Category: Musings-Articles

Medicare: Things to Know to Help You Plan for the Future

     Medicare, the government health care program for those 65 and over (and disabled persons who have been collecting Social Security for at least two), has a number of features important to understand as you plan for your retirement health care needs. A recent study by Fidelity Investments indicates that a 65 year old couple retiring in 2020 without employer provided health insurance would need approximately $295,000 at retirement to pay for their health care costs during retirement. The Employee Benefit Research Institute’s research on the same topic concludes that Fidelity’s figure is probably a little low. These studies do not include the cost of long-term care. Rather, they include the premiums, deductibles and co-pays associated with Medicare, as well as the cost of insurance to “fill the gaps” Medicare coverage leaves. Therefore, today’s retirees must not only know how Medicare works, but must also recognize what options they have to supplement Medicare’s core benefits.

     Original Medicare has two parts, Part A and Part B. In recent years, Medicare has added a Part C, known as Medicare Advantage (formerly called Medicare + Choice). Since 2006, a Prescription Drug Benefit Program (Part D) also became available. The rest of this article will review each of these parts of Medicare.

     Part A refers to “Hospital Insurance” which generally covers room charges and services associated with an inpatient hospitalization, including stays in acute care hospitals, psychiatric hospitals, and limited coverage for care in skilled nursing facilities. Part A also covers hospice care and limited amounts of home health care. In 2021, the Part A deductible is $1,408 for each hospitalization up to 60 days. Hospital stays exceeding 60 have co-insurance charges. Likewise, skilled nursing facility coverage levies co-insurance charges for days beyond the first 20 up to 100 days. Part A will not pay for private rooms, TV, telephone or private duty nurses, but never the less provides good coverage for acute hospital care, including coverage for medical tests, blood work, and drugs administered in the Hospital. There’s no premium for Part A, as you’ve paid for this coverage through payroll taxes during your working lifetime.

     Part B (known as medical insurance) covers physician care whether received in the hospital, at the doctor’s office, or as an outpatient at a health care facility. Part B also pays for ambulance services, lab tests, physical therapy, and rehabilitations services as well as coverage for x-rays, medical services, and durable medical equipment. The 2021 annual deductible for Part B is $203. After the deductible is met, Part B pays for 80% of the “Medicare allowable” charges. Services not covered by Part B, include: annual physical exams (beyond the initial “welcome to Medicare” physical), eye glasses, routine podiatric care, hearing aides, dental care, homemaker services, and custodial care. In 2021, the monthly Premium for Part B remains at $148.50 per month per person. Married couples with Adjusted Gross Income over $176,000, and single beneficiaries with AGI over $88,000, pay higher Part B premiums.

     The Part D prescription drug program (PDP) covers prescription drugs through Medicare authorized, private insurance plans that must meet minimum standards, and they’re available nation wide. Once the 2010 annual deductible of $445 is met, PDPs cover 75% of the cost of prescriptions up to $4,130 (including premiums). Once the $4,130 is paid, beneficiaries will pay no more than 25% of their prescriptions costs until their expenses reach $6,550. Then you’ll only may a small co-pay or co-insurance on prescriptions exceeding $6,550.

     If you are collecting Social Security benefits and you’re under 65, upon reaching age 65 you will be automatically enrolled in Medicare Part A. Part B coverage is voluntary. However, unless you are covered under a group health plan (or have dependent coverage under your spouse’s group health plan), it’s important to enroll in Part B immediately. If you delay and want to sign up for coverage later, you must generally wait until the next annual enrollment period (between January and March of the following year), and your coverage will not begin until the following July. Furthermore, Medicare will charge you a permanently higher Part B premium for each month you were eligible to sign up, but didn’t. Likewise, Plan D Prescription drug plans charge a permanently higher premium for those who don’t sign up when they’re first eligible (and then want to enroll later).

     Part C (Medicare Advantage Plan) works a little differently. Original Medicare allows beneficiaries to choose any physician who accepts Medicare, and it’s available anywhere in the country. Under Part C of Medicare, insurance companies contract with the federal government to offer Medicare benefits through their own insurance plans. These plans include: managed care plans (e.g., HMOs), preferred provider plans (PPOs), private fee-for-service plans (PFFS), and others. Generally, Part C Plans provide beneficiaries with all Medicare-covered services and most cover prescription drug coverage and other services. Part C plans may restrict which doctors or health care facilities their participants may use, while plan benefits and cost-sharing arrangements may differ significantly from Original Medicare.

     Part C is available only to those who are in Medicare Part A and have enrolled in Part B. Also, participants must live in the plan’s service area. You become eligible to join a Part C plan when you first become eligible for Medicare (generally, at age 65). After your initial enrollment in a Plan C plan, you may change plans once a year during an “annual election period.” If special situations arise, (e.g., you move out of the plan’s service area, or the plan leaves Medicare), you’re also allowed to switch plans during the year.

     If you join a Part C Medicare Advantage Plan, you are subject to the rights and restrictions of each plan. It’s important to understand that you have alternatives to joining a Medicare Advantage Plan to supplement Original Medicare’s coverage. These alternatives include Medicare Supplemental Insurance (aka, Medi-gap) plans designed to cover the co-pays and deductibles not covered by Medicare. Medicare Supplemental Plans do not provide prescription drug coverage. So, if you buy a Medi-gap Plan you must buy a Prescription Drug Plan discussed above to cover your prescription drugs. Comparing Medi-gap coverage (along with a PDP) with  Medicare Advantage plans, will be the subject of another article.

Filed under: Musings-Articles, Uncategorized

Long-term Care Insurance: What is It? Do I Need It?

    Long-term care (LTC) expenses are among the greatest financial risks retirees face. No other risk has quite the same ability to threaten their life-styles. In this context, LTC refers the care provided to help a person who needs assistance with at least 2 out of 6 Activities of Daily Living (ADLs) for at least 90 days. ADLs include:

-Transferring from the Chair to the Bed
-The inability of the insured to perform these ADLs (as certified by a physician) triggers the payment of Long   Term Care Insurance (LTCI) benefits.*

LTC can be:

Nursing Home care
Care provided in an Assisted Living Facility
Care provided in an Adult Day Care Facility
Home Health Care
Personal Care (at home)
Respite Care

   The likelihood of needing LTC is greater than most people realize. 50% of retirees will need LTC at some point in their lives. Currently, 9 million people receive LTC and 85% of those individuals live in the community, and 40% of them are under age 65. 75% of those receiving LTC need it for a year or more, with 30% needing it for more than 5 years. 

    2020 national data indicate that the annual cost of basic LTC provided in a nursing home exceeds $93,000 (semi-private room), with many facilities in metropolitan areas charging considerably more. LTC provided today in an Assisted Living Facility averages approximately $55,000 per year, with a significant number of facilities charging much more.** LTC provided at home costs less, unless provided “around the clock”.  It’s important to understand that neither Medicare nor Medicare Supplemental insurance plans (including Medicare Advantage Plans) cover long-term care expenses. Though each pays for a limited amount of rehabilitation care provided in a nursing home or at home, neither pays for LTC.

    Long-term care insurance (LTCI) transfers the risk of incurring significant (LTC) expenses from an individual to an insurance company. Though LTCI has been around for many decades, over the last 10 years policies have improved significantly and gained increasing public awareness. None the less, only a small fraction of those who may one day need LTC have purchased a plan.

    LTCI policies’ key features are important to understand. First, plans are “medically underwritten.” This means you must be relatively healthy to be eligible to buy a LTCI policy.*** Second, plan premiums are “age-based,” that is, the older you are when you buy a policy, the higher the premium. Once you buy a plan premiums are expected to remain level. However, the insurance company can petition the state to allow them to raise premiums if they can demonstrate that “it’s necessary”. Therefore, when you shop for a plan find out how often a company has raised premiums in the past. It may be a sign that the company has underpriced its products and will raise premiums again.

    You generally buy LTCI in increments of daily benefit amounts (DBAs) which can range from $50-$500 per day for care in a facility, with home care coverage a percentage of the full DBA. The plans also have “elimination periods.” This refers to the time period when you first receive LTC that you must pay for yourself. For example, if your plan had an elimination period of 90 days, you’d pay for the first 90 days of care, and then your plan would begin paying benefits for care you receive after 90 days. Elimination periods typically range from 0 to 180 days. LTCI policies also have payout periods: the length of time the plan pays benefits. These can range from as little as one year to to five years. “Life-time” paying benefit plans are no longer sold. Another important option is an inflation rider. This can add significantly to the cost of a plan, but it’s a must as it allows your benefits to rise with inflation.

The price of LTCI plans vary considerably, depending on:

-Your Age at purchase
-the DBA 
-the length of the elimination period 
-the length of your payout period, and
-whether it has an inflation rider

    A “typical” LTCI policy’s annual premium can run $800 if purchased at age 45; $2,300 if bought at age 55; $3,800 at age 65; and $7,500 at age 75, and so on. So the consumer should consider buying LTCI at a younger age at a lower price. Likewise, this strategy avoids the possibility of later developing health problems, and thereby, becoming uninsurable. Some argue that buying a plan at a younger age has the consumer paying premiums for many more years and making the plan more costly. None the less, it’s important to bear in mind that 40% of people receiving LTC are under age 65, and group health insurance plans rarely pay for LTC.

LTCI experts suggest you seriously consider buying LTCI if a number of the following apply:

-you have financial assets (excluding your house) greater than $300,000
-can afford the premiums (now and in the future)
-want to be in control of the LTC you receive
-do not want to be a burden to your family
-want to leave an estate
-already are saving enough to be on track to afford to retire

    LTCI is designed to protect your life-style (and that of your partner’s) by transferring the risk of LTC expenses to an insurance company. Just as few home owners are without home owner’s insurance, most people should consider buying LTCI to manage the risk posed by LTC expenses. Check with your Elder law attorney to see if you’re a good candidate for LTCI.

*Even if the insured can technically perform these tasks, cognitive impairment requiring substantial supervision   can also trigger benefits.

**For example, the average annual cost of a semi-private room in a long-term care facility in Connecticut in 2020 exceeds $155,000, with costs for assisted living and home care much higher as well. 

***Group LTCI plans offered through an employer will usually waive this requirement briefly during an initial            open enrollment period.


Filed under: Musings-Articles, Uncategorized

The Bucket Approach for Retirement Portfolio and Income Management

     The Bucket Approach divides a retiree’s assets into buckets for retirement portfolio management to serve retirement income needs. Pioneered by Harold Evensky in the 1980s, this approach originally used only two Buckets: a Cash Bucket (CB) and a diversified total return bucket. The purpose of the CB is to protect the retiree from having to make withdrawals from equity funds in down markets. This will allow equity funds sufficient time to recover from down markets without harming the cash flow needs of the retiree. Evensky’s CB always has two years of income available to withdraw to pay bills. Ideally, this income will supplement Social Security benefits and other guaranteed incomes the retiree may have.

     In contrast, the Total Return Bucket (TRB) consists of a diversified portfolio of Stock funds, Stock funds, real estate funds, and perhaps funds of other asset classes. Its purpose is to provide portfolio growth over time. This will allow the retiree to make increasing withdrawals from this account to cover rising expenses. In practice, the retiree will be feeding funds from the TRB to assure that the two-year Cash always has two years worth of inflation increasing expenses covered.

     “Feeding” the CB will occur at least quarterly. The retiree has a great deal of discretion in transferring funds from the TRB to CB. Typically, all income (dividends, interest, etc.) are transferred. Furthermore, quarterly rebalancing can provide additional transfers to CB, especially when growth assets move the portfolio significantly beyond its prescribed allocation. Accordingly, the “excess growth” can be added to the CB. For example, if the TRB’s prescribed allocation is 40% fixed and 60% Stock, and a market rise transforms the TRB’s portfolio to 70% Stock and 30% fixed, the 10% “excess” of Stock value may be transferred to the CB. This will provide additional cash to the CB while also serving to return the TRB’s portfolio to its prescribed asset allocation of 40% fixed and 60% Stock.

     The Bucket Approach assumes that the retiree has already calculated and assembled the following information:

  1. monthly income need,
  2. the value of the portfolio,
  3. guaranteed incomes from Social Security, pensions, and other income sources
  4. prescribed asset allocation to meet income needs (adjusted for inflation) until age 100

These values will help the retire identify:

  1. the income shortfall needed to fund the CB (two year’s worth of needed income)
  2. the minimum risk profile for the portfolio for the TRB (prescribed asset allocation)

   The retiree will need all this information to identify the amount necessary to fund the CB, and to identify the least risky asset allocation (distributed among the remaining buckets) to provide inflation adjusted purchasing power to meet the retiree’s income needs until age 100.

     Since Evensky’s initial suggestions, others have developed variations of the bucket approach. Most enhance the CB and add buckets and spread them in time segments over a 30 year period. The CB still contains guaranteed investments but generally have enough funds to cover 3 to 5 years of income not met by the retiree’s guaranteed income sources. Since there has never been a bear market exceeding three years since World War II, many suggest 3-5 years is sufficient. More conservative retirees extend the income shortfall beyond 3-5 years for added income protection.

     A Second Bucket (SB) contains investments with modest risk to principal. This will allow the retiree to generate growth greater than offered by short-term investments, while limiting downside risk. Intermediate bonds and conservative real estate funds populate the second bucket. Over time, the second will gradually meld with the first bucket providing an additional source of guaranteed funds for income. 

     The Third Bucket (TB)  contains stock funds that will rise and fall with the stock market. The retiree will need the growth this bucket provides to increase the CB as the retiree’s income needs rise to keep pace with inflation.

   As gains occur in the TB, they can be distributed to the CB to maintain it’s income cushion for the retiree’s guaranteed incomes. In down market years, the retiree can “cannabalize” the CB (draw down the principal) to meet current income needs. As noted, the presence of the CB protects the retiree from drawing down from a depleted TB in episodic stock market swoons. This will serve to preserve TB by allowing it to recover from market lows to provide the long-term inflation protection is was designed to do.

    During the first decade or so of retirement, the SB will split, adding additional guaranteed incomes to the CB. thereby adding years of income protection. The remaining assets in the SB will be distributed to the TB, thereby enhancing the amount available for inflation protection. The retiree will revisit his asset allocation at this point as a guide for how to best divide assets from the SB between the CB and the TB.

    Finally, as the retiree reaches his mid 80s he will need a late retirement income strategy. Generally, he’ll reduce the  CB to three years of income protection, and then consider annuitizing some or most of the assets remaining in the TB. At his then advanced age, annuitization will greatly increase his income while protecting him from outliving his portfolio. Health considerations, assets remaining, current income need, and legacy goals will drive the decision on how much of his portfolio (if any) to annuitize.


Filed under: Musings-Articles, Uncategorized

Retirement Income Planning

    The main challenges of retirement income planning are to create an income that lasts a lifetime, keeps pace with inflation, and allows enough flexibility to cover emergencies. While there are countless strategies to meet these challenges, they boil down to two fundamentally different approaches: the Probability based approach  and the Safety first approach.

     The Probability based approach, favored by investment manager types, has you assemble a sizable portfolio during your career and systematically draw from it during retirement to underwrite your retirement life-style. This approach requires significant participation in the Stock Market, a sizable portfolio, and a plan to deal with inevitable stock market swoons. Some call this approach the “4% Solution” drawn from the work of Bill Bengen during the 1990s. Bengen examined rolling 30 year periods from 1926 and discovered that a Portfolio of 60% S&P 500 and 40% Intermediate Bonds could sustain an annual withdrawal rate of 4% (and each year upping the withdrawal by the inflation rate). For example, a $500,000 portfolio would prescribe a $20,000 withdrawal (in retirement’s first year ($500,000 X 4% = $20,000). If inflation was 3% in year two, the next withdrawal would be $20,600 ($20,000 X  3% = $600) and so on, each year raising the annual withdrawal amount by the preceding year’s inflation rate.

     Bengen found that there was never a 30 year period among the 100 or so he studied where a portfolio was fully depleted before 30 years expired. In some 30 periods, it was nearly fully depleted, where as in other 30 year periods, the retiree could have withdrawn 8% per year and still have funds left at the end of the period. It just depended on how the markets performed and the time sequencing of market downturns occurred during the 30 year periods. Bengen assumed 30 years as a proxy for a retirement life-time.

     Many variations of “the 4% rule” have appeared over recent decades. Vanguard’s iteration suggests setting “guard rails,” allowing somewhat greater withdrawals than 4% during Stock Market booms, while requiring withdrawals less than 4% in years when the Stock Market doesn’t deliver.

     The RMD variation follows the required distribution percentages the IRS mandates from most qualified plans. Here you make withdrawals somewhat less than 4% in retirement’s early years, and gradually increasing the withdrawal percentage each year as your life expectancy shortens. 

     Some 4% strategies suggest drawing 4% plus inflation “on a total return basis” each year, combining investment income along with capital gains (and investment principal, if necessary) from the entire portfolio. Other 4% withdrawal strategies exempt guaranteed buffer (emergency) assets from annual withdrawal considerations. 

     In contrast, The Safety first approach emphasizes guaranteed incomes as the centerpiece of retirement income planning. Payouts from defined benefit pension plans, Social Security’s retirement benefits, and commercial annuities with guaranteed incomes are used to implement this approach. Withdrawals from Investment assets, though present, are used primarily to “inflation hedge” fixed incomes and to provide emergency or buffer funds. 

   The (SFA) also employs commercial annuities to “risk pool” in generating life time, guaranteed incomes, virtually impossible to assure in any other way. Insurance companies can guarantee life-time incomes because their actuaries know everyone (as a group) dies at a predictable rate. This allows the insurance company to spread the risk among populations of annuitants to cover the life-time income needs of even the longest lived. Immediate annuities, deferred income annuities, and longevity insurance (advanced life deferred annuities) in various combinations are the insurance products used to implement the plan. Each provides life income either immediately, some time in the near or distant future.

   With payout annuities you exchange a lump sum of money to an insurance company for a promise to provide you with a life-time income. The life-time income can begin immediately, some time in the near future, or in decade or more hence. For a given monthly income, the longer you delay the income to commence, the lower the cost. For example, in 2021, a 65 year could buy a a life-time annual income of $6,340 for $100,000. In contrast, a 65 year old could buy the same life-time income to begin at age 65 (20 years in the future) for only $16,000 today.

   Because some buyers of these future income products do not live to receive the payments, these unused dollars are distributed among those who do to provide them with additional income. These enhancements to the incomes of the survivors are called “mortality credits” and provide additional income to survivors difficult to replicate in any other way. Also, the IRS waives required minimum distribution (RMDs) requirements for qualified retirement plans up to $130,000 if they use advanced life deferred annuities in this way. They’re called Qualified longevity annuity contracts (QLACs). Once the life-time income is initiated, the annuitant is subject to the RMD requirements.

     Every retiree has a retirement income plan. Often, the plan is by default where the retiree never actively creates a plan but simply withdraws funds from accounts randomly. Occasionally, a retiree’s pension and Social Security represent such a large portion of his/her retirement income that plan creates itself. We hope this discussion provides you with the impetus to be an active participant in creating your own plan. The two approaches described above (Probability based approach and the Safety Approach) provide templates to consider. Retirees need to take the best of each approach for themselves to create a plan they can live with. Successful retirees will combine portions of both to reflect their needs for certainty, willingness to take risks, and legacy considerations. Good luck on your journey!



Filed under: Musings-Articles

College Retirement Research Center Suggestions: Keep It Simple

The Boston College Retirement Research Center indicates that the four most important things to do to increase your retirement’s financial security are:

Spend less (and Simultaneously Save More). Essentially, allowing you to reduce your income need while     simultaneously salting away more for your future retirement.
Delay your Retirement. This allows you to extend the time available to save more and to grow your assets     for a longer period, thereby, providing you with a larger “retirement nest egg.” Likewise, you’ll be     simultaneously shortening the retirement life-time you’ll need to underwrite.
Delay collecting Social Security. By delaying collecting your Social Security until your “Full Retirement Age”    or better yet, until Age 70, you’ll substantially increase your retirement income while assuring that you’ll   receive higher future cost of living increases.
Use you Home’s Equity. Some retirees move to less expensive areas to “stretch their dollars”. Others prefer    to use reverse mortgages to tap their home equity to provide retirement income without moving. Though not      without caveats, in the right circumstances, reverse mortgages can generate tax free income or protect           portfolios in ways we’re just beginning to fully recognize.

There is often elegance is simplicity.


Filed under: Musings-Articles, Uncategorized

American Opportunity Tax Credit Offers Help for College Expenses

    After funding your retirement, paying for the kids’ college educations is the number one financial challenge most families face. Luckily, a recent law has has made college tuition less expensive for millions of Americans. This article focuses on tax breaks available to families as a result the American Opportunity Tax Credit (AOTC) passed as part of the American Recovery and Reinvestment Act. The centerpiece of this legislation is the tax break for families called the American Opportunity Tax Credit (AOTC). The AOTC has made college more affordable for millions of students and their families. 

    As a reminder, a “tax credit” is a dollar for dollar reduction of your tax bill. For most people it’s much more valuable than a “tax deduction” which is simply a reduction in the amount of your income subject to taxation.

    The law allows families with tuition expenses to obtain a tax credit of up to $2,500 each year for up to four years per student, with up to $1,000 of the credit being refundable. The credit is 100% of the first $2,000 of college expenses, and 25% of the remaining expenses, up to a total credit of $2,500. A “refundable tax credit” means that a family could receive back more than they actually paid in taxes if their college expenses exceeded their total federal income tax bill. For example, if a family otherwise owed $1,500 in federal taxes and was eligible for a $2,500 AOTC, they would get a tax credit against the $1,500 they would have paid in taxes, thereby eliminating their tax bill. In addition, they would receive an additional $1,000 “refund” from the IRS called a “refundable tax credit.”

  The AOTC replaces and improves the Hope Credit by increasing the amount of the credit by $700. Unlike the Hope Credit, which allowed students to apply it to the first two years of college, the AOTC applies to the first four years of college. Third and fourth year students receive significantly larger benefits under the AOTC, making it more likely that they will be able to continue their educations. Furthermore, more families are eligible for the AOTC because income limits were expanded compared to the Hope Credit. Families with Adjusted Gross Income (AGI) below $160,000, and single filers whose AGI is below $80,000 are eligible for the full credit. The credit gradually “phases out” (i.e., is reduced) for Single Filers with AGIs between $80,000 – $90,000, and Joint Filers with AGIs between $160,000 – $180,000. Likewise, the AOTC covers textbooks, a significant expense for a typical college student, which the Hope Credit failed to cover.

    For nearly all Americans, completing higher education can be a “ticket to the middle class.” Don’t overlook the opportunity provided by AOTC, an important tool to help you and your family complete this journey. By the way, and as a practical matter, the AOTC is claimed by using IRS Form 8863 and attaching it to your main tax return.



Filed under: Musings-Articles, Uncategorized

Saver’s Tax Credit Helps Lower Income Employees Save for Retirement

    Saving for retirement is a daunting task for anyone, but its particularly challenging for lower income employees. One provision of the Tax Code, however, can make it a little easier. Its called the “Savers Tax Credit.” For 2020, the Savers Tax Credit (STC) is available to employees whose modified adjusted gross income is below $32,500 for Single tax filers, $65,000 for couples and $48,750 for Heads of Household.

    To be eligible, you must 18 or older, not a full-time student, and not be claimed as a dependent on some else’s tax return. 

Saver’s Tax Credit

Credit Amount Single Head of Household Joint Filers
50% of Contribution AGI of $19,500 or less AGI of $29,250 or less AGI of $39,500 or less
20% of Contribution $19,501 – $21,250 $29,251 – $31,875 $39,001 – $42,500
10% of Contribution $21,251 – $32,500 $31,876 – $48,750 $42,501 – $65,000
0% of Contribution more than $32,500 more than $48,750 more than $65,000

    If eligible, the STC allows the first $2,000 of the amount you contribute to an IRA, 403b Plan, 401k Plan, or similar workplace retirement account, to count towards the savers tax credit. As a reminder, a tax credit is a dollar for dollar reduction of your tax bill. The credit can be used to increase your refund or reduce the tax you owe. The potential amount of the credit varies and is based on your income and filing status. Never the less, the credit itself can be as large as $1000 for employees (50% of the $2000 amount you contribute to employer’s Retirement Plan, or to an IRA). For eligible employees, the savers tax credits benefit is in addition to the tax deferral you receive from making a contribution to your employer’s Retirement Plan or IRA.

    Unfortunately, awareness of the provision has remained low. Millions of lower income Americans don’t know of this opportunity to help them save for retirement. In fact, a recent Transamerica Center for Retirement Studies online survey of 4,080 employees age 18 and older, found that only 21% of people earning less than $50,000 said they knew of the STC. That’s up from 12% in 2010. Hopefully, this article will reach employees who may be eligible.

    Employees interested in obtaining the tax credit must have made a contribution to their employer’s retirement plan by the end of the calendar year. However, you have until April 15th (federal tax filing date) to make contributions to an IRA to get the credit for the preceding year. Also, you must ask for the Credit with IRS Form 8880. You don’t automatically get this benefit.

    For nearly all Americans, making contributions to employer retirement plans or IRAs is the key to a secure retirement. If you’re eligible, don’t overlook the opportunity provided by STC to help you fund your retirement.


Filed under: Musings-Articles, Uncategorized

Having that Uncomfortable Conversation With Your Parents

     You may remember the television commercial about how important it is to have your car’s oil changed regularly. It went something like this, “pay me now, or pay me later”. We all knew what they were getting at: either pay attention to what needs to be done today, or you’ll have to deal with the consequences later. The same message applies to the uncomfortable conversation with your parents (or older relatives) on the need for an up-to-date estate plan. Without such a plan in place, the responsibility could fall to you to make difficult decisions when your parents die or become incapacitated. Making those decisions can be doubly difficult if you don’t know what their intentions were.

     For some families discussing these matters can be threatening. Parents may question the need for such a conversation. It may prompt fears over their loss of independence, incapacity, or eventual demise. Or, they may feel that it’s none of their children’s business, or even worse, that their children just want their money. Children may be reluctant to initiate the conversation because they may feel as if they’re challenging their parents traditional authority or that they are violating their privacy. Therefore, tact, patience, and persistence are keys to successful conversations.

     You’ll first need to discuss what they would like to happen if they were to become incapacitated or die. Once you identify their intentions, its simply a matter of making sure the appropriate documents are in place to carry out their aims.  A good estate plan will ensure that your parents property goes to the right people, at the right time, and in the right form, while minimizing taxes and administrative expenses. Also, they’ll need documents to authorize others to act on their behalf in financial and health care matters if they become incapacitated.(Discussed Below).

     Imperative is an up-to-date will. Also known as a last will and testament, this legal document directs property the will maker owns solely in his or her name at death. If your parents already have wills, they should consider updating them if they if there’s been significant federal or state tax law changes or if they:

– bought a new life insurance policy
– bought a time share
– moved to another state
– bought real estate in another state
– want to name a new executor
– got a divorce
– got married (or remarried)
– became estranged from a beneficiary-had a change in your health (or your child’s health) 
– had a birth or death in the family

    It’s also important to have your parent(s) create or update their Letters of Instruction. This document, though technically not a legal document, should accompany the will. It speaks for the parents as if they were still living. Suggest they include instructions not easily included in the will, such as: burial instructions; identifying various accounts, including passwords and pin numbers; contact information of advisors, attorneys, relevant family members, executors, employer benefits personnel, etc.; safety deposit box and key locations; where they keep important documents, including: life insurance policies, deeds to real estate, and the original will.

    It’s also important to make sure the named beneficiaries of your parent’s various accounts are current. These accounts include: their company savings plans; their life insurance policies, including group plans at work; IRAs, among others. Too often proceeds have gone to the wrong people or to reimburse the state for a parent’s nursing home care expenses because they forgot to update their beneficiaries.

    Make sure your parents have up to date Durable Powers of Attorney (DPOA) in place. This document authorizes a person to act on behalf of the parent for financial and legal affairs. The earlier this document’s in place the better, as sometimes, time limited property transfers may be necessary to protect the parent’s assets from costly long-term care expenses. Also, the enumeration of specific powers in the document provides the holder of the document with the needed flexibility to act as needed. Generally, if the powers are not specifically designated the law assumes the parent didn’t want the holder to have those powers.

    An Advance Directive for Health Care (ADHC) is another document the parent should have in place. As with the DPOA, the holder of the ADHC makes health care decisions for them and carries out their “end of life wishes” as they’ve expressed them in their Living Will. Living Wills are documents that express your parents’ “end of life” wishes, including “do not resuscitate” orders, and their wishes if they fall into a “vegetative state with no hope of recovery.”  Make sure all these documents comply with rules on protecting medical information (HIPPA) so that your parents’ agents can make informed decisions.

     In closing, review your parent’s estate plan every 3 years as it’s likely they’ve overlooked something, like the consequences of a new federal or state tax law. And don’t forget to coordinate changes in your parent’s will with their beneficiary designations, letters of instruction, DPOAs, ADHC, and Living Wills.


Filed under: Musings-Articles, Uncategorized

Rebalancing Your Portfolio: An Important, Often Overlooked Task

    Other than making sure you saving enough for an investment goal, the most important decision an investor can make in an investment plan is deciding what percentage of investable assets to “allocate” to each asset class. With employer retirement plans, these asset classes ordinarily include mutual funds in: cash equivalents, bonds, and stock (and sometimes, a combination of all three).

    Generally, in a given economic environment, one asset class will perform better or worse than the others. For example, in the late 1970s, “cash was king,” handily outperforming stocks and bonds. From 1995 through 1999, stock market returns dwarfed cash and bonds. And from 2000 through 2002, bonds led the pack. Few (if any) prognosticators can consistently predict which asset class will lead in the future. But for the long-term investor it really doesn’t matter. Once you select a suitable “asset allocation” (i.e., one that reflects your goals, time horizon, and risk tolerance), you must only make certain that your portfolio doesn’t veer too much from your chosen allocation. That’s where rebalancing comes in.

  Let’s say that you have a prescribed long-term asset allocation of 15% Cash Equivalents, 50% Bonds, and 35% Stock. Let’s also assume that you established this allocation at the beginning of 2020, and didn’t add to nor make withdrawals from his portfolio during the year. See Row 1 in the Table Below.

Cash Equivalents

Bonds/Fixed Income Securities





10% (Year1) End Value

35% (Year1) End Value

50% (Yr1) End Value

+5% Rebalance

+15% Rebalance

-15% Rebalance




    If you re-visit your Asset Allocation at the end of 2020, notice that the equity (i.e., stock) portion of your portfolio swelled to 50%, with the bond portion dropping to 35%, and cash equivalents shrinking to 10% (See Row 2 of the Table). Here, a “casino mentality” might suggest doing nothing and “letting your winners ride”. However, a prudent investor would take the gains from the “winning asset class” (in this case, stock) and buy the asset class that did less well (in this case, cash and bonds) to return to his original allocation (See Row 3). This process is called “rebalancing”.

    When you rebalance you are really selling “your winners” and buying “your losers,” not a very appealing proposition for most people, at least in the short term. However, if you look a little closer, you’ll also recognize that rebalancing “protects you from yourself” by forcing you to “sell high” and “buy low” every year. In our illustration, who would to know that bonds might outperform stock the following year (2000-2002) and that the stock market might tank simultaneously. Those who hadn’t rebalanced might have lost a larger portion of their portfolio in a stock market downturn. Why? Because the stock portion of the portfolio would swollen to a larger proportion of the whole.

    Rebalancing takes discipline and courage. It typically puts you in the position of liquidating investments that have performed well recently and buying investments that are may be temporarily out of favor. Think back to the investment environment at the end of 2008. The stock portion of investors’ portfolios shrank dramatically during 2008. Rebalancing would have asked investors to add to their stock market holdings (assuming they had set a valid asset allocation) just at the time when “pundits” were predicting further market losses. However, investors who did rebalance were rewarded (with the greatest annual stock market surge since World War II) in 2009. Rebalancing doesn’t always work that dramatically, but 2009’s market performance is an important reminder of the importance of rebalancing.

    Experts differ on how often to rebalance, but most agree that you should do so at least annually. Some experts also suggest rebalancing if your “asset allocation” drifts more than 10% from its prescribed percentages during the year. For investors the key is to rebalance at least annually and to have a plan in place to make it happen. For employees with a significant portion of their assets in tax-deferred accounts, rebalancing can occur without triggering any taxable capital gains. Some employees prefer to rebalance by directing their new contributions to their “under-performing” asset classes until they return to their prescribed asset allocation. Though an acceptable option, it’s easy to forget to re-direct your new contributions once you’ve completed the rebalancing process. Again, the key is to choose a rebalancing method and stick to it.


Filed under: Musings-Articles, Uncategorized

Monte Carlo Simulations: What Are Their Limits?

    In the last decade or so, a “Monte Carlo simulation”(MCS) became the “gold standard” of retirement planning assistance. Named after the European gambling center, this calculation projects the odds of attaining your retirement financial goals. Unfortunately, MCSs don’t generally include scenarios like recent stock market meltdowns. Though the method runs portfolios through hundreds (or even thousands) of market situations, they assign very low odds to extreme market events. Unfortunately, these so-called “Black Swan events” appear to be happening all too frequently. So how much credence should some one planning for retirement give to MCSs?

    To answer this question let’s consider how simulations work. Though there’s no uniform approach, a good simulation typically has you enter information on: your age, retirement date, value of your investment assets, asset mix, income goals, annual contributions toward retirement, guaranteed retirement income sources, and other details. The calculating program then runs hundreds (or again, even thousands) of market scenarios based on past market performance. It incorporates assumptions on long-term expected investment returns, market volatility, inflation, and other factors. The resulting calculation provides a “rate of success,” that is, what percentage of expected market scenarios allows you to support your retirement income goals.

    It’s important to recognize that MCSs represent a significant improvement over past retirement planning approaches which simply assigned a set return to an asset class and assumed consistent performance every year. However, critics argue that MCSs are hardly a panacea because they fail to incorporate scenarios like the recent stock market swoon. In fact, William Bernstein, author of “The Four Pillars of Investing,” was quoted in the Wall Street Journal as saying, “just add 20 percentage points to the probability of failure your MCS predicts, and you’ll be O.K.” Others complain that different MCS calculators do not make the same assumptions about interest rates, inflation, and market gyrations. Also, many MCSs assume that market returns reflect a “bell-shaped” distribution. This means that the likelihood of a 6% market return (toward the middle of the curve) would be dramatically higher than the likelihood of an extreme return (e.g., a 50% loss occurring at the extreme end of the curve). MCS proponents argue that it should be that way because extreme returns are just that: extreme and infrequent.

    It’s important to recognize that some MCS models are better than others. For example, some MCS models assumes much higher odds of extreme returns than would be expected by a bell-shaped curve. Likewise, Morningstar has modified to its MCS model to allow its clients to assume returns that fall along a “bell shaped curve,” or to select a model which presumes higher likelihoods of more extreme market behavior. Other firms are considering similar modifications to their MCS models.

    How much should you rely on MSCs to help you figure out if you can afford to retire? First, recognize that a MCS is one tool among many to help you answer this question. Regardless of improvements to MCSs, no methodology will ever be able to accurately predict very infrequent events. This means that every retirement plan should have enough flexibility to respond to unpredictable occurrences that will inevitably happen. This could mean being open to working part-time, especially during your retirement’s early years. You could also mean gradually converting some or all of your assets to guaranteed life-time incomes (annuitizing). Delaying the collection of Social Security Benefits until you reach your full retirement age could be another prudent strategy. And finally, you could separate your retirement expenses into categories of “must haves” versus “would like to haves,” to identify an acceptable fall back life-style if extreme market events happen.

   As far as using MCSs, follow the recommendation of the Retirement Income Industry Association to only use MSCs that run at least tens of thousands (and preferably, hundreds of thousands) of scenarios. Currently, some MCS projections rely on as little as one thousand scenarios for their depictions. Larger numbers of simulations include more extreme events in their runs and reduce the possibility of relying on an overly rosy investment scenario for your retirement projections. Check with the MCS sponsor you use to make certain that they adhere to the Retirement Income Industry Association recommendation. As with most things, your retirement plan should be prudent and flexible to respond to “unhappy surprises” ignored by less than robust MCSs.


Filed under: Musings-Articles, Uncategorized

Funding Your Kids’ College Education(s)… Are You Ready?

   After funding your retirement, underwriting your children’s college educations is the single, largest expense most families face. Never the less, it’s important to make sure you’re on track for a financially secure retirement before looking to fund the kids’ college. That said, there are a number of ways to approach the daunting task of college funding. Before you get intimidated about the high price of college, it’s important to keep a few facts in mind. On average, four-year state colleges charge $21,447 annually for tuition and fees for students who live in state, according to College Board’s website. Private colleges charge $42,224, while two-year public colleges average $15,286 in tuition and fees, with two-private institution charging $28,155. Obviously, that’s not the total bill because you must include room and board. College Board’s website, offers some helpful ways to estimate these additional costs. So your first step is to estimate the total cost of college.

   It’s important to break down costs between direct billable costs, such as: tuition, fees, and room and board. Tuition and fees can vary by academic program and whether you child attends full or part-time. Also, room and board charges usually vary by the meal plan and room your child selects. If your child lives off-campus or at home, don’t forget to estimate these costs as well. Many so-called “indirect” college costs include: books, supplies, travel, and personal items. These costs can run into thousands of dollars annually. Savvy students can make wise choices to avoid over spending on these items.

   It’s also encouraging to realize that most students receive financial aid. College Board reminds us that the average amount of aid for a full-time undergraduate student is approximately $13,200, with more than half coming from grants that don’t need to be repaid. Even students from well off families can receive financial aid. For example, 44% of first year students at Brown University receive financial aid, with the typical package around $55,682. Some of those students come from families with incomes exceeding $200,000. Therefore, don’t assume you don’t qualify for financial aid even if your family income is relatively high.

  The first step in applying for financial aid is for parents to complete the Free Application for Federal Student Aid (or FAFSA) which determines the student’s eligibility for financial aid (i.e., Pell Grants, Stafford Loans and Perkins Loans). The process considers the applicants “available income” which generally includes most taxed and untaxed income, but excludes some tax credits such as the “earned income tax credit.” FAFSA puts your family’s financial information into a central data base for federal, state, and university-provided aid. You can find a FAFSA form at

   Generally, as part of applying for financial aid, FAFSA assesses parent owned assets at a rate of 5.64% in determining a family’s contribution toward college expenses. Student owned assets are assess a 35% rate for contribution purposes Therefore, its generally a good idea to keep assets out of the students name when applying for financial aid. The FAFSA considers the “base year” the year prior to awarding financial when they examine a family’s assets and income. Therefore, its also wise to defer income and “load up on” tax deductions during your “base year”, as both income and assets play a significant role in determining your eligibility for financial aid. Assets in 403b and IRA accounts are generally not counted in determining your available assets because they are considered “inaccessible” for financial aid. So you could have a situation where a modest income family with college earmarked assets in its child’s name could qualify for less financial aid than a higher income family with most of its assets in retirement plans. Know these rules and plan accordingly. Also, be aware that competition for financial aid is intense.

   Experts also agree that you shouldn’t be shy about trying to negotiate with financial aid offices. Some people have even try to play one schools financial aid office against another, by letting their preferred choice school know what others are offering. But be careful not to alienate financial aid officials by being too aggressive.

   Under the financial aid provisions of the 2011 Health Care and Education law, students and parents are able to borrow for higher education directly from the federal government. Parent borrowers need a better credit record than students and parents can’t have any missed loan payments in the last 90 days or declared bankruptcy or had a foreclosure in the last five years. The law also provides more funding for Pell Grants, available for students from families making less than $50,000. Publishers of suggest that total education debt should not exceed what students expect to earn in their first year out of college.

   As another option, parents should compare the rates for a home equity loan before taking out a private education loan. While a home equity loan can put the borrowers house at risk, interest rates on these loans can be low and the interest may be tax deductible.

  In summary, fund your own retirement before funding your children’s college education. But when planning to pay for the kids college: know the rules, plan early, know your options, and be persistent. Your children’s college education could depend on it.


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What to Know About ESAs (Coverdell) Education Savings Accounts)

    Consumers have had an excellent opportunity to help pay for their children’s educational expenses by contributing up to $2,000 a year to Coverdell Education Savings Accounts (ESAs). Contributions, though not tax deductible, grow tax deferred and withdrawals to pay for qualified educational expenses from kindergarten through college are tax free. Covered expenses include: tuition, room and board, computers, extended day programs, academic tutoring, equipment, uniforms, and transportation.

    The beneficiary of the account must be under the age of 18 at the time of the contribution. There is no requirement that the beneficiary be your child or have any other particular relationship. Also, your income must be below a certain level in the year of your contribution. Contributors must have less than $190,000 in modified adjusted gross income ($95,000 for single filers) in order to qualify for a full $2,000 contribution. The $2,000 maximum is gradually phased out if your modified adjusted gross income falls between $190,000 and $220,000 ($95,000 and $110,000 for single filers). You can contribute to both a 529 plan and an ESA for the same beneficiary if you wish. However, besides the $2,000 annual limit on how much you may contribute for a particular child, there is also an overall $2,000 annual limit on contributions to ESAs for the benefit of that particular child in a given year.

    There are a number of other restrictions with ESAs. First, beneficiaries of the accounts must be under age 18 when contributions are made, and the money can only be used for the beneficiary. Second, no refunds are available to the person who initiates the account. Third, if the beneficiary reaches age 30 without using the money, it will be distributed to the beneficiary and become taxable. However, the person who set up the account can change the beneficiary at any time to another family member under age 30.

    Contributors to ESAs can select their own investments. Unlike 529 Savings Plans which limit investor choices to a limited menu of investments, the only investment prohibited for Coverdell accounts is life insurance. Never the less, financial institutions that offer Coverdell accounts can set their own investment restrictions. For example, Charles Schwab Investments does not allow risky and often illiquid investments such as coins and antiques. Schwab also disallows other exotic investments like futures contracts and other financial derivatives from Coverdell accounts.

    Again, unlike 529 Savings Plans that limit changing investments to once a year, ESA  contributors can switch among investments as often as they like. Though switching investments often can be costly, it’s a nice have that option. Speaking of costs, be careful of firms’ set up charges and annual fees to maintain an account. With ESAs’ relatively low contribution limits, even a modest $25 annual fee can cut deeply into returns.


Filed under: Musings-Articles, Uncategorized

What You Should Know About 529 Education Savings Plans

    529 Plans are tax advantaged education savings plans run by states or educational institutions to help families help pay for education. Originally limited to post-secondary education costs, it was expanded to cover K-12 education in 2017 and apprenticeship programs in 2019. The two major types of 529 plans are savings plans and prepaid tuition plans as described below.

    With employees trying to balance saving for retirement with funding the kids college educations, it’s important to understand how 529 Plans work. Unlike Coverdell Education Savings Accounts, there are no income restrictions on who may contribute to 529 Plans. Though contributions are not tax deductible for federal income tax purposes, an account’s growth and distributions are tax-free as long as they’re used to pay for qualified higher education expenses. Qualified expenses include: Tuition, fees, books, supplies, computer technology and special needs; room and board for minimum half-time students. There are no maximum contribution amounts, though some plans have set their own limits.

    A number of states consider contributions tax deductible for state income taxes as long as the contributions are to the in-state plan. For example, in Connecticut an individual may deduct up to $5,000 per year, with married couples filing jointly eligible to deduct up to $10,000 per year, for contributions into CT’s plan.

    Generally, your choice of college is unaffected by the state sponsoring your plan. For example, you could be a Connecticut resident, invest in a Utah 529 Plan, to pay for the student’s expenses in a school in South Carolina. Though every state now offers a 529 Plan, not all offer the same kinds of plans. Essentially, there are two types of 529 Plans:

►Pre-paid plans allow you to pay all or part of the costs of an in-state qualified college. These plans may be converted to pay for private and out-of-state colleges. A separate pre-paid college plan for private colleges is called the Independent 529 Plan.

► Savings Plans are like 403b Plans or IRAs where your funds are invested in mutual funds or similar investments. Plans allow you to choose from among investment options. How much your plan grows will depend of how well your selected investments perform.

    A 529 Plan feature particularly attractive to parents of college students is that the account-owning parent is able to change the beneficiary to another family member (including the account owner) if the child decides against college or drops out. But withdrawals not used for qualified education expenses are generally subject to income taxes and a 10% penalty.

     Contributions to 529 Plans qualify as “a gift” for gift tax purposes. Therefore, a contributor may contribute up to $15,000 annually without incurring any gift tax liability, or the need to file a gift tax return. Also, a special election allows contributors to apply the annual exclusion over a 5-year election period ($15,000 X 5 years = $75,000). In this situation, $75,000 is removed from the contributor’s taxable estate if the contributor survives the five year period. Decisions around gift and estate tax consequences of 529 Plan contributions should be reviewed with your attorney and be part of your overall estate plan.

    When shopping for a 529 Plan look to your own state’s plan first because the contributions may be tax deductible against state income taxes. Unless the plan is deficient in other respects, that’s often the way to go. CT’s 529 plan is called the Connecticut Higher Education Trust (a.k.a, CHET) and the low cost provider, TIAA-CREF, is the program’s manager. Along with its low costs, TIAA-CREF has over 90 years of successful investment experience. For details about CHET, visit: In contrast, some states have broker sold plans that are usually much expensive to cover the brokers’ commissions. For example, Ohio’s broker sold Putnam Plans not only generated higher cost broker commissions, but mediocre performance as well

    Limited investment choices may be another reason for consumers to look elsewhere when shopping for a 529 Plan. Also, a recent study of plans by Morningstar points out that some Plans have overly aggressive Age-based options. With an Age-based investment option, the plans are suppose to switch from more volatile stock investments to more stable bond investments as the student approaches college age. Never the less, some plans, such as New Jersey’s age based option investment, can still have up to 60% of its assets in equities in the years just before college, and 35% in stocks when the student’s attending college. Not a good choice when tuition bills are due and the stock market takes a dive.

    For those seeking more detailed information on 529 Plans, the most comprehensive source available is Joseph Hurley’s website: Not over does this site provide answers to frequently asked questions, but it rates the various state plans, summarizes the tax rules associated with 529 Plans, helps consumers compare plans, and is just the best website on 529 Plans period.


Filed under: Musings-Articles, Uncategorized

Target Date Fund Controversy: Lessons for Investors

    The growing presence of Target Date Funds (TDFs) in Defined Contribution Retirement Plans has been meteoric. In 2004, only 13% of Retirement plans had such funds. That percentage grew to well over 90% in 2020, with virtually all firm’s with than 5,000 employees having TDFs in their 401ks. However, the market swoon of 2008 (and, into early 2009) brought a lot of attention to TDFs, and most of it was not good. Employees expecting to retire in 2010 (and thereby choosing a “2010 TDF”) testified to a joint hearing of the U.S. Department of Labor and the Securities and Exchange Commission that they “were shocked” by the steep losses in their “2010 TDF.” In fact, the average “2010 fund” lost 23% of its value in 2008, with at least one 2010 fund down 60%. Many (including government regulators) were asking how this could have happened.

    TDFs are designed to make investing for retirement convenient by automatically changing the mix of your investments over time. Most investment professionals agree that “asset allocation,” which involves dividing your investments among the various asset classes, such as stocks, bonds, and cash, as the single most important investment decision an investor will ever make. Once you select a TDF, the managers of the fund make all asset allocation decisions for you.

    TDFs, which are often mutual funds, hold a combination of stocks, bonds, and other investments. As time passes, the mix gradually changes according to the fund’s investment strategy. TDFs are funds are designed to match the long-term retirement dates that employees have in mind. The name of the fund often refers to its “target date,” such as “Portfolio 2040”, designed for employees who intend to retire near the year 2040. However, misunderstandings by employees can arise because TDFs, even if they have the same target date (e.g., 2040), can have profoundly different investment strategies and risks. Some employees assume that TDFs will guarantee that they will have enough retirement income at retirement, or that they can’t lose money, especially if they are close to the target date. In fact, TDFs do not remove the need for you decide before investing, and periodically thereafter, if the fund fits your situation.

    Most TDFs automatically change the fund’s mix of investments in a way that becomes more conservative as you approach the target date. Over time, most TDFs shift from a mix heavily laden with stock investments in the beginning to a more bond weighted mix. This “shift” over time is called the fund’s “glide path.” Never the less, funds vary enormously in philosophy, underlying assumptions, glide paths, and what constitutes an appropriate portfolio for a given age. For example, the percentage in equities in 2010 Funds vary from less than 15% to over 60%. This happens because there is really no consensus among TDF providers on appropriate glide paths. Furthermore, TDFs are typically designed for someone with an “average” risk tolerance, another concept that can vary dramatically by provider. In addition, TDFs with similar target dates also vary by when they arrive at a stable income glide path. Some achieve this at the “target date,” while others not until 20 or even 30 years beyond that date.

    Problems grew with TDFs because a provision in the Pension Protection Act of 2007 allowed employers to use TDFs as “the qualified default investment option” for employees they automatically enrolled in their retirement plans and who failed to elect their own investment options. This meant that some employees found themselves automatically invested in TDFs by their employer without any direct decision on their part. In the past, the default option for employees who did not elect their own investments was a money market or stable value fund. Because these funds historically did not keep pace with inflation, it was difficult for these employees to adequately fund their retirements. So the use of TDFs as the “default option” was seen as an improvement. Never the less, as discussed, TDFs have presented their own set of issues.

    The problems with TDFs underscore the need for employees to evaluate the appropriateness of a target date fund before (and after) investing in one. At a minimum, employees must consider a TDF’s:

-asset allocation over its entire life
-its most conservative investment risk
-its risk level and glide path
-its performance-and its fee structure

All this information is available in the fund’s prospectus.

    Furthermore, when employees invest in TDFs they must incorporate all retirement assets they hold into the decision, including assets held outside their employer’s retirement plan (and even retirement assets held by their partner). In this era of personal responsibility and accountability, it’s imperative that employees educate themselves not only on TDFs, but on all the investments in their portfolio, especially those earmarked for retirement.

    TDFs also don’t provide for a systematic method for retirees to make withdrawals from these funds. Unless instructed otherwise, withdrawals will consist of taken from each asset class equally within the fund. This may or may not serve the best interests of the retiree. These withdrawals such be part of a comprehensive retirement income plan.

    Employees need to learn more about TDFs to assure they use them properly. No longer will the excuse “I didn’t know” suffice. Too much is at stake for employees to remain uninformed on these matters.


Filed under: Musings-Articles, Uncategorized

Perhaps You’ll Be Able to Retire After All

   We’ve all seen TV advertisements suggesting you need $2 million dollars (or more) to retire comfortably. With day-to-day family expenses pressing, its easy to get discouraged when planning for retirement. Yet, if you look at “retirement” differently, the future may not look so bleak.

    Some years ago Fred Brock wrote a provocative book, Retire on Less Than You Think (NY: Henry Holt & Co., 2004). Rather than lament the possibility of never being able to retire, he offered people some practical strategies to afford “retirement” without enduring too much pain and deprivation. They still apply today. The “watchword” of his message is flexibility of what you mean by retirement. I’ve listed below are suggestions to help make retirement affordable.

□ Plan to work in retirement…at least part time. This may include staying in your primary career (or job) longer than you had planned. Though some people may feel “cheated” if they have to work longer than planned, increasing numbers of people are recognizing the benefits of “working in retirement.” These benefits include: retaining lower cost group health insurance coverage until at least 65 when Medicare begins; delaying making withdrawals from portfolios to meet every day expenses; saving more for retirement; staying engaged socially; keeping minds active, not to mention the benefits of having some time apart from partners, or as the bumper sticker reads, “retirement: not enough money and too much spouse!”.

□ Separate “necessary expenses from “nice to have” expenses. Some people have never sat down and seriously figured out what its really “costing them to live.” When you remove the extras, your basic expenses may be far less than you imagined. Though “the extras” can be what makes life worth living, it can be reassuring to know that you could cut back without dramatically reducing your life style. This exercise can also help you distinguish between activities you really enjoy from those which you do by habit. Knowing “your necessary expenses” will help you more accurately calculate your retirement income needs.

□ Delay Collecting Social Security. In 1984, an Alan Greenspan led committee gradually increased the eligibility to collect a full Social Security benefit (known as your “Full Retirement Age”) from age 65 to age 67. The committee simultaneously increased the permanent penalty (in reduced benefits) for collecting “early” at age 62. Therefore, with people living longer, it has become increasingly important to delay collecting benefits to maximize your Social Security benefits. Furthermore, Social Security provides extremely generous “delayed retirement benefits” if you postpone collecting until age 70. This “enhanced” benefit (in some cases nearly 70% higher than your age 62 benefit) not only enables you to receive larger annual costs of living increases, but also can significant increase the survivor benefit your spouse could collect if you die first.

□ Consider Relocating. Most of us already know that many areas in the Northeast are among the costliest to live in the USA. Therefore, it could makes sense to consider relocating to a less expensive area. Not only will your dollar “stretch” further elsewhere, but seven states (Alaska, Nevada, South Dakota, Wyoming, Florida, Texas, and Washington) levy no state income taxes. Furthermore, 75% of all states exempt Social Security benefits from state income taxes. Many areas are 30% less expensive to live for the typical retiree, so it could make sense to move. A special capital gains tax exemption against federal income tax is also available if you sell your primary residence ($500,000 for married couples filing jointly and $250,000 for single filers). Likewise, recent legislation allows you to immediately buy a home elsewhere and take out a reverse mortgage on the new primary residence to supplement your income.

□ Consider Annuitizing Some of Your Assets. One of the biggest concerns many face is “outliving their money.” This results in some retirees needlessly scrimping to protect against this possibility, while others withdraw too much too soon from their portfolios and face the possibility of fully depleting it too soon. One way to protect yourself from this dilemma is to convert a portion of your portfolio into a life-time income. You do this with a “payout annuity” by a process called “annuitizing” which provides you with a life-time income. Just as life insurance protects your family from your dying “too soon,” a payout annuity protects you against “living too long.” Along with the income Social Security provides, you could annuitize just enough of your nest egg to meet your basic expenses. The remainder of your portfolio you can invest to draw from later to pay for discretionary expenses and to protect you against inflation.

Filed under: Musings-Articles, Uncategorized

A Financial Checklist to Keep Your Finances on Track

    Before major airlines allow flights to depart, their pilots must complete a thorough and systematic checklist. Not only is this good aeronautical practice, it’s also an excellent way to avoid problems before they arise. Likewise, employees should periodically complete the Financial Checklist below to make sure their finances are in good order.

□ Create or Update Your Will. Review your will to make sure: it reflects any changes in your wishes; incorporates additional assets you may have recently acquired; confirms your choice of executor; incorporates any changes in the family (births, deaths, divorces, etc.); incorporates new tax laws (federal and state); and deals with real property you may have purchased, especially out of state real estate.

□ Create or Update Your Letter of Instruction. This document, which should accompany the will, is designed to speak for you as if you were still living. Here you put instructions not easily included in the will, such as: burial instructions; your various accounts, including passwords and pin numbers; contact information of advisors, attorneys, relevant family members, executors, employer benefits personnel, etc.; safety deposit box and key locations; where you keep important documents, including: life insurance policies, deeds to real estate, and your original will.

□ Create or Update Your Advance Directives. These documents authorize others to act in your behalf if you become incapacitated. The holder of your Durable Power of Attorney makes legal and financial decisions for you; the holder of your Health Care Proxy makes health care decisions for you and carries out your “end of life wishes” as you’ve expressed them in your Living Will. Make sure all these documents comply with rules on protecting medical information (HIPPA) so that your agents can make informed decisions.

□ Review Your Beneficiary Designations. As the years pass, it’s important to make sure the named beneficiaries of your various accounts are current. These accounts include: you and your partner’s company savings plans; your life insurance policies, including group plans at work; your IRAs, among others. Too often proceeds have gone to ex-spouses or to reimburse the state for a parent’s nursing home care expenses because employees/retirees forgot to update their beneficiaries.

□ Calculate if You’re on Track to Afford to Retire. Though hard to believe, 44% of Americans retire today without identifying if they can afford to. Companies’ 401k or 403b providers, often have excellent, no cost calculators available at to help you with this task. Employees can also access Fidelity Investment’s excellent calculator at and look for the “Retirement Income Calculator.” Though no calculator can foresee all circumstances, attempting to figure out if you’re on track can be an eye-opening experience to motivate you to get more serious about your retirement planning.

□ Contact Social Security to confirm Your Benefit Amount. Nothing beats contacting Social Security directly at ( or at 1-800-772-1213) to confirm what your monthly benefit will be. While everyone receives an Annual Statement, contacting Social Security directly will provide a much more accurate projection. Likewise, you’ll discover which documents you’ll need to apply for benefits.

Filed under: Musings-Articles, Uncategorized

Confronting Challenges Women Face Planning for Retirement

    According to a recent study by the Society of Actuaries (SOA), women face special risks in retirement. The study, The Impact of Retirement Risk on Women, suggests that an overwhelming majority of women have a very poor understanding of their own longevity and what it will take to support that longer life-span. Olivia S. Mitchell, Professor of Insurance and Risk Management at the Wharton School, University of Pennsylvania, indicates that one of the reasons that many women are unprepared for retirement is that people, in general, have a very low level of financial literacy.

    According to the SOA study, the risks women face in retirement from an actuarial standpoint differ considerably from those facing men. According to the study, the five key issues that women face and fail to adequately plan for include:

►Outliving their assets

►Widowhood’s financial challenges (as well as emotional)

►Potential for Chronic Disability, either mental or physical

►Cost of health care

►Economic Factors

    Many of these issues occur because women tend to outlive men and because older women are much more likely to be widowed than men. On average, a 65 year old woman can expect to live into her late 80s, with many living well into their 90s. In contrast, a typical 65 year old man can expect to live about 20 more years, with far fewer surviving into their 90s. Also, widowhood falls disproportionately upon older women. Over 85% of women age 85 or older are widowed, while only 45% of men over 85 are. Because traditionally women have been younger than their husbands, and, along with their longer life expectancies, women can experience widowhood for periods sometimes exceeding 15 years or more. For many women, the loss of a spouse comes with a decline in standard of living. Of women over 65 living alone, 40% depend on Social Security for virtually all their income.

    At first glance these numbers can be intimidating. The good news is that there are resources and tools to help many female (as well as male) employees with the tasks. For example, eligible employees can make “pre-tax” contributions to company sponsored 401k and 403b Tax Deferred Savings Plan. Many employers also match employee contributions.

    These plans grows tax-deferred until you make withdrawals from the account in retirement. Tax deferral allows funds that would have been lost in taxes today to compound for your benefit. In addition, when you withdraw these funds in retirement, you will likely be in a lower tax bracket, further reducing the tax bite on these funds. While employees then have the responsibility for managing the investments in their tax-deferred savings plans, most plan sponsors provides a variety of tools to help.

    Many employees often overlook the opportunity of saving “just a little bit more” for retirement. The Table Below shows the impact that “saving a little more” can have on the amount you can accumulate at age 65. (The Table assumes a 7% annual rate of investment return).

Age Employee 401k Contributions Begin

Contributes $100 more a month

Contributes $200 more a month

Contributes $300 more a month

















   As mentioned earlier, another retirement challenge women face is the risk of outliving their assets. With traditional pension plans (that guarantee a life-time income) less common, women must confront the possibility of living longer than their nest egg can support. One way to manage this risk is to convert a portion of their assets to a life time income (i.e., “annuitizing” the asset). Only insurance companies (through payout annuities) can offer this guarantee to pay you life-time income beginning at a selected date. Generally, once the payments begin, they will continue for the rest of your life, regardless of how long you live. In most cases, the payout amount will depend upon how much money you annuitize, your age when the payments begin, and prevailing interest rates at the time of annuitization.*

*There are many different types of payout annuities and they will be the topic of a future article.



Filed under: Musings-Articles, Uncategorized

The “Best Time” to Begin Collecting Social Security Retirement Benefits

     An increasingly important financial decision nearly every employee must eventually face: when’s the best time to begin collecting Social Security retirement benefits?  Not long ago, “conventional wisdom” was to begin collecting Social Security retirement benefits as soon as you became eligible at age 62, and not wait for a full, un-reduced benefit.” The thinking was that so few people would live into their 80s that it wasn’t worth the wait for a larger benefit.

    So what’s the real story? Our parents (born in 1937 or earlier) received 20% less for collecting at 62 than had they waited to collect at their full retirement age of 65. Alan Greenspan extended Social Security’s full “un-reduced benefit retirement age” for anyone born after 1937. Those born between 1943 and 1954 get 25% less at age 62 than had they waited to receive their full benefit at 66 (new full retirement age). Those born in 1960 or later will receive 30% less at 62 and must wait until age 67 to receive an unreduced Benefit. By doing the math, you’ll see that you must live 12 years beyond your full (unreduced) retirement age to justify waiting to collect your full benefit. So what’s the smart move?

    Most people approaching age 62 can’t imagine living into their 80s, and so they opt to collect Social Security benefits early. What they fail to realize is that a 65 year old has about an 80% chance of reaching age 80, with women even more likely to live well past 80. Therefore, from a “dollar and sense” standpoint, it’s better to wait to collect. Not only will you get a substantially higher benefit, but your cost of living increases will be bigger because they’ll be based on a higher benefit.

    Selecting the best time to take Social Security is very important to ensure retirement income security, especially for lower and moderate income employees. In fact, according to a recent study, an employee with a $40,000-a-year salary a spouse who’s been marginally employed, Social Security benefits are worth nearly $600,000 for that couple at retirement. For a $120,000 a year salaried employee, her benefit is worth well over a million dollars. Therefore, if your health prospects are average or above, you ‘re better off waiting to collect. There are a few exceptions that could justify taking benefits early. First, if your health is poor and your unlikely to live long enough to benefit from waiting. Second, you desperately need the income. And third, (and most people will need help calculating whether this option is best), it renders other family members eligible to collect ancillary benefits by virtue of you collecting (spouses, eligible children, etc.).

   There’s an added advantage if you wait until age 70 to collect. For each year you delay collecting Social Security from your full retirement age until age 70, your benefit rises by 8%. Not bad in a low interest rate environment where to receive an 8% return you must take substantial investment risk. Likewise, this strategy will result in a higher widow’s benefit for a surviving spouse.

   Bottom line: the decision to opt for a permanently reduced Social Security benefit at age 62 can have disastrous long-term financial consequences for employees, especially for women. Why women? Not only do women generally collect smaller Social Security checks than men because they have worked fewer years, but also because they live longer than men (a 65 year old woman has nearly an 50% chance of reaching age 89), women are more likely to feel the “pinch” of a permanently reduced check. So unless you’re in poor health, are desperate for income, or have more than enough income from other sources, consider waiting until you’re for a full, un-reduced Social Security retirement benefit.


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Medicare Advantage Plans: An Alternative to Traditional Medicare

By: David K. Carboni, Ph.D., CFPⓇ

Consumers enrolled in Medicare can buy Medicare Supplemental Insurance Plans to fill in the gaps Medicare leaves in co-pays and deductibles. These plans, along with a Medicare Prescription Drug plan (Plan D), provide Medicare recipients with significant health coverage. However, there is another alternative for health care coverage for those eligible for Medicare: Medicare Advantage Plans (MAP). With MAPs, insurance companies contract with the federal government to offer Medicare benefits through their own policies. They are different types of MAPs, including: Health Maintenance organizations (HMOs), Preferred Provider Organization (PPOs), Medicare Private Fee for Service (PFFS) plans, and others. Costs, extra benefits, and rules vary by plan. With MAPs there’s no need to buy a Medicare Supplemental Plan.

MAPs are required to provide the same services as traditional Medicare. But there are catches. First, they can do so in different amounts, that is, they can offer different co-pays, coinsurance, and deductibles for these services. With MAPs, you continue to pay Medicare’s Part B premiums ($148.50 in 2021), except for high incomes folks), and then (usually) pay an addition premium. MAPs commonly offer services Medicare does not, such as: vision coverage, health club memberships, and even dental care. Drug coverage is also common in MAPs. This eliminates the need to buy a separate Plan D prescription drug plan. In fact, the Center for Medicare Advocacy says it’s possible to have lower out-of-pocket costs with MAPs.

Never the less, there are serious caveats with MAPs. Some plans add benefits that may have little value (e.g., health club memberships), while paying less than traditional Medicare for hospital stays or nursing care. Hospitalizations and nursing care expenses represent the real financial risks you face later life. Unfortunately, MAP coverage limits can be obscure or be buried in footnotes not readily apparent. Therefore, it’s imperative to carefully scrutinize the deductibles and co-pays for doctor and hospital care and compare these with traditional Medicare (together with Supplements).

Medicare Supplemental Plans used in concert with Traditional Medicare are portable, that is, a plan holder may receive care from any Medicare authorized provider. In contrast, MAPs typically run like HMOs or preferred provider organizations, with networks of providers. If you want the freedom to see any provider (or if your current providers don’t participate), you should probably not enroll in a MAP. Likewise, if you expect to travel a lot (or spend time outside the service area), you should likewise think twice before enrolling in a MAP. In the recent past, aggressively marketed MAP private fee for service (PFFS) plans were said to offer the freedom of choice of providers while providing the savings of MAPs. These freedoms can be illusory, as providers can refuse to accept patients in such plans, and recent legislation has further restricted their use.

MAPs present other problems as well. If your doctor leaves the plan during the year, you could be faced with higher medical charges, as the doctor would then be considered an out of network provider. Your other choice would be to find a new in network doctor. Also, a serious illness could prompt you to seek care from non-participating specialists or hospitals. These could be at potentially much higher charges, or you may be forced to pay the entire cost of the covered service. So a MAP’s seemingly lower premium could come at the price of less flexibility in seeking and paying for needed care. Likewise, if you are on a prescription drug regimen, it’s a good idea to check the formularies (prescription drug protocols) offered by the MAPs you are considering. If a MAP charges significantly more for the drugs you require, the lower premiums may be offset by your higher out-of-pocket prescription costs.

You can join a MAP or other plans when you first become eligible for Medicare-called your initial enrollment period. You may also enroll during prescribed enrollment periods. Likewise, you may only switch plans during certain time periods. For example, each year an Annual Election Period (AEP) occurs from October 15 to December 7, and the plan you elect becomes effective January 1. MAP open enrollment periods (MA-OEP), Jan. 1 to March 31, are also available to allow you to switch plans. There are restrictions on what changes you’re allowed to make among plans during MA-OEPs. For example, you can’t add or drop Medicare prescription drug coverage during OEPs unless you already have Medicare prescription drug coverage. Refer to for other change limitations during MA-OEPs. In addition, there are special enrollment periods (SEPs) which allow consumers to switch MAPs if:

-they move out of the plans service area
-they move to an area that has new MAP or Plan D options available
-their plan leaves the Medicare program, and other special situations

Medicare websites tool: The Medicare Options Compare ( displays the MAPs in your area. By clicking on estimated annual cost, you receive out of pocket estimates based on your general medical condition. Two other excellent websites with tips for comparing plans are: Medicare Rights Center ( and Medicare News Watch ( This latter site also displays estimates of out-of-pocket estimates for MAP HMOs and MAP preferred provider organizations (PPOs). Your State Health Insurance Assistance Program (SHIP), easily accessed through, can provide access to health insurance counselors who can offer guidance on selecting MAPs available in your state.

Key: Currently, only four states (Maine, Massachusetts, Connecticut, and New York) allow you to switch from an Advantage Plan to a Medicare Supplemental Plan without demonstrating evidence of that you’re in good health. This could lead to a situation that if you develop a serious health issue, you could be unable to seek out the best providers available for your condition if they are not in your MAP network. This suggests that Medicare Supplemental Plans are nearly always a better choice than MAPs unless you are simply unable to afford what may be a higher premium of a traditional Supplemental Plan, or you live in the Northeastern states mentioned earlier.

As with many areas of financial planning and retirement planning, retire health care planning is a dynamically changing. Health care and how its financed remains a major challenge facing the USA, and new plans and approaches will no doubt emerge. Therefore, you must remain informed on this changing landscape as you plan for your health care needs in retirement.

– 4/20/2020

Filed under: Musings-Articles, Uncategorized

Credit Scores: Myth versus Reality

    Credit scores are increasingly important to our financial lives and yet many of us don’t realize it. Our financial transactions are closely monitored by the credit bureaus and used to determine our credit risk, otherwise known as our Credit Score.

    A credit score affects how much interest we pay on mortgages, consumer loans, credit cards and more. The difference between a good score and a bad one can be tens or even hundreds of thousands of dollars over our adult lives. A credit score can also affect your ability to get a job, a cell phone contract, rent an apartment, or even how much we pay for insurance.

    All of us must becoming an educated consumer about our credit score. A bad credit score can block you from buying a home or a car, or finding a job. And yet, the credit scoring system seems such a mystery because there’s so much confusing information out there (bad and good) that it’s hard to sort what’s real from the myths.

Facts about Credit Scores:
1. All credit scores are not created equal.
2. Pay attention to the credit score called the FICO score.

    Major lenders use the FICO score and about 90% of the top 100 financial institutions in the U.S. The score, based on a formula developed by the Fair Isaac Corporation, is the gold standard for measuring credit risk. FICO scores range from 300 to 850, the higher the better

    The best place to get our FICO score is directly from the company at If you have applied for a loan your lender can give it to you. Under federal legislation, every credit bureau is required to give consumers one free credit report per year (visit, but not a free credit score. The major credit bureaus sell credit scores based on their own models. The closest to FICO of the three is Equifax.

    Check Your Credit Score. Lenders will obtain your FICO score which rely on the credit reports from each of the big three bureaus. Your credit reports may vary somewhat with each bureau as they may not have identical data. Also, 85% of credit reports have errors, with many serious enough to affect your credit score. Unless you find these errors and take action to remove them from your credit reports, they will remain there.

    That’s why its wise to check your credit reports annually because you never know when you might have to borrow money and it’s best to be prepared. If you aim to buy a house in the near future, it’s vital. By the way, it can take months to raise your credit score.

    For most of us, buying a home is the most expensive purchase we will ever make. Getting a preferred interest rate will make a huge difference over the mortgages life. Here’s an example from a past year that shows how a credit score impacted the interest rate available on a 30-year fixed rate mortgage:

Credit Score

Interest Rate
4.500% (options are very limited for people with scores in this range)

4.750% (and likely not able to be done)

Other Impacts of Your Credit Score:
    To get the best terms from a credit card company, you need a high credit score. Likewise, a bad credit score can get you turned down from renting an apartment or force you to pay more money up front to the landlord. Now, only seven states restrict the use of credit scores to screen job applicants. States that restrict this practice are: California, Hawaii, Oregon, Connecticut, Illinois, Maryland and Washington.

    In addition to credit card records, consumer loan and mortgage payments, and collections, charge-offs and bankruptcies are also tracked by the major credit bureaus. Many of our financial dealings that used to go under the radar are now being captured by a fourth credit bureau: CoreLogic. CoreLogic tracks evictions, child support payments, payday loan applications and property tax liens. It’s being offered to mortgage and home equity lenders to screen applicants for credit risk.

    How do you maintain a good credit score? The single greatest factor is payment history, which makes up 35 percent of a credit score. So pay your bills on time. The amount of debt you have is the next most important factor, making up 30 percent of a credit score. Work to keep credit balances at zero. But if that’s not possible try to keep the balance owed at no more than 30 percent of what’s available.

The other factors include length of credit history, which makes up15 percent of your credit score, types of credit (10 percent), and inquiries for new credit (also 10 percent).

A few pitfalls to avoid:

♦Don’t close an inactive credit card account as it could raise your overall debt-to-credit ratio and lower your   credit score.
♦Don’t co-sign a loan unless you are prepared to risk lowering your credit score should the other person default.
♦Don’t max out or exceed credit card limits.
♦Understanding and tracking your credit score doesn’t have to be difficult. But it can reap great rewards for your financial life.

    Like many other aspects of your financial life, your Credit Score needs to be monitored annually and managed as needed. It’s a “snapshot” of how Lenders (and others) rate your financial worthiness. Make sure yours is the best it can be.

Filed under: Musings-Articles, Uncategorized