Easy Money or Bad Idea?

A number one concern of retirees is running out of money in retirement. Say you’re strapped for cash flow, or worried about depleting your retirement savings. What do you do?

Home equity might be your most significant asset and a tempting solution. Early on, I was drilled “Don’t consider your residence as an investment asset. It’s a personal asset – you need a roof over your head. Consider it an ‘idle’ asset. Accessing that equity is via selling the home, or borrowing against it.” The first one – downsizing – may make sense for retirees (less lawn to mow). The second one… well we learned the harsh lessons of using our homes as ATMs. But a third option emerged – reverse mortgages.

Easy money? Perhaps. They offer homeowners the benefits of staying in their home, and, withdrawing some of the equity. But their popularity suggests otherwise. HUD’s reverse mortgages (Home Equity Conversion Mortgages or HECMs) number about 60,000 in the US in late 2013, representing a decline of almost half from their high in 2008-09. Some call reverse mortgages “loans of last resort.”

There are many types of reverse mortgages including those government or agency backed, and proprietary or privately insured. We’ll focus on FHA-insured HECMs.

I’ll summarize what they are, and more importantly, several planning considerations which are relevant to other issues in your personal finances.

They’re a type of home loan where homeowners convert a portion of the equity into cash – a lump sum, line of credit, monthly cash payment, or some combination. But you don’t make payments. There are many requirements, variations and loan calculators which you can read online (e.g. HUD.gov). Generally you must be 62 or older, the homeowner, and live in the home. The accessible cash is based on age, interest rates, and property value. Per a hypothetical estimate on ReverseMortgage.org, a couple age 65 with a $300,000 home debt free might qualify for a monthly check of about $847 for life, or a principal limit of about $153,000. Homeowner retains title to the property, and the responsibilities of taxes, insurance, utilities and maintenance. Mirroring traditional mortgages, these generally involve rising debt (mortgage balance) and falling equity. The loan generally comes due when you sell the home, move out, or the surviving borrower passes. And mortgage insurance helps protect the borrower.

Planning Considerations

Know the costs – Reverse mortgages are generally more expensive than traditional mortgages – both up front and on-going – primarily due to the cost of mortgage insurance and servicing fees. Read and understand the documents.

Inflation – Two impacts. First, perhaps you’re procrastinating – “We’ll downsize or reverse mortgage later.” Higher inflation implies higher interest rates. If you’re going to downsize and finance part of the purchase, why not make the transition before mortgage rates significantly rise? And, if you’re going to reverse mortgage, higher rates may mean a lower amount of accessible cash. Second, inflation can decimate the value of electing a lifetime of fixed payments. Using the example above, if you reversed today, an $847 monthly check may be sufficient to augment your retirement income today. Will that same $847 check be enough in 20 or 30 years?

Non-borrowing spouse – What if you’ve remarried… the pool boy (or gal) – i.e. you were 62 or older and qualified for the HELC, but not your partner – or your partner wasn’t listed on the title (or didn’t want to sign the loan papers)? And what if you died? He or she likely needs to find another roof, and the reverse monthly checks cease. Spousal protection cases are currently in the courts. What steps should you do today in planning for the future?

A piece of pyrite sits in my office. It’s heavy, multi-faceted and shiny. As “fool’s gold,” it’s a reminder to me that things aren’t always what they appear to be. Talk to your advisors. Get legal counsel. Think things through.

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Going for the Gold

They’re soaring, flying, gliding and scoring. Men and women from across the globe are competing in Sochi for the gold. My athletic glory days may be past, yet I’ll root the youngsters on. However, I’ve got gold to pass on to my heirs.

Baby Boomers are projected to transfer between 12 and 40 trillion in wealth to Gen X and Y. The 40 trillion reflects many pre-2008 Financial Crisis estimates. The 12 trillion reflects potential revisions for lost wealth or joblessness. Nevertheless, two take aways are (a) younger generations stand to be prudent and conservative accumulators of wealth – skeptical of fast and easy money, and (b) it’s still a ton of money.

So what do you do with your inheritance? And on a parallel course, what fine-tuning is appropriate for you Boomers?

Settle the estate. Your parents may have designated you and your siblings to help steer their ship and settle their estate – executor, trustee, and guardian. I remember sitting in my father’s garage as one of the three Loy boys a little over two decades ago. Our father had passed and we had the jobs of settling and distributing his estate. It involved legal and accounting responsibilities, and the personal issues of fairly and equitably slicing the pie. Fortunately, we got along and the jobs were well done. Others aren’t as fortunate. Some say blood’s thicker than water until it comes to money. How well do you work with your brothers and sisters? Will you seek the advice of professional advisors in dotting “I’s” and crossing “T’s?” And how can those third parties help you foster strong family bonds, rather than suffer division?

Outright distribution of assets. Will your inheritance be outright (receipt of assets or a check) or in trust? Some assets transfer outright by the will (e.g. family heirlooms), ownership (e.g. joint banking accounts), or beneficiary designations (e.g. retirement accounts). Are you prepared to take on complex assets (e.g. a business), what if Mom and Dad named sibling #2 as joint owner on all their bank accounts because he or she lived the closest, and do you liquidate your share of your father’s IRA (and pay the taxes) or rollover to an inherited IRA account (tax deferral) and take required minimum distributions over your lifetime? Do you keep the investments “as is” (they were good enough for my folks, or refuse to generate taxable capital gains – remember investment markets are indifferent to your ‘cost basis’… the future performance of an investment, good or bad, is going to be the same whether you own it at $1 or your neighbor at $100 per share), or reposition according to your situation? In lieu of writing a check to your favorite charity, how about gifting an appreciated asset?

Distribution in trust. You may receive car keys and a check, yet the bulk of your inheritance may come in trust. There will be strings attached. Perhaps you’ll receive the income from the trust assets each year, however, the principal might be parsed out periodically (e.g. a third at age 35, half at 40 and the balance 5 years later) or it’s reserved for your future kids. It isn’t necessarily because they don’t trust you, rather they’re concerned what might happen to you – a marriage gone wrong or litigation from a car accident. Situations arise from the definitions of “income” and “reasonable expenses for health, education and welfare” (what’s “reasonable”). Competing interests may arise if there are multiple trust beneficiaries – income beneficiaries want maximum income generation yet the residual beneficiaries say heck with income, we want maximum growth. Fiduciaries (trustees, investment advisors, etc.) negotiate these minefields. Get legal and tax advice from experts.

Bottom line, be a good steward of the treasure you’ve inherited. Likely your folks worked hard and sacrificed for that money. The fire red headed Olympic racer Katie Uhlaender currently stands in skeleton medal contention. Whether or not she stands on the medal podium, she wears her deceased father’s 1972 National League championship ring around her neck. She doesn’t ride alone.

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New Year Brings Financial Renewal

He was the youngest President at age 42 following McKinley’s assignation, led an uncanny regiment of cowboys and Ivy League polo players at San Juan Hill, and was a renowned reformer rooting out corruption, cronyism and slackers. He was called Theodore, Teddy, or TR. And I’ve gained a deeper respect for Theodore Roosevelt from reading David McCullough’s historical narrative “Mornings on Horseback.” I better understand the background and family that helped mold the gregarious, boisterous, and interesting TR.

During TR’s lifetime, the US had grown to the world’s greatest economic power largely due to innovation. At the time TR was born, a farmer needed about sixty hours to grow and harvest a single acre of wheat. Four decades later, in the late 1880’s, a farmer needed only five. The threshing machine had greatly improved agricultural productivity.

Technology, discovery and innovation are engines of economic growth and enhance our lives. Consider a handful of advancements or breakthroughs that happened this past year:

Bioengineering – Doctors implanted the first synthesized blood vessels into a patient potentially leading to development of bioengineered veins for heart disease, and whole organs or body parts. Controversial stem cell research continues to shorten paths to      cloning, organ generation, and new treatments for Parkinson’s and diabetes.

Medical technology – New technique in cardiac MRI (T1 MRI) advances the detection of early childhood heart diseases. Researchers are attempting to integrate MRI and PET imaging to improve organ evaluation without less radiation exposure. And others explore the benefits of using silver in antibiotics.

Technology – Scientists created the equivalent of a lithium-ion battery, a nano battery, thousands of times smaller than a human hair that could be used in tiny machines (e.g. cardiovascular study). German scientists harnessed brain signals via EEG to brake a moving car quicker. 3D printers are creating jet parts. Artificial intelligence is expanding with advanced voice and image recognition.

These and future advancements have significant impact in wealth and financial planning. They provide us more efficient tools. They offer potential business and investment opportunities. And we plan to save more so our retirement monies cover longer life expectancies, the costs associated with aging, and inflation protection.

And with the dawn of a New Year, it’s time to refresh your personal financial plan. Here are some things to review:

How much is enough – Make sure you’re on track with your saving and spending plans and that you’re well-funded for retirement.

When  should you tell your heirs – The best time to have that conversation varies. Some feel they should be well-prepared. Some think secrecy is best. And others are a bit too young.

Any issues – There’s a growing trend to keep assets in trust for your heir’s protection. This includes upping the age when assets are freely available to them. Factors may include broken relationships, their financial issues, and a litigious society.

How to split the Mars bar – Situations where all heirs might not be treated the same include equalizing prior wealth sharing (e.g. financial support, college costs, etc.), second marriages, or skipping to grandchildren.

Best person for the job – Designating successor executors and trustees are important decisions. Some issues include longevity, capability, and maintaining positive relationships.

May you be blessed with peace, the reality of hope, and the joys of health and opportunities in the New Year.

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Preparing for Your Holiday Feast

Life can resemble flour in the Kitchenaid. Often it blends in smoothly. At other times, you’ve got a powdery mess. You clean it up and keep going.

Hopefully the year’s been good to you. If not, a new one is dawning. Here are some reminders as you look to the future… where you and your family will spend the rest of your lives.

Save more – Socking away sufficient savings, plus smart investment strategies put you well on the road for living with dignity and independence in retirement. Prudent savers build nests with both after-tax, and retirement accounts – plus real estate and business investments. Retirement accounts are convenient (forced savings) and there are a couple of barriers from dipping into them before you retire (taxes, and potential early withdrawal penalties). But build your after tax savings as well and build that into your budget – you’ll be happier when a portion of your future withdrawals aren’t fully taxable.

Pre-tax savings go to your IRA, 401k, or deferred compensation plans. The contribution limits aren’t changing dramatically for 2014. And if saving has been challenging (e.g. job cutbacks or kids moving back home), consider increasing your deferrals starting January. Saving $100 per month will accumulate to about $46,200 in 20 years if you’re averaging 6% returns; 30 years of savings grows to about $100,400. If you increase that savings by $20 more a month, it could mean an additional $9,200 and $20,100 over the same periods, respectively.

Watch your debt – Consumer debt rose to $11.3 trillion during the third quarter according to a Federal Reserve Bank of NY report. It was the biggest increase ($127 billion) since 2008. Components included mortgages (up $56 billion), student loans (up $33 billion), auto loans (up $31 billion), and credit cards (up $4 billion). Factors could be the sluggish but growing US economy, the need for increased skills and training, and rising confidence by some households buoyed by rising home prices and retirement account balances. The Commerce Department reported home construction grew to a five year high in November to an annualized rate of 1.09 million units. Locally, the Reno/Sparks Association of Realtors reported that sales prices have remained stable the past five months; however, the October median home price ($215,000) is up 19.4% compared to a year ago.

Rising consumer debt is a double-edged sword. Consumer spending is the largest driver of our economy. However, more debt, and/or higher costs to service that debt (from rising interest rates or fees) risks your ability to adequately save for retirement. Meet with your lenders and “fix” adjustable rate debt (ARM mortgages, equity lines, lines of credit, etc.) where possible – a 2% rise in interest rates on $100,000 will increase your monthly payments by about $167. And homebuyers are likely to see higher borrowing costs from increased fees on government-backed loans. The hike in guarantee fees by Fannie Mae and Freddie Mac take effect in March and the rates are based on creditworthiness – borrowers with low credit scores or down payments under 20% will likely pay more).

Celebrate your accomplishments and check your course – Many businesses have completed their annual budget and strategic and marketing plans for 2014. Households are advised to run their finances like a business as well. Uncertainty will always persist (economic, political, markets, your longevity, etc.). However, the stakes are high – your goals and your future – and best you get all stakeholders at the planning table (your spouse and advisors) to help you think things through, set priorities, and adjust contingency plans.

Financial planning and a preparing for a scrumptious holiday celebration with your family share a common thread. You expect the best, plan for the worst and brace for surprises. Happy holidays and may you have a healthy and peaceful New Year.

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Build Arks in the Sunshine

He was six hundred years old when the he and his family boarded the vessel which would save their lives and protect their precious cargo from the ravaging floods. You and I might not have Noah’s longevity. Hopefully, we each command commitment, competence and courage, and build our arks while the sun’s shining.

Protect your wealth and liquidity – Investors tend to be more complacent and less risk adverse when their monthly account statements continue to post gains – largely from US stock market advances. It’s not a question of if the stock market will correct, it’s when. Stay alert, maintain disciplined diversification strategies, and don’t put short-term need money at risk (e.g. your tax bill in April, daughter’s wedding in June, or planned expenses 1-3 years out).

Here’s an example. Some employees in the Nevada PERS retirement system are eligible to increase their pension benefit by purchasing up to five years of service credit. The cost is based on your age and current average compensation – if the cost to buy one year is $30,000, then the cost for five years is $150,000. Sources to fund the purchase can be tax-deferred accounts – 401k, IRA, 457 plan, etc. (Consult with your tax advisor and benefits manager). Say you’re considering using your 457 plan, it’s diversified with equity mutual funds, and you’re going to make the purchase soon to avoid higher future costs. Consider selling plan assets now and park the $150,000 in the money market to reduce market risk. Until you actually transfer the 457 funds to PERS, you’re forgoing the opportunity for market gains for the benefit of not losing money. Most investors hate to lose.

Revisit your savings and spending plans – Tax deferred limits to retirement plans (IRAs, 401k’s, etc.) generally remain unchanged for 2014. That may encourage investors to save more (and balance their nest eggs) into after-tax vehicles (e.g. individual, joint or trust accounts). On the other side, expenses tend to rise – e.g. inflation and rising interest rates. There may be other areas. My medical insurance costs are increasing under Obamacare. I’m grateful I didn’t receive an immediate cancellation notice. Instead, I was informed my coverage would be cancelled in 12 months, I’d pay a 16% premium increase for the interim, and per the State’s exchange site, the cheapest replacement coverage costs 59% more. No, I’m not happy. I’ll grouse. And while I’ll “hope” for changes with ACA, I’ll search alternatives and make adjustments to stay on track with my savings plan, and spend less to balance my budget.

Stay vigilant for more regulation and reform – Retirement planning is but one area. The three main issues being discussed in Washington are fiduciary rules, tax reform and IRAs. Fiduciary issues – the focus on putting clients’ interests first (fiduciary) vs. “suitability” standards (brokers) – are debated at the DOL and SEC. The debt ceiling and budget crises haven’t gone away. Government is hunting for more revenue. And tax incentives for retirement saving are under scrutiny. The President has proposed limiting how much Americans can sock away for retirement, and Representative Camp and Senator Baucus – two leading tax law writers – have stated their intentions for a broad “blank slate” approach to tax reform. And IRAs – representing about $5.1 trillion in retirement assets – are coming under increased pressure for uniform disclosure notices (think about the additional information you receive on self-directed 401k’s).

Boiled down, money issues are emotional, and despite da Vinci’s “Simplicity is the ultimate sophistication,” wealth management is complex. My advice… be financially literate, and seek competent and trusted advice. Have a safe voyage.

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Lessons from the Titanic

The magnificent ship failed to reach her destination. Consider the valuable lessons from the disaster that claimed more than 1,500 lives –

• Moderation versus full speed ahead
• Illusive goal of invincibility
• Challenges may loom larger than what we see on the horizon
• Big issues don’t lie at the surface
• And, icebergs don’t move

I share two discussions. First, we’ll explore some strategies to navigate one of two certainties in life – the ‘icebergs’ of death and taxes – the 3.8% Medicare surtax. And remember the shield of invincibility we carried in our youth? Kids today face a world of uncertainty – career and employment outlooks, accumulation of debt, and aging family members to name a few. So second, I’ll summarize three discussion areas with college students that gave me renewed optimism about young adults – our leaders of tomorrow.

Navigating the 3.8% Medicare Surtax

If you’re having a good year, so is the IRS. Some taxpayers view higher taxes as a cost of doing business. Others seek solutions for tax minimization and healthy wealth transfers. The new surtax is a provision of Obamacare. While it (and the 0.9% Medicare payroll tax) affects higher income taxpayers, tax reduction strategies may apply to taxpayers across the board.

• The surtax is complex. The strategies aren’t. Keep your income below the tax thresholds. Discuss with your tax and legal advisors.

• Net investment income (NII) – dividends, interest, capital gains, rent, passive activities, etc. – is subject to tax if modified adjustable gross income (MAGI) exceeds $250,000 for married filing jointly (or $200,000 for individuals). If a couple has $300,000 MAGI and $75,000 of NII, only $50,000 is subject to the surtax, and the tax is about $1,900 ($50,000 times 3.8%).

• Reduce Income – Contribute to 401k plans (current deferral limit is $23,000 for 50 year olds and over) and non-qualified deferred compensation plans. Look at tax-free (e.g. munis), tax-deferred annuities (not my favorite – potentially converts favorable capital gains to ordinary income, and surrender charges), or cash value life policies. Consider Roth IRA conversions (current tax from conversion versus tax-free withdrawals) if you expect future income to rise (e.g. SS and retirement plan distributions). And possibly spread capital gains over multiple tax years via installment sales.

• Gift Income – Remove income producing assets by gifting to charities or lower taxed family members. Qualified charitable IRA distributions were extended through 2013 for 70-1/2 year olds and over ($100,000 limit). Gifting appreciated stock, CRTs and CLTs are additional options.

Youth Manning Up to Realities

I was eager to lead two college class discussions. What words of wisdom and encouragement, and stories of mistakes made could I share with students? I focused on the financial planning process (case studies), investment strategies, and career opportunities. However, I was most interested in hearing what was on their minds. Here are my take-aways from those bright kids.

Debt and Cash Flow Management – They want to keep their finances in order, establish and maintain credit, and budget for saving and spending. They see the pressures of over-extended households, underwater homes, and national debt.

Investing for the Future – Currently the maximum SS retirement benefit is $2,533 per month, the average benefit is $1,224, and for half of couples 65 and older (and three quarters of singles), more than half of their retirement income comes from SS. But students asked “What if Social Security isn’t there for me?” They recognize a greater burden on their shoulders to invest – for retirement, emergency reserves, and in themselves.

Growing Older – Estate planning serves important roles. Areas of concern include aging family members (care giving, medical and assisted living expenses), talking to parents about their financial future, and inheriting wealth (being good stewards, and keeping peace in the family).

The luxury ship with her magnificent amenities lacked a sufficient number of lifeboats. Continue to put things in your favor and plan ahead.

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T.I.N.F.L.

The ageless phrase is conveniently forgotten at times we need it most. Rudyard Kipling wrote in 1891 about a developing trend in taverns to attract drinking customers. “It was the institution of the ‘free lunch’ I had struck. You paid for a drink and got as much as you wanted to eat. For something less than a rupee a day a man can feed himself sumptuously in San Francisco, even though he be a bankrupt. Remember this if ever you are stranded in these parts.” Writers and economists use the term to describe trade-offs. The concept is core to economics – to get something you give something. There is no free lunch.

The aging and retirement of Boomers, the most affluent generation, bring tides of economic, political and social change to America. We’re a big target for advertisers and sales – representing more than $8.5 trillion of retirement assets and possibly inheriting another $7 trillion. And despite investor alerts by regulators and industry associations, seniors are victims of financial abuse to the average tune of $140,500 (CFP Board of Standards survey 2012). One of the most common is “free lunch” seminars.

We’re inclined to believe “bad things don’t happen to me… they happen to the other guy.” Just in case, I’ll share a recent example. I’m not out to embarrass or get sued. I’ll use some pretty broad strokes.

I got a call from retired couple living in a sunny retirement community – very smart, successful and comfortable. They had attended a scrumptious luncheon at a beautiful country club. She was contemplating a significant investment to help them pass their IRA monies tax free to their grandkids and asked me to check things out. Here are some ‘red flags:’

• Free lunch seminar… Bring your spouse… Nothing will be sold – If I ask my spouse to another “free lunch” she’ll call me George Costanza. Why don’t I take her to another Rotary lunch? At least she’ll get to visit with people she knows.

• Multi-Generational IRA – A better mousetrap? Or is it merely a rebranding of the classic ‘stretch IRAs?’

• Please: No stockbrokers, financial planners, or insurance agents – Aren’t seminars to learn and share? We live in an idea society, seek illusive silver bullets, and no one has a monopoly on good ideas. Shouldn’t my trusted advisors (including tax and legal experts) be engaged? What about the current tax bill converting to a Roth IRA (for future tax-free withdrawals)?

The alleged solution included a fixed index annuity (FIA). These are generally contracts between you and an insurance company that pay a fixed annuity linked to the performance of a stock market index (e.g. S&P); offer a guaranteed minimum return (by the insurance company, not the FDIC); and provide the potential for upside market gain (limited by the policy’s stated caps). They aren’t designed to beat the stock market, but may outperform other fixed income investments.

Americans hunger for greater certainty in their financial futures, and the hint of guaranteed returns is attractive. I’d love a guaranteed solution. However, life’s rich with trade-offs – risk and return (need more than a risk-free return to retire and stay retired?), liquidity and flexibility (surrender penalties or lock ups), and solvency (future promise fulfillment). What are other options to build, protect and transfer wealth? Perhaps, FIAs do make sense for a part of the portfolio.

Life would be so much easier if people talked straight and delivered what they promised. We know there’s no free lunch. But sometimes we forget, or become forgetful. And no amount of regulation or good intentions will always protect me and my loved ones. I’ll continue to keep smart and caring people in my inner circle. Big decisions? May I always sleep on them.

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Time in the Batter’s Box

American fans flock to stadiums to witness baseball’s unforgettable… stealing home, an acrobatic threat-ending catch, or other heart stopping play. They are the game’s rarities. Yet fans eagerly watch a sport where the ball is in play an average of 18 minutes in a three hour game. Say it ain’t so, Joe! Ninety percent of game time is spent talking about playing, rather than actually playing? That was the subject of a recent Wall Street Journal article, “In America’s Pastime, Baseball Players Pass A Lot of Time” – idle time between innings, batters, and the worst, time between pitches. An NFL football is slightly worse. In a WSJ survey conducted in 2010, about six percent of game time is spent actively advancing the football. Perhaps a $4 to $8 (gulp) small draft beer sweetens the down time at the park.

Time’s a valuable resource. How can I do more ‘making time,’ rather than ‘spending time’ sitting or standing around? While I’m no poster child for time management, the advice by a sage businessman has been helpful, and I share with you. Hopefully, you expand one or more ideas in your business, or life.

• Maximize shareholder value. Focus on customer satisfaction and reliable, streamlined, and efficient operations. Increased profitability and shareholder value will naturally follow.

• Be more marketable (referable). Build your track record and reputation. Sheepskins are nice wall dressings… apply your training and make lifelong learning a habit.

• Have balance in life. What can you do to squeeze more happiness out of life? Your greatest talent is choice – the career you choose, the projects you take on, and the people in your inner circle. Happiness is contagious (as is her red-headed step-sister).

And how might you make your discussions with your financial advisors be more valuable and relevant to you? Chit-chat is an appropriate courtesy. How about focusing on the things that advance your financial ball or base runners? Absolutely, common discussion points are about saving enough, not running out of money in retirement, what’s “Your Number,” downsizing, exiting your business, when to take Social Security, and planning for the ‘what ifs.’ But what about the emotional issues around retirement?

• Loss of structure and prestige of your career…

• Control…

• What am I going to do now?

• The better mousetrap not quite complete…

• “So long” to your partners, employees and colleagues…

Retirement is one of life’s most challenging transitions. It is a major shift. Consider practicing retirement before the final pitch is thrown. Explore hobbies, community groups, projects and travel that didn’t quite fit on your plate before. Try them out. Spend some of your savings account. You’re likely going to convert your retirement savings into a monthly “pension” (consisting of earnings and principal). These are to help avert the call to your advisor years later, “He’s driving me crazy. Please find something for him to do.” A ballgame only lasts three hours.

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Fitness and Planning – Medicare Facts for Boomers

One of life’s lessons came while driving in sugar cane country twenty-some years ago. I was traveling a three lane road, alternating between single and double lanes on my side of the yellow line. But it was Florida – a place where drivers roared or limped at 75 or 45, in the left lane. And my business meeting was an hour and a half away.

Another danger came into view – an old man riding a scooter, weaving on and off the shoulder. I felt a bad scene. Someone was going to either hit him, or me as I slowed. But the fear and anger subsided. I checked the rearview mirror as I passed, and smiled. I pictured his wife standing on her porch every morning, tipping her coffee cup, and wishing the Gentleman Wild Hog another safe return home. He and his driver’s license had been separated for moons.

It was a vivid reminder of some basic human needs – freedom and living with dignity.

Many Americans are concerned or ill prepared for healthcare costs in retirement. Few visualize their future old age or understand Medicare. The impacts of Obamacare on our healthcare system, citizens, and economy are uncertain. Nevertheless, plan for what we do know. Here are four facts Boomers should know about Medicare.

1. Medicare is mandatory once you retire. It’s your primary payer after age 65, and enrollment is not automatic (unless you’re already on Social Security). Enrollment is required at 65 unless you’re working and covered under a large employer plan. If you’ve got medical insurance through a small employer plan with less than 20 participants, retiree plan, COBRA or private policy, you’ve got to enroll.

2. What if you don’t enroll on time? You’ve got gaps in coverage, and late enrollment penalties. Your seven month enrollment period begins three months before age 65. Part A (hospital) is generally free if you’ve paid into SS for 10 years. Part B (medical) incurs a 10% penalty for every twelve month period you’re late, and payable for the rest of your life. Penalty for Part D (prescriptions) is 1% for each month you were eligible but didn’t enroll, unless you have private prescription coverage as good as Medicare’s – creditable coverage. These are to discourage people from deferring enrollment until just prior to a major illness.

3. Medicare doesn’t cover everything. Excluded are long-term care, dental, vision, and others; fees that exceed Medicare limits; deductibles; and co-payments. Most retirees view supplemental coverage as essential (Medigap, Medicare Advantage or managed care plans). Supplemental plans might be standardized, but pricing isn’t. And plans can change annually.

4. Healthcare costs are probably higher than you think. Fidelity Benefits estimates a 65 year old couple may need $220,000 for medical expenses (excludes long-term care). Premiums are a big share and they’re highly inflationary. Part B premiums grew 6% annually the past 15 years – over twice SS benefit hikes. There’s a surcharge for higher income retirees for B and D. Proactive ways of reducing healthcare costs include generic drugs and reducing medicines and services (splitting pills, postponing procedures, etc.).

Jimmy Buffett sings “I’m growing older but up.” However, living a good long life has its aches and pains. Aging is a natural process. Plan ahead. Make good health a priority. Learn about Medicare. Talk openly with your family, healthcare professionals and caregivers. And build future health care costs into the retirement income plan.

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The Most Important Question

The excitement grew as we were about to board the Incredible Hulk Coaster. Suddenly, the roar of the cars and the howls of the riders hushed as the coaster shut down. “I don’t want to go on this ride… get me out of here now!” the young lady shrieked as her car readied on the launch platform. A ride with top speeds of 67 mph, high G turns, and seven inversions is a thrill to some. Others will disagree. I understand. And while I may enjoy a moment of thrill on an amusement ride, it’s certainly not the ride I want for my life, business, or retirement portfolio.

Ever find yourself in a place you didn’t want to be? How do you make decisions in a world of uncertainty? The most important question to ask is “What’s important about ___ to you?” Insert the word “money” for financial planning issues and discuss it with your family and advisors. Go far enough, you’ll build a hierarchy of values and needs. Generally the base is security (not living underneath a bridge with the trolls), upward to control and flexibility (doing what you want) and independence (not being a burden), and then achievement (satisfaction, making a difference and giving).

It drills down to the “whys,” and once they’re on the table, the “hows” come abundantly clear as friction – the force that makes the apparently easy thing difficult – fades away. It’ll help you build solid strategies that can better weather the strain of temporary disappointment or setbacks, and have the courage to change course as your world changes.

Some reflections on questions that have come my way:

Should I buy more years of service? It depends. Some government employees, teachers, etc. have the option of purchasing “service credit” to increase their future pensions. There’s usually a maximum you can buy and the “cost” is compensation-dependent. It’s a trade-off – giving up assets today for a promise to pay. Financial issues include affordability; assumptions regarding investment returns, longevity and inflation; taxes; and estate planning (survivor benefits). Often, deferred compensation or other qualifying retirement accounts are used to fund the purchase, and sooner-than-latter may make sense (more expensive as compensation increases). Emotional issues include control, flexibility, security (e.g. Detroit employees ought to be concerned), and a smaller balance sheet. Get information from your employer and talk to your advisors.

I’m close to retiring; do I renew a life policy that I don’t think I need? Perhaps. Four reasons for life insurance are income protection, debts (including unfunded obligations such as college funding), taxes and business needs (buy/sell, keyman, etc.). You may have others. Generally income protection declines as you approach retirement. The other needs may or may not decline based on your situation. Insurance planning is multi-dimensional (amount needed, insurability, taxes, etc.) so have discussions with advisors including your estate planning and insurance teams. And don’t forget to review ownership and beneficiary designations.

And I’ll close with a recent global poll by deVere Group (UK-based advisory group) that focused on the questions does money bring happiness and how much makes one “wealthy.” The majority (80%) responded “yes” to the first question. The amounts varied on the wealth question by region – $2.8 million in Hong Kong, $2.6M in the UAE, and about $1.35M in both the US and UK. It highlights that “wealth” is a subjective and largely relative issue. “What’s important about money to you?”

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