Don’t Forget These Five Retirement Challenges

People who are approaching retirement tend to ask themselves certain questions, sometimes repeatedly:

Am I investing enough?
Am I investing aggressively enough?
Am I making the most of my tax-saving opportunities?

You can greatly increase your peace of mind concerning your retirement nest egg by following your financial advisor’s guidelines for generating income in retirement. As you plan, there are five major risks to keep in mind.

1. Longevity. Thanks to improvements in diet and medicine, we’re all living longer. Your money will have to last longer, too. While your life expectancy at age 65 is about 20 years, life expectancy is an average. Half of us will spend more than 20 years in retirement and half won’t. It is prudent to plan for more than 20 years of retirement income.

2. Rising prices. Inflation doesn’t disappear from your life after you retire. Assuming you are no longer working but want to keep your lifestyle intact, you will have to give yourself a raise from your retirement savings. Some people plan to spend less money in retirement, but that may not be the best thinking. True, you may spend less on things like housing and transportation. But health care and long-term care—services that you are likely to use quite a bit as you get older—is expensive and costs are rising by approximately 8 percent annually.

3. Medical and long-term care costs. Statistically, people tend to spend a great deal of money on health care in their later years. Total health care spending can easily rise into the six-figure range if you do not have employer-sponsored post-retirement medical insurance. And today’s employers are increasingly unlikely to provide retiree health benefits. Long-term care costs also are high and rising. According to AARP, nursing home care costs approximately $75,000 a year, on average. To help mitigate these risks, your retirement income planning might include life insurance or long-term care insurance products.

4. Taxes. During the past 50 years, tax rates have been at current levels or lower only 10 percent of the time. The current economic and political climate is increasing the odds of tax rates reverting to pre-1980s levels. This means the tax savings that investors enjoyed during their working years could be more than offset by higher taxes in retirement.

5. Investment risk. Finally, we can plan for the impact of the stock and bond markets. It’s essential—but not easy—to find the right balance between bonds that preserve capital and investing aggressively enough to ensure that your portfolio growth keeps up with inflation. Otherwise, your assets and income might not support your standard of living as inflation erodes your purchasing power. In retirement, stocks should continue to be a significant part of your portfolio. The stock market’s rate of return and volatility may help you generate a sustainable income over a long period of time.

The only thing that’s a given about the retirement landscape is that it will keep changing. It’s critical for investors to prepare for certain (and uncertain!) risks. A thoughtful income strategy and comprehensive financial plan can help you address the five key challenges while working toward the retirement lifestyle you desire.

Wealth Enhancement Group

Health Care Reform Timeline

2010 –New Coverage Options
• Health care tax credit for small employers
• Children covered to age 26
• High-risk pools

2011 –New Taxes
• Medicare tax rate increases 0.9% for higher-income taxpayers
• New 3.8% tax on unearned income for higher-income taxpayers

2011 –Medicare Changes
• Part D
• Medicare Supplement
• Medicare Advantage

2014–Exchanges and Subsidies
• State Health Insurance Exchanges
• Premium subsidies for individuals with incomes below $47K (based on CBO estimate for 2016)

2014–Individual and Employer Coverage Requirements
• Employers with more than 50 employees
• Individuals who can find workplace, exchange, or other policies that cost less than 8% of their income

With the recent elections, we’ll have to watch and see what happens in the meantime, there is new legislation, which goes by the name Patient Protection and Affordable Care Act.

There are two main pieces of Health Care Reform
• One piece aims to make health coverage nearly universal by requiring employers to provide insurance and requiring individuals to buy it (tax credits & subsidies help pay for it).

• Part two tries to make Medicare, a popular and effective, but expensive, program that serving people 65 and older, more efficient.

Ten Thing You Should Know About Medicare – Part Two

6. Medicare doesn’t cover all your expenses.
You may find that each part of Medicare has some things it doesn’t cover.

7. Start by looking at what you have now.
Look at your current health coverage. For example, if you have group coverage from your job, or retiree insurance from a former employer, you’ll want to see how this coverage fits with Medicare.

8. You won’t want to put this off.
Timing matters when you’re choosing Medicare coverage.
Your enrollment window begins just before you turn 65 or when you become eligible for Medicare due to disability.

9. It’s smart to review your choices once a year.
Once you choose your Medicare coverage, you’re not locked into that choice. You’ll have the chance to change your choices at least once a year. That’s why it makes sense to check your coverage every year to make sure it still fits your health needs.

10. Don’t be afraid to ask for help.
There’s help available for everyone making Medicare choices. And there’s extra help with the cost of Medicare for people with little income and few assets.

Open enrollment starts on November 15. You are limited in when you can change your Medicare health plan during the year. You can switch during the Annual Coordinated Election Period which runs from November 15 through December 31 every year.

New coverage starts January 1. During this period you can change your choice of health coverage, and add, drop or change Medicare drug coverage.

A licensed broker can help you with these specifics.
Sources:
United HealthCare.com

Ten Thing You Should Know About Medicare – Part One

1. There are two ways to get Medicare, turn age 65 or become disabled.
Your biggest decision is choosing between Original Medicare (Part A and Part B) and the Medicare Advantage plan. If you choose Original Medicare, decide whether to buy a stand alone prescription drug plan or Medigap (Medicare supplemental insurance) policy. If you choose Medicare Advantage, pick a specific plan from a specific company.

2. There is drug coverage available.
Medicare now includes prescription drug coverage also known as Part D.
This coverage is optional. You can get prescription drug coverage through a Medicare Advantage plan. Some of them include drug coverage. Or you can enroll in a standalone Part D prescription drug plan to go with your Original Medicare coverage.
This is important to know: If you don’t sign up for Part D prescription drug coverage as soon as you become eligible for Medicare, you may pay a penalty on your premium unless you qualify for an exception.

3. Even for covered expenses, you’ll pay a share of the cost.
Medicare helps you get the health care you need when you’re sick, but you’ll still be expected to pay a share of the cost. You contribute to Medicare by paying taxes while you work. When you start to use your Medicare benefits, you’ll pay a share of the costs of the care you receive.

4. Your share may be larger than you expect.
If you choose Medicare Parts A and B, you’ll find that there are some expenses Medicare doesn’t cover. If you are seriously ill, these gaps create big bills. Some people who choose Medicare Parts A and B also buy a Medicare supplement insurance policy. Another alternative is to choose a Medicare Advantage plan that can also help you avoid these gaps.

5. Where you live makes a difference.
Medicare Parts A and B are the same across the United States. But other parts of Medicare (Parts C and D) are offered by private companies and may be available in specific counties, states, or regions, and not in others. There are Part C or Part D plans that offer nationwide coverage.

Your Health and Wealth in Retirement

Traditionally, there have been 5 things that may impact retirement savings during retirement:
• Inflation
• Market volatility
• Taxes
• Health care costs
• Longevity
A comprehensive study by LPL Financial, United HealthCare, Age Wave and Northstar Research found that health care expenses are the #1 worry for people nearing and in retirement.

Why? People feel unprepared, overwhelmed and frustrated. Health care planning is one of the things you need to think about and understand how it may impact your financial situation, especially your distribution planning. Consider overall health, you should plan for good health and you should plan for not-so-good health, also called planning for the “certainty of uncertainty.”

It also helps to understand the types of available insurance, such as Medicare, Medicaid and Supplemental.

Sources:
AgeWave, LPL Financial and UnitedHealthcare, Health and Wealth Planning in Retirement Survey, July 2010
LPL Financial and Northstar Research Partners, Advisor Health Insurance Study, May 2010

Your Year End Financial Checkup – Part One

As 2010 comes to an end and 2011 gets underway, it’s a great time for a financial check-up and review of your financial situation. Following are some items to consider:

Take a look at your current budget and savings plan and make adjustments as necessary.

Review current IRS Guidelines, such as contributions to your employer retirement plans and other retirement accounts. The maximum contribution to a 401(k), 403(b) or 457 Plan in 2010 and 2011 is $16,500 and taxpayers age 50 and older may make “catch-up” contributions of an additional $5,500. The maximum contribution to a SIMPLE IRA Plan in 2010 2011 is $11,500 with a “catch-up” contribution of $2,500 for taxpayers age 50 and older. The maximum contribution to Traditional and Roth IRAs is $5,000 in 2010 and 2011, contributions are subject to eligibility requirement based on Adjusted Gross Income. Taxpayers age 50 and older may make “catch-up” contributions to Traditional and Roth IRAs of $1,000. Please note: You have until April 15th, 2011 to make a year 2010 contribution to your IRA or Roth IRA if you qualify.

Don’t Sell Yourself Short

Planning is the only way to make sense of the five things you can do with money. If you don’t plan, you will likely spend more, save less, invest less, and do nothing to reduce your taxes.

Don’t sell yourself short by planning your retirement based on some arbitrary percentage of your income. “Needs planning” is a good start for someone who has given no thought to retirement savings. It’s one way to convince people that they should save something, but it’s not good for people who want to do better than just get by. Don’t settle for mediocrity in your investment planning; try to excel. It’s fine to set a floor for what you will need, but then aim higher—and plan to get there! Become a “wants” planner, instead of a “needs” planner. Only when you determine what you want from life can you determine the role that money will play in helping you achieve your dreams.

Planning Together…

The first step in planning for retirement with your spouse is to reach an agreement on your primary objectives. Without that, a strategy is impossible, or at least a lot more complicated and expensive.

I have been amazed at how often I’ve interviewed new clients, couples creating a financial plan, who have fundamental disagreements on what they want from retirement. Sometimes they don’t even realize their differences until I ask them both to write down their ideal retirement. I get back one piece of paper from Mars and one from Venus.

As in all other things with your spouse, communicate clearly and never assume. Lay out precisely what each of you wants and decide how you can make those desires work together. Be specific. I advised one couple that was confident they shared a similar vision of retirement, a home on the beach. Only after I probed further did we all learn that he wanted to live in Florida and she wanted to live in Martha’s Vineyard. Both were shocked, and neither would budge. They had always talked about a beach home, but had never gotten around to specifying which beach.

As part of your review of your financial plan you might also want to confirm that your partner’s plans or wants have not changed. You wouldn’t want to find out years from now that your spouse decided long ago that his view of an ideal retirement had changed, but he had forgotten to tell you.

Nearing Retirement?

Retirement planning has become more challenging in recent years. Aside from current market uncertainties, there are other more constant issues to consider, such as inflation and taxes. Investors planning for retirement have questions about how these factors will affect their retirement funding issues. Have I saved enough? What is a reasonable and sustainable withdrawal amount? Can I plan for retirement while also meeting other intermediate financial goals, such as educating children and paying off debt?

These and other questions weigh heavily on the minds of most retirement investors. What’s the solution? While it may be necessary to adjust your financial expectations for retirement or even postpone your retirement date, you can still achieve retirement security. But to do so, you’ll want to engage the services of a financial planning expert. Once retained only by the wealthy, financial advisors now assist all types of investors in making decisions about retirement. In fact, in a landmark survey conducted by the Certified Financial Planner Board of Standards, Inc., the most common reason for people to begin financial planning is to build a retirement fund. And among those who use a financial advisor as their primary source of guidance, a landmark 2004 survey found that 81% were extremely or very satisfied with the advisor.*

*Source: Certified Financial Planner Board of Standards, Inc., 2004 Consumer Survey.

Vacation Properties and Income – Part 2

Another way for retirees to generate income from a vacation home is to sell it. By using the federal capital gains exclusion in conjunction with the sale of your primary residence, you can potentially realize tax-free income. Here’s how it works. The basic capital gains exclusion rules state that you must have owned and used the home as your primary residence for at least two years out of the five-year period ending on the date of the sale. If you are married, the full $500,000 exclusion ($250,000 for single homeowners) is available as long as one or both of you satisfies the ownership test (two years) and you both satisfy the use test (primary residence).