the least-healthy) economic climate for future growth. But of course there are other ways of measuring competitiveness, including the bottom line (as mentioned at the top of the article) of percentage of the world GDP, and whether you’re moving up or down.

US and Global GDP through 2014

By that standard, the U.S. is indeed moving down. If you look at Figure 1 above, which shows the size of the overall global and U.S. economies since 1991, you see that the U.S. has enjoyed steady economic growth, while the world at large has essentially taken off like a rocket. The years following the collapse of the Soviet Union, when several billion people were suddenly allowed to become capitalists, have been good for world growth. When China shifted from a communist to a capitalist economic posture, this added fuel to the rocket. The democratization of computer technology and the global Internet has empowered value creators everywhere.

The U.S., Europe and Japan, in other words, no longer have a monopoly on capitalism. And that’s a good thing.

Is there a better way of evaluating how the U.S. economy is holding up in an increasingly competitive world? Figure 2 below looks at the first chart from a slightly different angle. Since 1991, what percentage of all the world’s business has been happening in the U.S., vs. Europe, Japan, China, India, Russia and Brazil?   How much of the total global economy did each nation claim in each year, and how has that balance changed over time?

US GDP Market Share through 2014

What you see there is that the U.S. is still in the lead by a pretty wide margin, and in recent years has actually stabilized its percentage of total global GDP. The decline has come mostly because a lot of smaller emerging markets, plus China and, to a certain extent, Brazil, India and Russia, have all been growing. At the same time, America’s traditional competitors—Europe and Japan—have been sinking. If you want to point a finger at decline, perhaps that’s a better direction than the U.S.

Does the U.S. face economic challenges? Of course. Is our political system a mess? Sure. Could things be better? Certainly. But if you sift through a lot of variables with a fine-toothed comb, you discover that the U.S. has created a better environment to grow and prosper than almost anywhere else, and it has held its own with the roaring growth of the emerging markets while the other developed nations are losing ground. More than a fifth of all economic activity still happens in the U.S., and the long, slow decline in that figure is not due to stagnation at home, but abundant growth all around the world. That’s not something to worry about; it’s something we should be celebrating.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

http://reports.weforum.org/global-competitiveness-report-2014-2015/rankings/

http://www.economywatch.com/economic-statistics/year/1990/

http://theamericanscene.com/2008/05/07/a-post-american-world

TheMoneyGeek thanks guest writer Bob Veres for writing this post.

Posted in American Economy, Financial Planning, General, markets, retirement planning. Tags: , . Leave a Comment »

Getting Ready for a Fresh Start

February 22, 2015 — Sam H. Fawaz

Despite the potential long-term benefits of reviewing personal finances on an annual basis, it seems that many Americans still don’t make it a priority to do so.

Have you already taken steps to give yourself a fresh financial start next year? It’s still not too late to begin.

Aim Higher for Retirement

Today, workers are eligible to contribute more money than ever to their employer-sponsored retirement plans. For most workers, the maximum annual pre-tax contribution is $18,000 in 2015. If you’re at least 50 years old, you may also make additional contributions — known as catch-up contributions — of up to $6,000. That amounts to a $24,000 overall contribution limit this year.

Search for Savings

Even if you can’t contribute the maximum, a reality for many given life’s various financial challenges, seek out opportunities to set aside more money for retirement whenever possible.

Consider creating a comprehensive household budget that allows you to plan and track spending on an ongoing basis and includes among your listed expenses a commitment to “pay yourself” in the form of retirement savings. More than likely you’ll find some “fat” in your budget, even just a little, that can be trimmed to free up savings dollars.

Defeat Debt

The U.S. savings rate recently hit its lowest level in almost half a century, due in part to higher rates of borrowing and credit card debt. If debt is getting in the way of your long-term goals, consider strategies for chipping away at it:

  • Transferring high-interest debt to a credit card with a lower rate.
  • Trying to pay at least twice the minimum required payment.
  • Using a tax-refund to pay off outstanding loans.

For more ideas on how to get a fresh start or to discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

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Understanding Bond Investing: It’s a Matter of Balance

February 18, 2015 — Sam H. Fawaz

It’s a common misconception to think of bonds as “plain vanilla” investments that are appropriate only for certain types of people, such as financially conservative retirees. But in reality, bond investments may have the potential to add stability to a portfolio and help reduce overall investment risk — regardless of your age or financial outlook.

What Is a Bond?

Bonds are investment securities issued by corporations or governments to raise money for a particular purpose. Basically, bonds are the “IOUs” of the business world. There are different types of bond funds, each with varying levels of risk and return potential. Generally speaking, the higher the risk, the better the return potential. For example:

  • Government bond funds invest in bonds issued by the U.S. Treasury. Historically, they have been among the strongest types of bond investments. However, they typically offer lower returns than other bonds.
  • Corporate bond funds invest in bonds issued by private companies. They can range from “investment grade” (safer, lower return potential) to “below investment grade” (riskier, higher return potential).

Know the Risks

Bond funds are subject to several types of investment risk, including:

  • Market risk — Like stock prices, bond prices move up and down. However, such fluctuations tend to be less severe in the bond market.
  • Interest rate risk — When interest rates rise, bond prices may fall, and vice versa.
  • Inflation risk — If the return on a bond fund does not outpace the rising cost of living, the purchasing power of your investment could decline over time.

Managing Risk

Despite these risks, investors of all ages may potentially benefit from putting some money in bond funds. Because bond funds tend to respond to market influences differently than stock funds, they may help balance out the risks associated with stock investing.

In addition, lower-risk bond funds, such as government and investment-grade corporate bond funds, may help protect some of your money from losses during turbulent times.

If you would like to review bond investments in your current portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

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About that Social Security Insolvency

February 15, 2015 — Sam H. Fawaz

Social Security’s future solvency has become one of the most commonly-discussed issues in retirement planning—and for good reason.  Gallup polls show that an estimated 57% of retirees rely on Social Security as a major source of retirement income—a number that has held steady since the early 2000s.  But when Generation X and Y individuals plan for their future retirement, they’ll often ask their advisor to assume that Social Security won’t be there for them 20 or 30 years down the road.

However, if you look closely at the numbers, you see a very different story.  Up until 2011, the Social Security system actually collected more revenues from workers’ FICA payments than it paid out in benefits—and that has been generally true since the 1940’s.  Most of the Social Security benefits that people receive today are simply a transfer; that is, the money is collected from worker paychecks (and, of course, employer matches), spends a few days at the U.S. Treasury and then is paid out to recipients.  The surplus has been used to pay government operating expenses, and for seven decades, the government issued “special issue federal securities” (essentially fancy IOUs that pay interest) to the Social Security trust fund.

In 2011, the program crossed that threshold where benefit payments slightly exceeded the amount collected.  Why?  Because the number of beneficiaries, compared to the number of workers, has steadily increased.  In 1955, there were more than eight workers paying into Social Security for every beneficiary.  Today, that number is closer to three workers for every beneficiary, and by 2031, if current estimates are correct, that ratio will fall to just over two workers supporting every retired beneficiary.

When Social Security Administration actuaries crunch the numbers, they have to take into account the shifting demographics, and then make estimates of fertility and immigration rates, longevity, labor force participation rates, the growth of real wages and growth of the economy every year between now and 2078.  After adding in the value of the government IOUs, they estimate that if nothing is done to fix the system, the trust fund IOUs will run out in the year 2033.  At that time, only the FICA money collected from workers would be available to pay Social Security beneficiaries.  In real terms, that means the beneficiaries would, in 2034, see their payments drop to 77% of what they were promised.

In other words, the money being transferred from current workers to beneficiaries through the FICA payroll program, assuming no course corrections between now and 2033, will be enough to pay retirees 77% of the benefits they were otherwise expecting.

The government actuaries say that if nothing is done to fix the problem over the next 63 years, this percentage will gradually decline to 72% by the year 2078.

So the first takeaway from these analyses is that today’s workers are looking at a worst-case scenario of only receiving about 75% of the benefits that they would otherwise have expected to receive.  This is far different from the zero figure that they’re asking their advisors to use in retirement projections.

How likely is it that there will be no course corrections?  There are two possible ways that this 75% figure could go up.  One lies in the assumptions themselves.  The Social Security Administration actuaries have tended to err on the side of conservatism, presumably because they would rather be pleasantly surprised than discover that they were too optimistic.  But what if the future doesn’t look as gloomy as their assumptions make it out to be?

To take just one of the variables, the actuaries are projecting that labor force participation rates for men will fall from 75.5% of the population in 1997 to 74% by 2075, while the growth in female workers will stop their long climb and peter out around 60%.  If male labor force participation rates don’t fall, and if female rates continue to rise, some of the funding gap will be eliminated.

Similarly, the projections assume that the U.S. economy’s productivity gains (which drive wage increases) will grow 1.3% a year, well below long-term U.S. averages and certainly below the assumptions of economists who believe that biotech and information age revolutions will spur unprecedented growth.  If real wages were to grow at something closer to the post-Great Recession rate of 2% a year, then more than half of the funding gap would be eliminated.  If the current slump in immigration (due to tighter immigration policies) is reversed, and the economy grows faster than the anemic 2% rates the Social Security Administration is projecting (compared to 2.5% recently), then the “bankrupt” system begins to look surprisingly solvent.

A second possibility is that Congress will tweak the numbers and bring Social Security’s long-term finances back in balance, as it has done 21 times since the program originated in 1937.  The financial press often cites the fact that the total future Social Security funding shortfall amounts to $13.6 trillion, but they seldom add that this represents just 3.5% of future taxable payrolls through 2081.  Small tweaks—like extending the age to collect full retirement benefits from 67 to 68, raising the FICA tax rate by 3.5 percentage points or making the current 12.4% rate (employee plus employer match) apply to all taxable income rather than the $118,500 current limit—would restore solvency far enough into the future that today’s workers would be comfortable adding back 100% of their anticipated benefits into their retirement projections.

How likely is it that Congress will take these measures, in light of recent partisan budget battles?  It’s helpful to remember that older Americans tend to vote with more consistency than younger citizens.  The more you’ve paid into the system, the more you expect to at least get back the money you were promised.

The bottom line here is that if you’re skeptical about Social Security’s future solvency, then you should pencil in 75% of the benefits you would otherwise expect—rather than $0.  Meanwhile, as you approach the age when you’re eligible for benefits, watch for signs that immigration restrictions are loosening, the economy is growing faster than the SSA actuaries’ gloomy projections, more people are working during traditional retirement years or yet another round of tweaks from our elected representatives.

If you would like to review your social security payment options or projections, analyze your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

http://economix.blogs.nytimes.com/2014/03/05/another-way-to-do-the-math-for-social-security-reform/?_r=0

http://www.treasury.gov/resource-center/economic-policy/ss-medicare/Documents/ssissuebriefno.%205%20no%20cover.pdf

http://www.treasury.gov/resource-center/economic-policy/ss-medicare/Documents/post.pdf

http://www.wsj.com/articles/how-social-security-benefits-are-calculated-when-you-wait-to-start-taking-them-1421726460

http://www.usatoday.com/story/money/personalfinance/2013/11/25/nine-surprising-social-security-statistics/3698005/

http://www.huffingtonpost.com/2013/02/18/change-social-security_n_2708000.html

http://www.therubins.com/socsec/solvency.htm

http://www.encyclopedia.com/topic/social_security.aspx

http://fdlaction.firedoglake.com/2012/04/30/growing-number-of-americans-expect-to-rely-mostly-on-social-security/

TheMoneyGeek wishes to thank guest writer Bob Veres for this post.

Posted in General, retirement planning, Social Security Benefits. Tags: , . Leave a Comment »

Financial Habits and Net Worth

February 1, 2015 — Sam H. Fawaz

You already know that our financial habits determine our financial fate.  If we avoid credit card debt, spend less than we earn and create a financial buffer against the unexpected, we tend to thrive financially.  If we carry a lot of debt or live constantly on the edge, with little savings, then our financial future is much cloudier.

Recently, a paper published by the Federal Reserve Bank of St. Louis proved these truisms in the real world.  For eight individual years between 1992 and 2013, the Fed’s Survey of Consumer Finances has posted a series of financial questions to thousands of people in all walks of life, at all income levels and ages.  Among them:

1) Did you save any money last year?
2) Did you miss any loan or mortgage payments in the last year?
3) Did you have a balance on your credit card after the last payment was due?
4) Do liquid assets make up at least 10% of the value of your total assets?
5) Is your total debt service—the cash you devote each month to paying principal and interest—less than 40% of your income?

The paper scored the answers, giving every positive answer (yes for 1, 4 and 5, no for 2 and 3) one point, assigning zero points to the “wrong” answers. Then they added up the scores for each household and looked at a financial health score taken from the same survey, and compared the two.  They found what you would probably expect: that good financial habits are highly correlated with the accumulation of wealth.  A small chart at the back of the study, which divided people according to age and ethnic profile, found that individuals who averaged a score of 2.63 had a median net worth of $25,199, while those who averaged a 3.79 score enjoyed a median net worth in excess of $800,000.  The average score: 3.01, associated with a net worth somewhere in the $70,000 to $75,000 range, which happens to fall neatly in between the median for people age 35-44 ($51,575) and those age 45-54 ($98,350).

How did you score? Is it time for some changes to your financial habits to bolster your net worth?

If you would like to learn how to improve your financial habits, review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Source:  http://www.stlouisfed.org/publications/itb/articles/?id=2575

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Love, Marriage and Finances

January 28, 2015 — Sam H. Fawaz

Marriage affects your finances in many ways, including your ability to build wealth, plan for retirement, plan your estate, and capitalize on tax and insurance-related benefits. There are, however, two important caveats. First, same-sex marriages are recognized for federal income and estate tax reporting purposes. However, each state determines its own rules for state taxes, inheritance rights, and probate, so the legal standing of same-sex couples in financial planning issues may still vary from state to state. Second, a prenuptial agreement, a legal document, can permit a couple to keep their finances separate, protect each other from debts, and take other actions that could limit the rights of either partner.

Building Wealth

If both you and your spouse are employed, two salaries can be a considerable benefit in building long-term wealth. For example, if both of you have access to employer-sponsored retirement plans and each contributes $18,000 a year, as a couple you are contributing $36,000, twice the maximum annual contribution for an individual ($18,000 for 2015). Similarly, a working couple may be able to pay a mortgage more easily than a single person can, which could make it possible for a couple to apply a portion of their combined paychecks for family savings or investments.

Retirement Benefits

Some (but not all) pensions provide benefits to widows or widowers following a pensioner’s death. When participating in an employer-sponsored retirement plan, married workers are required to name their spouse as beneficiary unless the spouse waives this right in writing. Qualifying widows or widowers may collect Social Security benefits up to a maximum of 50% of the benefit earned by a deceased spouse.

Estate Planning

Married couples may transfer real estate and personal property to a surviving spouse with no federal gift or estate tax consequences until the survivor dies. But surviving spouses do not automatically inherit all assets. Couples who desire to structure their estates in such a way that each spouse is the sole beneficiary of the other need to create wills or other estate planning documents to ensure that their wishes are realized. In the absence of a will, state laws governing disposition of an estate take effect. Also, certain types of trusts, such as QTIP trusts and marital deduction trusts, are restricted to married couples.

Tax Planning

When filing federal income taxes, filing jointly may result in lower tax payments when compared with filing separately.

Debt Management

In certain circumstances, creditors may be able to attach marital or community property to satisfy the debts of one spouse. Couples wishing to guard against this practice may do so with a prenuptial agreement.

Family Matters

Marriage may enhance a partner’s ability to collect financial support, such as alimony, should the relationship dissolve. Although single people do adopt, many adoption agencies show preference for households that include a marital relationship.

The opportunity to go through life with a loving partner may be the greatest benefit of a successful marriage. That said, there are financial and legal benefits that you may want to explore with your beloved before tying the knot.

If you would like to discuss financial planning related to your upcoming or existing marriage or any other investment portfolio management matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

 

Posted in estate planning, Fee-only, Financial Planning, General, retirement, retirement planning, tax planning. Tags: , , . Leave a Comment »

How Much Health Insurance Do I Need?

January 25, 2015 — Sam H. Fawaz

How Much Health Insurance Do I Need?

The answer is simple: enough to ensure that if you (or a covered family member) get sick or injured, you’re not footing the entire medical bill on your own.

If you receive health insurance through your employer, your choices are limited. Some employers will offer plans from multiple health insurance providers, but most limit their offerings to one provider. Additionally, most employers offer one or more of the following: an HMO, a PPO or a traditional plan.

• An HMO (or health maintenance organization) is usually the lowest-cost alternative. As a result, enrollees are limited to doctors and treatment facilities within a limited “network.” These plans usually have no deductibles. Enrollees are required to make copayments when seeing a physician.
• A PPO (or preferred provider organization) allows enrollees greater flexibility. Enrollees can see doctors in or out of the PPO’s established network of providers. Deductibles usually apply and co-payments are required. A visit to an out-of-network doctor will trigger an additional charge.
• A traditional indemnity plan is usually the most expensive, as it typically gives enrollees the greatest number of choices in choosing doctors and facilities. But the deductibles can be high and the insurance company may cap the amount of money it will spend on the enrollee’s behalf over his/her lifetime.

Choices for the Self-Employed

If you are self-employed, you can comparison shop among the insurance providers licensed to do business in your state. It is a good idea to get as many estimates as you can because coverage and premiums vary significantly. Be sure you are comparing apples to apples: You want cost breakdowns for coverage with similar deductibles, copayments, prescription benefits, and physician access.

Beyond Standard Insurance

As you can see, even the best plan probably won’t provide 100% coverage for you or your family. If your employer allows, you can also fund a flexible spending account (FSA) or health savings account (HSA). An FSA, which is an employee benefit typically funded through payroll deduction, allows you to set aside pre-tax dollars to use toward copayments, out-of-network coverage, or other medical expenses. The drawbacks of an FSA: The maximum you can contribute is low and any funds not used during a calendar year are forfeited. An HSA, available to those enrolled in a high-deductible plan, has a higher annual contribution limit and no “use-it-or-lose-it” rules.

If you feel you need more coverage and can afford it, you can also buy supplemental health insurance. The three most common types are disease specific, accidental death or dismemberment, and hospital indemnity. Again, be sure to comparison shop before purchasing.

If you would like to discuss your health insurance or any financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

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