Dean Roland Russell LLC, Fee Only Family Wealth Management, San Diego, CA

Guest Blogger:  Every now and then, we come across a great blog written by a fellow Fee-Only Financial Planner.  We ask their permission to allow us to repost the blog on our website to share the knowledge.  Thank you Frank Moore CFP of Vintage Financial Services, LLC for sharing the following blog: What kind of retirement income do you want?

Posted on October 4, 2012 by Vintage Financial Services

Many investors today are very concerned about their retirement income. People that are close to retirement fear that they won’t be able to sustain another event like the 2008-09 credit crisis. And they look to the federal debt, the trillion dollar annual budget deficits and the Federal Reserve’s non-stop printing press and wonder how they can protect their life savings.

Unfortunately most investors are making the classic mistake of buying yesterday’s (or 2008’s) best investment for tomorrow. They really want something safe yet they don’t really understand how different investments work.

So far in 2012 investors have pulled about $70 billion out of stock mutual funds while adding nearly $230 billion to bond funds (through Sept. 19 according to Investment Company Institute). Yet stocks, as measured by the S&P 500 index, currently pay a dividend yield of about 2.1% while the ten year US Treasury bond yields just 1.6%. Not only are investors accepting a lower income yield from bonds but that rate is fixed while stock dividends have generally risen over time.

The Federal Reserve has made no secret that they want inflation higher than the recent 1.9% rate for the year through August. Their focus has shifted to unemployment and they’ve promised to keep printing money until the unemployment rate falls from today’s high level. And some inflation may not be the worst thing for America. It will be easier to repay our $16 trillion federal debt with dollars that are worth less in the years ahead.

A higher cost of living, though, is a retiree’s biggest financial threat. Once you stop working no one will be giving you a raise. Social Security promises to increase benefits with inflation but those gains have been largely offset by higher Medicare premiums in recent years. Investing your life savings into fixed rate investments like bonds, bank CDs and fixed rate annuities may feel safe but living on a fixed income means your standard of living will decline by the rate of inflation every year. In the short term with low inflation there’s not much impact but in the 1970’s the cost of living doubled leaving retirees with half their real income in just a decade.

Source: Stern/NYU, Bureau of Labor Statistics. Bond interest is illustrative, not historical

The graph above illustrates investor’s choices today. Today’s investor can buy ten year US Treasury bonds that yield 1.6% or they can invest in stocks that pay dividends of about 2.1%. The US Treasury interest is guaranteed, but remains the same. Dividends have fluctuated but have risen in 43 of the last 50 years. The cost of living has increased more than seven fold over the last 50 years yet dividends have risen even more. They kept up with the high inflation in the 1970’s and have significantly outpaced inflation over the past 25 years.

Safe is a relative term. Do you want a guaranteed dollar amount or do you want a good chance of being able to maintain your purchasing power throughout your retirement years? Today’s choice seems pretty obvious.

Dean Roland Russell is a proud sponsor of the Community Resource Centers 2012 Autumn Equinox Event.

CRC Sponsors.

Mary was quoted in the June 2012 issue of NAPFA Practice Profile.

June NAPFA Advisor Profile Magazine.pdf

Here are some highlights from the one day class I attended on social security on 7/13/2012 plus classes in May at the NAPFA national convention:

1.   It used to be that Medicare and the Social Security full retirement age started at the same age, 65.  No more.  Medicare starts at age 65.  Full retirement age for social security is at age 66 today and will increase to age 67 for those born 1/2/1960 and later.  Many believe that full retirement age will eventually extend to age 70.

 2.  When should you apply for Medicare?  You should apply three months before your 65^th birthday.  This is true even though  your health insurance may be covered by your employer.  Your benefits could be reduced if you do not apply at or before age 65.

 3.  How long does it take to receive social security benefits after filing?  Depending on the state, it can take up to six months to receive benefits after application.

 4.  Can you take social security before full retirement age, age 66 today?  Yes, but your benefits are only 75% of those at full retirement age if the start date is age 62; if the start date is age 63, 80%; if the start date is 64, 86.7%; and if the start date is age 65, 93.3%.

5.  Are there two types of social security retirement benefits?  Yes, your own based on your own earnings and the spousal which is the higher of 50% of your spouse’s benefits or all your own benefits.  The spousal is reduced if you or your spouse start benefits before full retirement age, age 66.  That based on your own earnings likewise is reduced if taken before full retirement age.  Can both of you claim spousal benefits?  No.

 6.  Does it pay to delay benefits beyond age 66?  The yearly benefit increases by 8% for every year you delay social security benefits between ages 66 and 70.   

 However delaying benefits may not make sense for someone in poor health and a life expectancy under 77.  Still life expectancy should include that of the healthy spouse since he or she will receive survivor benefits (benefits paid after the worker’s death) based on the worker’s social security benefits.  At death the surviving spouse receives 100% of the deceased spouse’s benefits.  Note:  we are assuming that the surviving spouse’s benefits are lower.  If they are higher, he or she will receive the higher amount.  It is important to note that he or she will not receive both.

 There is NO advantage to delaying retirement benefits beyond age 70.

 7.  What if my spouse was covered by a government plan where no social security was withheld?  That spouse may only receive a portion or possibly none of your benefits.  This frequently happens with school teachers.   The formula is too detailed to outline here.  This also applies to foreign pension benefits.   German holocaust victim pensions will not offset social security benefits.

 8.  Should benefits be delayed given the current budget crisis and lower percent of working adults in ten years?  No, benefits should not be delayed. All three speakers believed that benefits were safe for those 50 and older.  Those under age 50 will get benefits if full retirement age is changed to age 70.

 9.  Divorced spouses can receive social security retirement benefits if they were married to the worker for at least ten years and 1) are not currently married or 2) married and age 60 or older. 

 Does this take away social security benefits from the current spouse?  No, as long as you have been married to the current spouse for at least nine months, that spouse will be eligible for spousal benefits.  In short social security benefits can be paid to former spouses meeting the tests mentioned in the above paragraph and the current spouse. 

Can the current spouse collect from more than one spouse (former or current)?  No. 

10.  Is it worthwhile to continue working or resume working?  Social Security benefits are based on the highest income over 35 years.  Lower earnings receive most of the benefit.  The system is weighted more for those with low earnings than high earnings.  The computation is too long to display here but once you exceed average indexed monthly earnings over 35 years (AIME) of $767 at age 62, you receive very little benefit from additional earnings.  The percent of benefits up to $767 is 67.5%.  From $767 to $4,624 it is about 24%.  Above $4,624 it is about 11.3%     

 The bottom line is that your benefit increase will probably not merit continue working.  However, the cash flow from earnings could allow you to defer taking benefits to a later age.  As mentioned under #6, delaying benefits adds another 8% per year.

 If you had social security withheld from your pay for less than ten years, you may not have enough credits for your own social security.  You would still be eligible for spousal and survivor’s benefits.  The amount of credits required for your own social security depends on your age.  See www.socialsecurity.gov/retire2/credits3.htm.

 11.  Will your social security retirement benefits be reduced by earnings?  If you work and are full retirement age or older, you may keep all of your benefits, no matter how much you earn. If you are younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits. However, if you are younger than full retirement age during all of 2012, $1 is deducted from your benefits for each $2 you earned above $14,640.  If you reach full retirement age during 2012, $1 is deducted from your benefits for each $3 you earn above $38,880 until the month you reach full retirement age. 

 It is important to note that social security can consider even rental income as earned income.  Earned income for social security purposes depends on frequency.  If someone does some repairs for a friend on a one time basis, it will not reduce his or her social security benefits.  Caring for a disabled Mom will not reduce your social security benefits even if the government pays you.  Being a managing member of a partnership, will also be considered frequent earnings.

 12.  BE CAREFUL - 1)  Be careful of taking benefits the same time that your spouse takes benefits.  It is common place for both to file at the same time.  If one is under 66, their benefits could be permanently reduced.  2)  Be careful of following social security advice.  They have a 43% error rate.  3)  Be careful to request your final discharge papers from the military.  Apparently the military has lost social security data.  4)  Be careful about disclosing part-time work to social security if you are under full retirement age.  You may have to prove that it is infrequent.

 My very best ….. Mary!!!   

On June 28, 2012, the U.S. Supreme Court ruled, in a landmark decision, that the Patient Protection and Affordable Care Act (ACA), including the provision that most Americans carry health insurance or pay a penalty, is constitutional.

The ACA, signed into law in 2010, made sweeping reforms to health-care coverage in the United States. Many provisions of the law have already taken effect. A number of other provisions are scheduled to take effect in subsequent years, including the requirement that most Americans and legal residents have qualifying health insurance (exceptions apply) or pay a penalty in the form of a tax. Here’s a summary of some of the important provisions that are already in place, and those that are on their way by 2014.

In effect now

Children can no longer be denied insurance coverage because of pre-existing conditions

Payment of $250 rebate to Medicare Part D beneficiaries subject to the coverage gap (beginning January 1, 2010) and gradually reducing the beneficiary coinsurance rate in the coverage gap from 100% to 25% by 2020

Insurers will not be able to impose lifetime caps on insurance coverage

All plans offering dependent coverage will be required to allow children to remain under their parents’ plan until age 26

Insurers cannot cancel or deny coverage if you are sick except in cases of fraud

Adults with pre-existing conditions will be able to buy coverage from temporary high-risk pools until 2014, when coverage cannot otherwise be denied for pre-existing conditions

Key provisions effective on or before January 1, 2014

Increasing the medical expense income tax deduction threshold to 10% of adjusted gross income, up from the current 7.5% (January 1, 2013)

Increasing the Medicare Part A tax rate by 0.9% on wages over $200,000 for individuals ($250,000 for married couples), and assessing a new 3.8% tax on some or all of the net investment income for these higher-income individuals (January 1, 2013)

All Americans must carry health insurance or face a penalty (in the form of a tax) of up to 2.5% of household income on individuals, with exceptions for economic hardship, religious beliefs, and other situations (January 1, 2014)

Adults with pre-existing conditions cannot be denied coverage or have their insurance cancelled due to pre-existing conditions (January 1, 2014)

A requirement that states establish an American Health Benefit Exchange that facilitates the purchase of qualified health plans and includes an Exchange for small businesses; also requires employers that contribute toward the cost of employee health insurance to provide free choice vouchers to qualified employees for the purchase of qualified health plans through Exchanges (January 1, 2014)

Tax credits will be available to qualifying families to offset the cost of health insurance premiums (January 1, 2014)

Employers with more than 50 employees must offer health insurance for their employees or be fined per employee (January 1, 2014)

Imposing taxes or fees on health insurance providers and drug companies, while doctors and hospitals will receive less compensation from government sources (January 1, 2014)

So is this it?

While the Supreme Court has ruled the ACA constitutional, it may still face challenges as Congress may seek to repeal the law. The ultimate fate of the health-care reform law may be determined by the outcome of the November elections.

Here is a good easy to understand article on investing in bonds in the current environment.  Thanks Michael Pollock!

via How to Invest in Bonds in 2012 – WSJ.com.

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Bank Rate Sheet as of 2/12/2012 pdf

 Disclosure: Dean Roland Russell LLC recieves no compensation for using BofI banking products.