retirement plan

Retirement Crisis?

The retirement crises debate.  A recent Wall Street Journal article pitted opposing parties in a debate as to whether America has a retirement crisis.  Obviously one side said we do have a retirement crisis as too many people save too little money, and the counterpoint indicated that we don’t have such a crisis because older individuals spend less money than while they are working and raising children.  The implication being that people won’t actually need more money in retirement.

retirement planOne aspect that neither party discussed in the debate was the cost of long term care.  While acknowledging that we are generally living longer lives, there was no discussion of covering the cost of residing at an assisted living facility, an adult family home or paying for in home care.  This would seem to be a significant oversight as studies show that one in four individuals over age 65 will develop some form of dementia related ailment.  Those number rise to one out of every two individuals over age 85.

The reality would seem to be there is no retirement crisis, until there is one.  If you live at home and the mortgage is paid, the car is paid, your debts are minimal and kids are gone, a monthly Social Security check of $2,000 and an extra $1,000 of IRA or annuity income is probably sufficient.  However, when you all of a sudden have to move to assisted living or an adult family home at monthly costs ranging between $3,000 and $10,000 per month, you see there is a scary income shortfall.

Many people will look to a reverse mortgage to solve their problem.  That may be fine, but you have to reside in your home.  If that is not possible the reverse mortgage is not a viable option.  The next step is usually to sell the house and hope the money lasts.  There are better ways to address this all-to-common situation.  Advance planning that fuses legal asset protection with straight-forward financial strategies can provide the answers that every family desires when planning for retirement.

retirement plan

Tax On My IRA? OMG!

Tax on my IRA?  Say what?! The Wall Street Journal recently told the story of Fanny Handel, a retiree who was floored when she received a notice from the IRS that she owed $92,000 in taxes on her traditional IRA. As many do, she assumed what she earned in her IRA was tax free. But that is not always the case. While gains from the sale of stocks, dividends, and bond interest all accrue tax free (only taxed when the money is withdrawn from the IRA), returns from other types of investments are taxed to the IRA when they are earned.

What types of investments can cause so much trouble in an IRA? Investments in ‘alternative’ assets such as hedge funds, private-equity funds, limited partnerships, operating businesses and real estate can carry a nasty tax burden. Of those, perhaps the biggest risk is limited partnerships. That’s because a very common type of investment these days is a Master Limited Partnership or MLP. MLP’s are very common investment vehicles in the oil and gas arena. And, it’s what got Ms. Handel into trouble. She apparently owned thousands of “units” of Kinder Morgan, Inc., a popular MLP.

So what the heck is the deal, you ask? Haven’t we all been told for decades that investing in an IRA is one of the best ways to save for retirement because you DON’T pay taxes until you have to begin withdrawing the money at age 70 1/2? We have been and that’s all true. With one odd little exception – Unrelated Business Taxable Income.

What on earth is that? And why does it affect you? Well apparently our Congress decades ago decided that this concept, that originally arose to apply to non-profit entities, should apply to IRAs. Unrelated Business Taxable Income or UBTI is meant to level the playing field between for-profit and non-profit businesses. So if a non-profit makes money from donations or from fees in exchange for its core services, no problem. But if a non-profit, like the YMCA, owns and operates a separate noodle business, it must pay tax on that income because it is “unrelated” to the core mission and operation of the YMCA. If the non-profit doesn’t have to pay tax like a for-profit business it would have an unfair advantage with its noodle business.

What all this means for IRA owners is that money from certain alternative investments – MLPs, hedge funds, real estate, operating businesses, etc. – gets taxed as UBTI. To make matters worse, UBTI is taxed at very compressed rates, meaning the top tax rate applies when you reach just $12,000 of UBTI. That can make for a nasty tax bill.

In short, most people should probably stick with stocks, bonds, ETFs, and mutual funds in their IRAs. For anything other than those, you would be wise to consult your tax advisor before you buy.

retirement plan

How to Handle the Coming Inflation

One topic on economists, advisors and investors’ minds of late is how to invest in a way that benefits from inflation. To answer this question we first have to make an assumption – that we will in fact experience an inflationary cycle. That is not something I can answer with certainty, but my personal belief is that we’ve had inflation for a very long time and all the reports about little or no inflation or even deflation is nonsense. That said, should president-elect Donald Trump be successful implementing some of his policy pledges, we could have a period of greater than normal inflation. I am sure you have heard that Mr. Trump wants to reduce the tax rates on both businesses and individuals while simultaneously embarking on an infrastructure spending package upward of one trillion dollars. If these pledges turn into reality wages and prices could rise. So where do you put your money to take advantage of this potential reality?

One innvestmet avenue is real estate. If you have the means, the knowledge and the desire, you could purchase investment property. This investment could be something such as a one bedroom condominium that you rent out. Or if you have more money and experience perhaps an apartment complex, office building, or industrial property. Investment real estate can make excellent investments. If done right, you will collect rents that increase with inflation together with a property value that will also increase with inflation. At the same time, you can get very nice tax advantages from real property investments.

What if you don’t have the money or the desire to become a landlord? You can take advantage by investing in Real Estate Investment Trusts, or REITs. A REIT is an investment vehicle that trades shares much like a stock. You buy and sell shares on the open market through your broker whenever you desire. This strategy allows for much more flexibility than owning an actual piece of property and you have no maintenance to deal with or tenant vacancies to fill. REITs are also required to pay out at least 90% of their annual income to shareholders so they are generally good vehicles for income investing.

Before you invest a dime, however, do you homework and understand the risks and the possible rewards.


retirement plan

Social Security and Medicare Part B Increases

Monthly Social Security and Supplemental Security Income (SSI) benefits will increase 0.3 percent in 2017.  The 0.3 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 60 million Social Security beneficiaries in January 2017.  Increased payments to more than 8 million SSI beneficiaries began on December 30, 2016.  The Social Security Act (“Act”) ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics.  The Act provides for how the COLA is calculated.

In the new year, the standard Medicare Part B premium amount will be $134 (or higher depending on your income).  However, most people who get Social Security benefits will pay less than this amount.  This is because the Part B premium increased more than the cost-of-living increase for 2017 benefits.  If you pay your Part B premium from your monthly Social Security payment, your monthly premium can go no higher than the increase you receive to your monthly benefit.  Social Security will tell you the exact amount you will pay for Part B in 2017.

Most beneficiaries will not see a reduction in their 2016 monthly benefit amount because of the increase in the Medicare Part B premium.  This is because the Act contains a “hold harmless” provision that protects most beneficiaries. The amount of the benefit payable between 2016 and 2017 will stay the same even though the Medicare Part B premium increases.

social security

To learn more about Medicare Part B costs go to at the Medicare webpage.

retirement plan

Longevity Planning – Are you ready?

Longevity Planning is important. Proper longevity planning will allow you to maintain a high quality of life in your retirement years, avoid the dreaded nursing home, maintain and protect your assets and avoid being a burden on your family members. Not planning can be catastrophic.

Let’s be realistic. Right now, and for the next decade, Baby Boomers are retiring at the rate of 10,000 per day!! At the same time people are living longer than ever before. Many individuals are living well into their 80s and 90s. Recent studies show that one in four people over age 65 will need long term care; and, one out of every two people over age 85 will need long term care.

Uncovered medical bills, basically long term care costs, are probably the greatest threat to your retirement, quality of life and your assets. Medicare and other health insurance coverages generally protect you from expensive hospital and doctor bills. However, this insurance coverage does not help with long term care costs.

Whether you need help at home, in an assisted living environment, in an adult family home or nursing home, those costs are not generally covered by insurance. These costs are severe. In home care costs can range between $20,000 to $50,000 per year; an adult family home can run between $50,000 to $100,000 and skilled nursing care often exceeds $100,000 per year.

Sadly that’s just the cost of a room, care and meals. The cost of hearing aids, walkers, hairstyling, clothes, trips, etc. are all on top of those costs.

How do you address these costs?

It is best to work with a qualified Elder Law attorney. An attorney that merely drafts basic Wills and Powers of Attorney is not sufficient. Why? This area of discipline is extremely complex and requires a thorough understanding of Medicare, Medicaid, Veteran’s Benefits, Wills, trusts, and fiduciary duties. Additionally, the attorney must have an understanding of investments, investment products, how they function, and how those products affect your overall situation. This includes an understanding of IRAs, Roth IRAs, annuities, real estate, business investments, 401K and 403B accounts, reverse mortgages, and more.

If that is not enough, a good attorney can also help with your living arrangements. For many, remaining in your own home is the best option. However, if your residence is multiple stories, has steps to get into the house, has narrow hallways, has the washer and dryer in the basement, etc., the home may no longer be the best location unless modifications are made.

It is also important the attorney have an understanding of how your physical and cognitive health impacts your situation. Issues such as how much and what level of care is or may be needed have to be addressed. A knowledge of how benefit providers interpret medical assessments is important as well as coordinating the resources available to you to challenge an incorrect assessment.

And, if all that is not enough your attorney needs to understand the tax implications of, among other things, setting up trusts, making gifts, selling assets, cashing in various accounts, and deductions for out of pocket medical expenses.

With all these obstacles to navigate you can see why you should not try to navigate all these obstacles on your own. Nor should you rely solely on an attorney who just does “estate planning”; you cannot rely solely on your financial advisor; you cannot rely solely on your medical professionals or hospital social workers; and you cannot rely solely on residential placement agencies that get paid from a nursing facility or adult family home only when you become a resident.

When should you begin this planning?

There is no right or wrong age to undertake longevity planning. However, for most people age 60 or above longevity planning is critical. Additionally, there are vastly more planning options available for married couples than for single individuals. And, what are you after your spouse dies? Single.

Who will benefit from this type of planning?

Generally everyone can benefit from longevity planning. However, the most affluent among us probably need this planning the least. While we all have different views about who is “affluent”, I would say any person or couple with a “taxable” estate in Washington, which is $2,054,000 or more in assets, meets this criteria.

For everyone else, longevity planning is important. And for those with estates of less than $1,000,000, including your house and other resources, this planning is critical.

What will I accomplish with longevity planning?

First and foremost, you will enable yourself to enjoy the highest possible quality of life available In retirement. You may be able to avoid institutional care, otherwise known as nursing home care. You can avoid becoming a burden on your children and other loved ones. You will be able to structure your assets and income to maximize your resources to accomplish a comfortable, quality retirement. And, you will be able to protect your assets and income to provide for you and your loved ones.

So how much will all this cost?

That is different for everyone because everyone’s situation is different. You should be prepared to make an investment of several thousand dollars. However, you can be reasonably certain planning will cost a lot less than one year of even the most affordable care.

Contact us to today to see how we can help you. Hugg & Associates, PLLC