Social Security – As Soon As Possible?

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Couple hikingWhen is the best time to start taking Social Security benefits? The answer is not always so simple. Perhaps this article with provide some things to think about as you ponder your choices. 

Myth No. 1:  If you wait, you get more…

The older you are when you start, the more Social Security monthly income you receive. The Social Security Administration thus entices people to wait longer. But let’s look at this a little deeper.

Let’s use an example. Assume at age 62 a person’s Social Security monthly income will be $1,000 per month. However, if they wait until age 67, this monthly income increases to $1,500. More is better, right?

Remember that in order to get this extra $500 per month, this individual had to wait five years. So if we calculate the income this person did not receive, it comes out to $60,000 ($1,000 per month for five years).

The proper thing to do in this example is analyze the pros and cons of waiting five years for the extra $500 per month.

Using the example, the pros are simple. Waiting earns you an extra $500 per month, which is a good thing.

Now let’s take a look at the cons. How many months does it take someone to simply break even (from a financial perspective)? Well, if you divide $60,000 (lost income) by the $500 (additional income), it comes out to 10 years.

However, the story does not end here. Remember, by waiting five years this person is now 67 years old. Therefore, in order to accurately calculate the lost income and “break-even” point, you also have to add in the five years this person waited (from age 62–67). Therefore, it really takes this person 15 years to simply break even and justify deferring their Social Security income.

But wait, there’s more …

Some other key factors to consider are:

  • Five years of potential lost interest or growth from the monthly income
  • Five years of lost ability to spend and enjoy the extra monthly income
  • Countless years of lost income due to a possible critical illness
  • Countless years of lost income due to a possible premature death
  • Countless years of lost income due to an unexpected illness or death of a spouse
  • Countless years of reduced purchasing power as a result of inflation
  • Countless years of lost income due to the potential for taxes to go higher
  • Countless years of lost income due to potential reductions, changes, or even the elimination of Social Security income

Myth No. 2:  My income and taxes will be lower in retirement…

Far too often individuals/couples make major mistakes as a result of basing a financial decision upon its tax consequences.

Most of us have heard the argument, “I will be in a lower tax bracket when I retire.” This statement seems to be an amazement for several reasons.

First, why do so many aspire to have a significant income reduction once they reach retirement? Retirement is commonly referred to as the Golden Years, right? This implies that you worked hard and long enough to have saved enough gold to live like Kings and Queens.

Second, when are you more likely to spend more money: While you are working or when you are on vacation? Since the obvious answer is while on vacation, isn’t it fair to say that retirement is supposed to be a wonderful, long, enjoyable vacation from work? Retirement is arguably the time when you have earned the right to spend and enjoy your hard-earned wealth and income.

Yes, more income does mean more taxes, indisputably. However, here is a theory on taxes: Make a lot of money, pay a lot of taxes, and repeat the process.

Again, let’s again analyze the pros and cons.

The main pro for deferring Social Security income is simple. More income means more taxes, and nobody likes paying more taxes.

Now, let’s take a look at the cons using an example:

In 2012, Couple No. 1 earns $50,000 per year. Couple No. 2 earns $500,000 per year.

Couple No. 1 paid less in Federal taxes (15 percent) than the couple earning $500,000 per year (35 percent). In fact, on the surface (excluding any deductions and State income taxes) Couple No. 1 paid a mere $7,500 in taxes, while Couple No. 2 paid a whopping $175,000 in taxes.

However, which of the following retired couples would you rather be:

Couple No. 1: Net Income (after taxes) is $42,500 per year, or $3,542 per month. Couple No. 2: Net Income (after taxes) is $325,000 per year, or $27,083 per month.

But wait, there’s more …

Some other key factors to consider are:

  • Today we are in the sixth lowest tax bracket in history
  • A large majority of people today believe tax rates are going higher
  • There are many reasons a person’s (or couple’s) taxable income can actually increase in retirement (employment income, asset and income growth, inheritances, spouse’s death and rental income, IRA Required Minimum Distributions, loss of deductions, and more).

A bird in the hand

When it comes to determining the right time to take Social Security income, too many individuals and couples conclude it’s in their best interest to delay beginning to take Social Security income so as to increase their future income and/or minimize their income tax.

HSAs/HDHPs – Working Together

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Smiling Pleasant LadyIt’s no secret that health care costs have been skyrocketing for many years and that the rapid rate of increase is affecting everyone. It’s estimated that a couple retiring today at age 65 will need $200,000 to cover health care expenses in retirement. 

That means saving for health care should be an important part of retirement planning.

There is an approach that can help you better plan for and meet these rising costs— enrollment in an HSA-eligible health plan (also known as a High-Deductible Health Plan [HDHP]) and an HSA. This combination can potentially save you money on health care while giving you more control over how your medical dollars are spent.

To help you better understand HSA-eligible health plans, HSAs, and how the two work together, here are answers to some commonly asked questions to help you get started.

What is an HSA-eligible health plan?

An HSA-eligible health plan is an HDHP that satisfies certain IRS requirements with respect to deductibles and out-of-pocket expenses. You generally pay more up front for medical expenses before the plan begins to pay for covered services. In return, you will generally pay less in premiums than in other medical plan options. Otherwise, an HSA-eligible health plan is much like a traditional health care plan. Enrollment in an HSA-eligible health plan is one of the requirements to be eligible to establish an HSA.

What is an HSA? – A Health Savings Account (HSA) is an individual account used in conjunction with an HSA-eligible health plan to cover out-of-pocket qualified medical expenses on a tax-advantaged basis. Your HSA belongs entirely to you and can be used to pay for both current and future qualified medical expenses for you and your eligible dependents. You can contribute to your account, withdraw contributions to pay for current qualified medical expenses, and potentially grow your account on a tax-free basis by investing your savings in a wide array of investment options.

Why should you consider an HSA? – If you have the opportunity to enroll in an HSA-eligible health plan with an HSA, you may want to take a closer look. This combination may offer some significant tax and savings advantages over traditional health care plan options—no matter if you’re a low, medium, or high user of health care services.

Control. You determine how much to contribute (up to your maximum annual contribution limit per IRS rules), when and how to invest your contributions, and whether to take an HSA distribution to pay for current qualified medical expenses, or let your contributions stay invested for future growth potential.

Tax savings. When used for qualified medical expenses, HSAs offer a triple tax savings—contributions, any investment earnings, and distributions are federal tax free.

Growth potential. You have the opportunity to invest your contributions in a wide array of investment options—including stocks, bonds, and mutual funds—for potential growth of your account over time.

Flexibility. Any unused balance in your account will automatically carry over from year to year so you can begin to build your savings for future qualified medical expenses.

Portability. Your HSA always belongs to you, even if you change jobs or become unemployed, change your medical coverage, move to another state, or change your marital status.

Who is eligible to open an HSA? – You must meet several IRS eligibility requirements in order to establish and contribute to an HSA. It is your responsibility to determine if you are eligible:

  • You must be enrolled in an HSA-eligible health plan on the first day of the month. For example, if your coverage is effective on May 15, you are not eligible to contribute to or take a distribution from your HSA until June 1.
  • You cannot be covered by any other health plan that is not an HSA-eligible health plan.
  • You cannot currently be enrolled in Medicare.
  • You cannot be claimed as a dependent on another person’s tax return.

If you open an HSA and do not meet the above criteria, your contributions, any investment earnings, and distributions may be subject to income taxes, penalties, and/or excise taxes. Additionally, in order to open and contribute to an HSA, you must have a valid U.S. address.

How does a person know if an HSA is right for them? – While many may benefit from an HSA, your personal situation will determine if an HSA-eligible health plan and HSA are the right approach to meet your health care needs. As you explore your options, consider your anticipated health care expenses, your current financial situation, and how much control you want over your medical spending. Keep in mind that HSAs come with the additional responsibility to track, manage, and monitor your health care and related expenses. The record-keeping of your HSA is up to you, and it’s important to hold on to all receipts, records, or other documentation as proof that the expenses you pay from your HSA are for qualified medical expenses.

What type of expenses does an HSA cover? – Distributions from an HSA used to pay for qualified medical expenses for you, your spouse, and dependents are tax free provided they meet the IRS definition of a qualified medical expense. The good news is that a lot of expenses qualify for payment or reimbursement, such as:

  • Health plan deductibles and coinsurance
  • Most medical care and services
  • Dental and vision care
  • Prescription drugs and insulin
  • Long-Term Care Insurance premiums

Note that these expenses must not already be covered by insurance and that health insurance premiums generally do not qualify. For more information about HSAs and qualified medical expenses, refer to IRS Publications 969 and 502 at http://www.irs.gov or consult a tax professional.

Should an HSA be used to pay current qualified medical expenses or be saved for the future? – An HSA is your personal account and only you can choose how to use it. You can use the funds in your account as you incur qualified medical expenses, or leave your contributions in your HSA and pay for current medical expenses out of pocket.

Why would you want to do this? The combination of HSA tax advantages and the variety of investment options available through many HSAs provide an opportunity for potential growth. Consider this hypothetical example:

If you contributed $3,000 annually to an HSA and earned a 7% return over a 20-year period, you could potentially grow your balance to $127,291— that’s $60,000 from your own contributions plus $67,291 in earnings that you can use to pay for qualified medical expenses, free from federal taxes.

 

 

 

The Short Term Care Revolution

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Cute couple smilingWith all the hoopla about LTC carriers going out of the market or raising rates, many people are more willing to consider short-term care (STC) policies. Hence, recovery care has come out of the shadows and sheds new light!

Short-term care (also known as Recovery care or “LTC Lite”) is not a new product but it has been gaining ground in the last three years as an alternative to traditional long-term care insurance. With its shorter underwriting cycle, high-issue rates, and low premiums it’s becoming increasingly popular especially for Medicare beneficiaries.

The standard STC policy provides coverage for one year or less. The benefits are usually reimbursement-type. Most are the “use it or lose it” type, although one popular insurance carrier uses the “pool of money” approach.

STC elimination periods are much more consumer-friendly. Most do not go longer than 60 days [as with LTC] and some offer a 0-day elimination period. And since these policies are not true LTCi – there is no 90-day doctor certification required before a person can receive benefits. This makes STC perfect for those who might have purchased a long-term care policy with a longer elimination period. Also, the policy can pay even if Medicare pays. In short, if a person chooses a 20-day elimination period, that is exactly what he or she will receive. The STC benefits would start on day 21.

Underwriting is a breeze. A person will not need to wait 4 to 6 weeks for a policy – more like 7 to 10 days or less. Most STC applications are just 10 or 11 health questions. If a person answers “No” to all the questions, then he or she is 95% through the underwriting process. Most insurance carriers do a prescription drug screen and a phone interview. Older ages [60+] would require a face-to-face interview with a cognitive screening. From time to time doctor records could be ordered, however that is pretty rare.

The health questions are similar to the questions found on an LTCi application and would be considered “knock-out” questions. Generally the insurance carrier wants to make sure that a person is not already ADL (Activities of Daily Living) deficient, cognitively impaired or affected by any life-threatening conditions. This is mainly considered a generalization. A “Yes” answer to any of the questions means the person will definitely not qualify.

Coverage can vary from policy to policy. They all cover care in a nursing home. While some policies only cover facility care, many offer benefits for care in the community as well. Some carriers may limit the amount of benefits they will pay for home care while others cover all types of care equally – just like a regular LTCi policy. One carrier offers a home care rider which provides for 90 home care visits. Coverages vary from company to company so be sure to contact your insurance broker in order to understand what the policy will pay.

The benefit triggers are the same as LTCi  if a person cannot perform 2 out of 6 activities of daily living (eating, dressing, toileting, transferring, bathing, continence) or has severe cognitive impairment.

A major difference between STC and LTCi is no 90-day doctor certification requirement. This means if a person only needs care for 6 or 7 weeks (i.e. recovering from a fractured hip), an STC policy will pay for the care. Whereas a traditional LTCi policy would not.

Generally people age 65+ buy these policies.  Fifteen years ago, the 65-year old was the perfect candidate for traditional LTCi. Now with higher rates, many people have found they are priced out of the market or they can no longer qualify due to health.

If a person is a Medicare beneficiary, according to the Medicare & You Guide, Medicare does not pay for most long-term care services. When they do pay, they will only pay for all charges up to 20 days. If a person continues to be eligible for the next 80 days he or she will pay $166.00 per day. After 100 days, Medicare stops paying altogether. That’s when a short-term care policy is critical.

For younger people, age 45-60, who may still have children at home, or are helping a few through college, a one year STC plan is a great way to guard against invading their retirement funds and to pay for a short-term serious illness or injury.

Those who cannot qualify for or afford traditional LTCi, the STC applications are only 10 to 11 questions. Most of the underwriting is taken off the application. One STC insurance carrier does not have a weight chart. The same company will also take insulin-dependent diabetics (regardless of the daily units used), as long as the person has not been on insulin for over ten years. Some other carriers do not ask if the person has been declined by another carrier. While no carrier wants to purposely insure ill people, there are plenty of times a person would be uninsurable for a traditional plan, but still qualify for STC.

Short-term care is not for everyone. However, it can be extremely important coverage for those people who do not have LTCi and have everything to lose.