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Senior Inflation Causes Concern


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“Senior Inflation” is a concern of retirees as prices for products used by seniors  – including medical services, home health care, and nursing homes have increased significantly more than the overall consumer price index.  with necessities going up in prices, seniors have less disposable income to spend on things they enjoy.  So much for retirement being “golden years” than many envision them to be.

The economic recovery in the U.S. is appears to be certainly on track, although subdued, the latest set of economic data provides an opportunity to bolster markets which are testing new highs. The US bond-buying stimulus program has lasted too long, and there are signs it is now distorting financial markets and encouraging risk-taking and is stoking asset-price bubbles that “may result in tears” for investors acting on bad incentives. 

We are feeding imbalances similar to those that played a role in the run-up to the financial crisis.  We must monitor these indicators very carefully so as to ensure that the ghost of ‘irrational exuberance’ does not haunt us again.

Retirement can be unpredictable, variables such as market performance, retirement dates, and cost of living can play out in unexpected ways and have a major impact on a retirees retirement.  It is now more important that ever that the waves of gray retirees and near retirees have to take “ownership” in that their future is up to them.

People are saving blindly. There’s no sense of how they’re doing or where they are trying to get to. A wake-up call is needed for people to realize that feathering their nest with retirement savings is absolutely essential.

There is no one-size-fits-all, however, a 401(k) with an employer match is a great core investment for building retirement security. It’s important to do everything possible – save everything possible – to build the biggest retirement nest egg you can and at the same time protect what you have already accumulated.

There is much more to financial planning than just the nuts-and-bolts, dollars-and-cents aspect of whether there will be enough money.  A thorough comprehensive financial plan will answer the specific questions you may have. This is a straightforward process where your expenses, income and assets are mapped out into the future.

As for the amount of money you’ll need to cover those expenses over a 25- or 30-year retirement, formulas vary.  Replacing 100 percent of household income, minus the amount you’re saving for retirement, insures against unknown expenses, such as higher taxes or extraordinary health costs.

Most want to shape an investment strategy that will provide growth and protection from negative market trajectories, with guarantees that provide certainty. By choosing an annuity product with an income guarantee you move market risk to an insurance company and continue access to growth.  An fixed indexed annuity guarantees that an investment would never lose value in a “bad” year while obtaining some growth in a “good” year.

To encourage you to save, the traditional 401(k) plans have a bunch of tax breaks and penalties. The money you invest in the plan – known as your contributions – is tax deferred until you are retired and withdrawing money from the account.  Annuities have some of the same tax treatment but there are differences.

There are tax issues you should consider in your plans? As we get ready to file for income taxes this year it’s a good time to have a discussion highlighting certain tax rules for general guidance. We are not offering tax advice, Individual taxpayers should consult a qualified tax advisor for specific advice that applies to their own case.

a. How is a pension or annuity taxed? Federal income tax treatment of a pension or annuity depends on whether or not the recipient has contributed “after-tax” dollars toward the cost:

  • Pre-tax dollars – Qualified Plans: If an annuity is purchased entirely with “before-tax” dollars, the benefits are fully taxable. This rule applies to benefits from a public or private pension plan that has no employee contributions, a 401(k) account accumulated from employer contributions or employee deferrals, or a traditional IRA funded by deductible contributions or rolled over from an employer plan (not a Roth IRA).
  • Post-tax dollars – Non Qualified Plans: If the individual taxpayer contributes “after-tax” dollars toward the cost of the annuity or pension — for example, from personal savings held outside a pension plan — the taxpayer later gets back benefits equal to these contributions (or “basis”) as tax-free benefits over his or her life expectancy based on IRS actuarial tables.

Because the individual’s contributions have already been taxed, IRS treats part of each benefit as a tax-free return of principal until the total benefit payments equal the taxpayer’s cost. From that point on, the annuity payments are fully taxable. The abrupt shift in tax treatment may come as an unpleasant surprise to the elderly people who are affected. Depending on the state where you live after retirement, you may pay little or no state income tax on retirement income. For retirees with substantial income, the state of residence can make a big difference.

b. How do IRS rules treat “early distributions” before age 59 ½?  Benefits paid from a qualified plan or IRA to an individual who has not reached age 59 ½, except certain early distributions permitted by IRS rules, are subject to a 10% excise tax (in addition to income tax). Lump-sum distributions generally are subject to this “early distributions” excise tax, but a series of substantially equal periodic payments is not, such as a life annuity that can begin at any age. This is one reason to consider receiving benefit payments that commence before age 59 ½ as a life annuity.

c. How do IRS rules treat annual “minimum required distributions” after age 70 ½?   Benefit payments from an IRA (except a Roth IRA) must commence when the individual reaches age 70 ½. Benefit payments from a qualified pension or 401(k) plan must commence when the individual reaches age 70 ½ and is no longer working for the employer that sponsors the plan.

The individual must take at least the minimum required amount out of the IRA or other fund each year. Whatever amount is withdrawn gets taxed as income, even if the individual just moves the money to another investment outside the IRA instead of spending it. Each year is treated separately, so an individual who takes out more than the minimum in one year may not count the excess toward the minimum for a later year. But each IRA is not treated separately — someone with several IRAs may add them up and take the total minimum required payment from one account.

In January 2001, IRS revised its rules for computing minimum required distributions after age 70 ½. The changes are helpful for individuals, reducing both their paperwork and their taxes. Instead of making each person choose among several complex calculation methods at age 70 ½, IRS automatically applies one method that produces the lowest minimum distribution in all cases. Also, a taxpayer can easily change the payout arrangements after payments have begun or the owner of the account has died. These rules are not yet final but they can be used right away.

The bad news is that IRS continues to charge a very stiff 50% excise tax on any shortfall in actual Payments’ compared to the minimum payments required in a calendar year. After age 70 ½ the financial institution or employer plan holding the funds usually will now notify both IRS and the individual each year about the amounts of required minimum distribution and actual distribution.

IRS expects the changes will make it much easier to enforce their rules and collect the 50% excise tax. Clearly, people beyond age 70 ½ who have funds in IRAs or other pension accounts must be very careful to take the minimum required distribution each year.

Amounts paid under a single-life or joint-life immediate annuity usually will satisfy these IRS rules in a simple way that does not expose the annuitant to the 50% excise tax.

Long Term Care Change:  As we get ready to file for income taxes this year, keep in mind that the Internal Revenue Service increased limits on long-term care insurance premium deductions for this year.

Premiums for “qualified” long-term care insurance policies are tax-deductible to the extent that they, along with other unreimbursed medical expenses (including Medicare premiums), exceed 10 percent of the insured’s adjusted gross income, or 7.4 percent for taxpayers age 65 and older (through 2016). Premiums are deductible for the taxpayer, his or her spouse, and other dependents.

If you are self-employed, the tax-deductibility rules are a little different. You can take the amount of the premium as a deduction as long as you made a net profit. Your medical expenses do not have to exceed a certain percentage of your income.

The IRS does impose a limit on how large a premium can be deducted, depending upon the age of the taxpayer at the end of the year.

Another change involves benefits paid under per-diem policies, (a set amount is paid for coverage per day). These benefits are not included in income except amounts that exceed the beneficiary’s total qualified long-term care expenses or $330 per day for 2014, whichever is greater. The 2013 limit was $320.

You’ve worked hard to accumulate savings through your 401k plan and other types of savings.  Now that you are retiring  making a decision about your retirement savings can seem complicated.  Your choice could be key in achieving a secure future. An fixed equity-indexed annuity, or FIA for short, is an annuity that earns interest that is linked to a stock or other equity index. One of the most commonly used indices is the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500).

EIAs offer consumers what could be described as the best of both worlds: a market-driven investment with potentially attractive returns, plus a guaranteed minimum return. In short: You get less upside but much less downside.

An equity-indexed annuity is in the category of “Fixed” annuities. That means, you may earn a comfortable return on your money while deferring the taxes on your gains. Fixed annuities also offer specified annual company-guaranteed returns.  Fixed Indexed Annuities can help retirees reclaim their retirement.

 

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Thursday, March 6th, 2014 Wealth Management

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