Benchmark Financial Group

FERS, FERS-RAE, FERS-FRAE… What Does All This Mean?

Posted by Katie Lightfoot

By Ehren Clovis for FedSmith

The alphabet soup of government acronyms got a couple new ingredients over the past year and a half:  the FERS (Federal Employees Retirement System) was joined by FERS-RAE in January 2013 and by FERS-FRAE in January 2014.  What are these new acronyms and what changes do they indicate?

Rest assured that for most employees, nothing changed.  In fact, most employees breathed a sigh of relief that the changes did not even affect current employees.  But newly hired employees and those returning to service with only a few years of government service in their past will be subject to new FERS provisions which require larger employee contributions to FERS than in the past.

A little background:  FERS provisions started on 1/1/1987 and were applied to employees who were newly hired in retirement-covered positions from that point on.  The new FERS provisions also applied to most employees first hired between 1/1/1984 and 1/1/1987, and to employees who were reinstated on or after 1/1/1987 who didn’t have at least 5 years of service that was creditable under the old Civil Service Retirement System (CSRS).

The standard employee contribution rate for FERS (the amount employees must pay for coverage under the FERS Basic Benefit pension plan) settled at .8%, after excursions to 1.3% and .94%, so for many years employees have paid less than 1% of their gross pay into FERS.  “Special group” employees such as law enforcement officers, firefighters, air traffic controllers, and Congressional employees, pay a rate that is one-half percent higher, settling at 1.3%.  For simplicity, I’ll refer to only the standard rate here; special rates are always .5% higher.

The standard FERS employee contribution rate changed with passage of the Middle Class Tax Relief and Job Creation Act of 2012.  Under this Act, a new category of FERS employees was created:  FERS-RAE.  This stands for FERS-Revised Annuity Employees. The standard FERS-RAE employee contribution is 3.1%, an increase of 2.3%.  (Special group rates went up the same amount.)  However, the new rate was to apply only to employees who are newly hired on or after 1/1/2013, or rehired with less than 5 years of civilian service that is potentially creditable under FERS.

That seems fairly clear so far:  current employees weren’t affected, but newer employees have to pay more.  Ok, we’ve got that.  HR offices have to make good decisions about what FERS code to use (K or KR) and payroll offices have to make programming changes to provide for proper deduction of the additional new coverage type.  That’s doable.  (No increase in retirement benefits, by the way.)

But that’s not all!  Along comes the Bipartisan Budget Act of 2013, which created yet another category of FERS employees thanks to a different employee contribution rate, and FERS-FRAE was born.  The new category – FERS-Further Revised Annuity Employees – has a standard contribution rate of 4.4% of gross pay, and applies to employees newly hired on or after 1/1/2014, or rehired with less than 5 years of civilian service that is potentially creditable under FERS.

The fact that this Act was signed on December 26, 2013, just six days before it was to be effective increased the potential for problems.  Although they may have known that such a change was possible, payroll and HR offices were caught short by this very last minute change.  In fact, OPM’s Interim Guidance concerning the new Act was not even issued until 1/30/2014, 30 days after the new FERS category was effective.

So here are the current FERS retirement coverage categories in table format:

Retirement Coverage Affected Individuals Standard Retirement Coverage Code Standard Employee Contribution Rate
FERS Employees first hired on/after 1/1/19871 K .8%
FERS-RAE Employees first hired on/after 1/1/20132 KR 3.1%
FERS-FRAE Employees first hired on/after 1/1/20142 KF 4.4%
  1. Or rehired after that date with less than 5 years creditable or potentially creditable service under CSRS
  2. Or rehired after that date with less than 5 years creditable or potentially creditable service under FERS

It’s easy to see the potential for errors here.  Brand new federal employees aren’t a problem, but rehires are.  HR offices usually have to make retirement coverage determinations before they have access to a rehired employee’s complete employment history.  That means they must make the retirement coverage decision based on information provided by the employee, which may not show exact, full dates of previous federal employment, or may not include all periods of previous service.  Incomplete or erroneous service histories could cause employing agencies to put new employees in FERS-RAE or FERS-FRAE when they actually belong in FERS or (heaven forbid!) CSRS.

We’ve been through this before.  When FERS hit the scene in 1987, errors in coverage between CSRS and FERS were made.  In fact, thousands upon thousands of retirement coverage errors were made – and they are still being made.  OPM’s solution to the problem was the Federal Erroneous Retirement Coverage Correction Act of 2000 (FERCCA), which provided options for affected individuals and instructions for correcting errors.  But FERCCA corrections are so difficult, time-consuming, frustrating, and confusing that finding an error that requires FERCCA action is cause for general mourning, dimmed lights, heavy drinking, and heartfelt sympathy cards.

So will we need FERCCA: The Sequel to correct errors in retirement coverage among FERS, FERS-RAE, and FERS-FRAE?  I don’t think so.  Oh, there will be errors in coverage, but they will be inherently less complicated because all of these coverage types include the same players:  FERS and Social Security.  Only the amount of the FERS deduction is different, which should be fairly easy to fix.  Nonetheless, it would benefit employees who are new or rehired since 1/1/2013 to check their retirement coverage and ask questions sooner rather than later.

© 2014 Ehren Clovis. All rights reserved. This article may not be reproduced without express written consent from Ehren Clovis.

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Caught in a Data Breach? How to Reclaim Control of your Credit and Identity

Posted by Katie Lightfoot

By the end of the first quarter 2014, more than 200 data breaches compromised millions of consumer records, according to the Identity Theft Resource Center, which keeps track of reported data breaches. Stunned? Data breach stats are even more staggering if you’re among the millions of Americans caught up in one every year.

In addition to the potential monetary loss and identity theft risks, data breaches can also rob you of your sense of security and confidence. When you learn you’ve been involved in a data breach, it’s important to take steps to help protect your identity and financial accounts, and to rebuild your sense of security.

Often, breached organizations will offer affected customers some form of credit monitoring for a set period of time (usually one year) after the breach. While such services may go a long way toward making you feel more secure, be sure you understand exactly what the offered product can – and can’t – do to help you recover from the potential impact of a data breach.

Data breaches, credit monitoring and identity theft risks

Consumers whose personal or financial information is compromised in a data breach may be at greater risk of experiencing identity theft. In 2013, more than 13 million Americans experienced identity fraud, according to a study by Javelin Strategy.

Credit monitoring products aim to help minimize identity theft risks by keeping an eye on your credit accounts, where evidence of potential fraud and identity theft may first appear. Identifying such signs early may help mitigate some of the damages associated with identity theft.

While it’s true that consumers can do on their own virtually everything a credit monitoring product does, going it alone can sometimes be time-consuming and burdensome. Convenience is a significant benefit of a credit monitoring product. Not all credit monitoring products are alike, however, and if a company offers you this product in the wake of a data breach, don’t hesitate to carefully review the product and ask questions, including:

  • Does the product provide daily monitoring of credit files?
  • Will you receive timely alerts of key changes in your credit files?
  • Does the product monitor your credit file at all three of the major credit reporting agencies, or only one? For example, Equifax Complete monitors information from all three bureaus.
  • Are financial alerts included, and is it possible to link your bank and credit card accounts to the monitoring product? This allows you to be alerted when withdrawals from your bank account and/or charges to your credit card are processed, based on threshold amounts that you define.
  • Is Internet scanning for your Social Security Number and credit card numbers included? This may help detect unauthorized posting of your Social Security number and credit card numbers on certain suspicious trading sites.

If a breached company cannot answer these questions, or you’re not satisfied that the credit monitoring product being offered is comprehensive enough for your needs, you may need to take additional steps. First, you should ask the breached company for a different product. Such companies are increasingly aware of the impact data breaches can have on their reputation, and may be more willing to engage with those customers who feel they’re not receiving an appropriate response in the wake of a data breach. If a company refuses to respond to your request, consider also subscribing to a more suitable product of your choice on your own – it can be a key step toward regaining some confidence and peace of mind when you’re a data breach victim.

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Retirement Credit for Military Service

Posted by Katie Lightfoot

By Robert F. Benson for FedSmith

Military service is generally creditable for civilian retirement, but it must be paid for by the employee. This is referred to as “buying back” the military time, or making the “military deposit.” The amount to be paid is 3% of military earnings, plus compounded interest added each year on the anniversary date of the start of civilian employment. The interest begins accumulating two years after the entry-on-duty date. If the employee pays in full any time prior to the 3-year anniversary date, no interest is charged.

Annually, the Treasury Department sets the interest rate. For an individual employee, the interest for each 12 months is calculated by a “composite” interest rate, which is pro-rated on his anniversary date from the rates of the current year and the next year. For an anniversary date of August 23, the composite rate would be 127 days at the first year’s rate plus 233 days at the next year’s rate (by law, a 360-day year is used).

Example: employee started work on November 5, 2001. Previously, he earned $60,000 while serving in the military. Three percent of $60,000 is $1,800. If he had paid the $1,800 in full by November 5, 2004, there would have been no interest charged. However, he waited until August of 2010 to pay. This would mean six years of interest, accumulated as follows:

Composite

Time Period Interest Rate Interest Total
2003 – 2004 4.0469% $72.84 $1872.84
2004-2005 4.2986% $80.51 $1953.35
2005-2006 4.1632% $81.32 $2034.67
2006-2007 4.7604% $96.86 $2131.53
2007-2008 4.7691% $101.66 $2233.19
2008-2009 4.0087% $89.52 $2322.71

 

In the example above, if the employee pays on/after Nov 5, 2010, he will be charged one additional year’s interest, to total $2,397.95. Once he has paid in full, he is assured he will receive full credit for retirement purposes for his military time.

Can a retired military employee pay the applicable principal + interest on his military earnings, and receive a larger civilian pension? Yes, but he must waive the military pension. There are risks in this. The larger civilian pension that results can be less than the combined military and civilian pensions.

There may be occasions when the employee believes the benefit of making the deposit is not worth the cost. For example, in the above case, the employee was in the military four years. His annuity would be an additional 4.0% of his high-three. If his high-three was $72,000, then he would get an increase of (0.04 x 72000), or $2,880 annually. Probably he would want to pay $2,322 one time to receive $2,880 more each year for the balance of his life. But what if his military service was just two years? Then he would still have to pay $2,322, but his annual “gain” would be only $1,440.

What if the high-three was $57,000 rather than $72,000? Then four years military would increase the annuity $2,280, while two years would be just $1,140, yet the payment in either case would still be $2,322.

But more than just money is involved. For retirement eligibility, the military time does not count at all, unless the employee makes the deposit. In our above example, the employee would become eligible to retire at age 57 with 30 years Federal service (26 civilian + 4 military). If he did not pay for the military time, he would not qualify for retirement until he became 60! (At age 60 he needs only 20 years service.)

Note: the above applies to FERS employees. For CSRS, there are slight, but significant, differences. A helpful tool for the arithmetic is at www.fedbens.us, menu option #1. This software will calculate the exact amount due to pay the military deposit. Also, the employee’s payroll/personnel office can provide information on repayment by payroll deduction, etc.

Ref: Chapter 23, CSRS and FERS Handbook, www.opm.gov/retire/pubs/handbook/hod.htm

© 2014 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

Tags: Retirement

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The Real Cost of Delaying Retirement Savings will Shock You

Posted by Katie Lightfoot

Recent graduates have a lot on their minds: moving, finding a job and the looming repayment of school loans. Retirement is typically low on the list of priorities, but ignoring the issue entirely can literally cost young professionals hundreds of thousands of dollars.

It’s difficult to think about retirement when you’re just starting your career and trying to make ends meet.  It sounds counterintuitive but retirement planning should really be the first thing on a recent graduate’s mind.

Why?

The examples below demonstrate of how retirement planning can unfold when funds have the longest time possible to grow:

$100 a month for 20 years starting at age 21 = $468,236

A new grad invests $100 per month beginning at age 21, and continues that monthly investment for the next 20 years, stopping at age 41. Their total investment is $24,000.  Assuming an 8 percent annual return, compounded monthly, that $24,000 will become $468,236 by the time the grad retires at age 67.

$100 a month for 20 years starting at age 41 = $95,039

Wait until age 41 to begin investing $100 per month for the next 20 years, stopping at age 61. Their total investment is, again, $24,000. However, assuming the same 8 percent annual return, compounded monthly, the nest egg will only total $95,039 by age 67.

In this scenario the total cost of delaying retirement is $373,197.  WOW that’s a real difference!!!

These numbers are jarring, but losing out on thousands of dollars does not have to be your reality.  No matter your age, starting to build your retirement now can help you maximize your options and retirement assets.

Below are some expert tips for new grads to get a head start on saving for retirement:

Save regularly

Save a portion of each paycheck. Even a minimal amount, when compounded over time, adds up. Use savings as your emergency fund or toward major purchases, such as a new car or a down payment on a house.

Budget

Track your monthly income and expenses and plan accordingly. Differentiate needs from wants and prioritize wants by happiness, rather than cost. Cut the items that don’t provide long-term happiness. That way, it won’t feel like as much of a sacrifice.  Then, set short and long-term goals. This will show what you can realistically afford now and help you avoid racking up credit card debt that will affect your future ability to save and invest.

Use employer-sponsored retirement plans

If your employer offers a retirement plan, enroll as soon as you are eligible. An employer-sponsored retirement plan, like a 401(k), deducts money from your paycheck before taxes. Many employers match your contributions, so take advantage of this important benefit at the highest match possible. This is essentially “free” money, so if you don’t take it now, you’ll lose the match and the potential tax breaks.

Continue your education

Understanding important money topics and available resources can help you become financially savvy. Subscribe to an investing magazine or podcast, visit financial websites or follow a credible financial blog.

Get a reality check

Ignorance is not bliss when it comes to your personal finances. Determine your long-term goals and use free calculators (like the ones on our website) to help assess your situation and develop an action plan to pursue your financial potential.

Talk it out

Parents, trusted family and peers can provide great insight into financial matters based on their own successes and mistakes. Use their experience to your advantage to make smart money decisions. Of course, financial decisions today do not set in stone what will ultimately happen in the market. Rather than traced back to a good or bad decision about this stock or that industry, the final results of investing are always going to be unpredictable. If you are looking for an example of the past not predicting the future, investing is just such a place. Also, no matter your age, it’s never too soon to meet with a financial advisor to go over your goals and create a plan for retirement. Be sure to consider the tax aspects of your retirement options as well, discussing these with your tax advisor is an important part of a serious look at retirement planning.

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Understanding and Getting the Most Out of FERS

Posted by Katie Lightfoot

By Jason Kay for FedSmith

For those who entered covered service with the United States Government on or after January 1st, 1984, retirement benefits are referred to as FERS (Federal Employees Retirement System).

FERS is a complex system and much depends on an individual’s status with the government when planning for what to expect upon retirement. This is a guide intended to assist readers in understanding, calculating, and maximizing their FERS.

The Main Components of FERS

FERS has three main parts:

The FERS Pension and Social Security are both fixed amounts. The amount of both depend on how much you have worked and how long. The TSP depends on the amount of money you put into it, and how well you managed it.

When Can I Retire?

The FERS system is built up on a series of rules, and tends to reward the ones who have worked the longest. In order to be eligible for FERS (barring disability or an unusual position), you must reach your MRA, or Minimum Retirement Age, which is typically between 55 and 57.

There are different kinds of retirement available, and each have their own MRAs and other requirements. This is a good place to learn more about the different kinds of FERS retirement.

The FERS Annuity

While this is referred to by the government as an “annuity,” it is more accurately a pension. Essentially, each pay period you work for the government, a small percentage (normally 0.8% of your pay) is withheld for your annuity – however, this amount does not define the amount that you will get. Upon retirement, you will receive a fixed amount each month, just like a pension. As this is a “defined benefit,” there is nothing you can do to change the amount that you will receive other than manipulating the variables that are involved with the annuity calculation. This calculation is as follows:

High-3 Salary X Years of Creditable Service X % Pension Multiplier = ANNUAL FERS pension

Here is a breakdown of each variable:

  • High-3 Salary. This is the highest annual basic pay received during three consecutive years of service. Not everything you earn counts toward your High-3. For instance, bonuses, COLA, and overtime do not. You can calculate your High-3 here.
  • Years of creditable service. This is often the hardest number to nail down. This number is calculated by the OPM and can be found by looking at your SF-50s. Calculating years of creditable service can be complex: this is a good resource.
  • Pension multiplier. For most federal employees, this is 1%. The exceptions are if you are age 62 or above at time of retirement with 20 or more years of service. Then it is 1.1%.

For example, if an individual’s High-3 is 75,000, they worked for 25 years, and they had a 1% pension multiplier:

$75,000 x 25 x 1% = $18,750/year, or $1,562.50/month

However, keep in mind that this is your gross, or total, pension. There are many possible deductions from your FERS annuity, and most employees have at least three (survivor benefit, taxes, FEHB).

How Can I Maximize my FERS Annuity?

The first, obvious steps are to work at least 20 years with the federal government and to retire at or after age 62 – this increases the pension multiplier and the more years worked ups your overall calculations. The second is to have as high of a high-3 salary as possible.

In terms of the deductions, taxes cannot be opted out of, and it is generally advised to not opt out of FEHB since the reduction of taxes outweighs that of income in most cases. The survivor benefit cannot be waived if you have a spouse.

In terms of the other deductions, most of them involve extenuating circumstances (like life-threatening illness) or deductions relating to extended periods of leave or having been a federal employee under CSRS.

Essentially, the best advice to maximize the FERS annuity is to work over 20 years and retire as late as possible.

Social Security

This is the same as the Social Security that other citizens and permanent residents of the US enjoy. Each pay period, the government will take 6.2% of your basic pay and roll it into Social Security.

The amount that you will get from Social Security depends on the amount of money contributed over your career and length of that job. You can use an estimation calculator website for your Social Security here.

How Can I Maximize my Social Security?

Just like with the FERS annuity, the best advice is to make as much money as possible (so your contribution is higher), and to work at least to the age of 62.

Thrift Savings Plan

The Thrift Savings Plan (TSP) allows federal employees to take pre-tax dollars of their salaries and invest them into various TSP funds. While Social Security and the FERS annuity will give you fixed amounts, the TSP payout depends on how much you invested and how well it was managed.

Another unique component to TSP is that it is entirely voluntary, so you could choose not to participate in this leg of federal retirement at all. It is estimated that about half of the US Army participates in TSP.

Should I Participate in TSP?

As with most investment plans, that’s a personal decision. However, the power of compound interest with TSP investments is a great benefit. Basically, every dollar put into TSP now becomes more powerful in the future.

When it comes to taxes, you have a choice with TSP: Roth (after-tax) or traditional (pre-tax) contributions. Being able to choose how to pay taxes on your investment can be a retirement powerhouse if used correctly.

How Can I Maximize my TSP?

Overall, many financial strategists recommend TSP for the above reasons. If you are looking to maximize, here are some quick tips:

  • If early in your career, choose Roth. If you are in a lower income bracket now and believe that your career will blossom, it’s better to pay lower taxes today as compared to higher taxes upon retirement. If you’re already well into your peak earning years, traditional contributions are smarter.
  • Consider your own beliefs about taxes. If you believe that taxes will overall be higher in the future, it’s better to invest with Roth.
  • Calculate your required rate of return. Figure out how much risk you’re willing to incorporate into your TSP. It’s a good idea to start from the goal point (how much money you want to get from TSP after retirement) and extrapolate based off of how much you are putting in. This will show what percentage you need on investments to get the goal number. A 7% return is considered reasonable, but only if you’re willing to take on a higher burden of risk.
  • Learn about the funds. The G Fund is entirely protected from risk, but offers low rates of return. The S Fund has a much higher amount of risk but has a far higher potential rate of return. Learn more about the different funds here.

© 2014 KSADoctor.com. All rights reserved. This article may not be reproduced without express written consent from KSADoctor.com.

Tags: Benefits, Retirement, TSP

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Your Life Insurance Policy May Provide Value for You Now

Posted by Katie Lightfoot

There are times in our lives when we realize the importance of what we do and how good it feels to be able to helps our clients.  Our very own Thomas Raetz, knows this feeling first-hand.  Thomas has seen how a chronic illness can adversely affect a family’s financial plan.

Thomas’ client, 64, retired, a husband and a father, who suffered a stroke and also diagnosed with kidney failure has experienced a significant depletion in financial assets due to the costs of his care.  Specifically, tapping into his pension dollars to pay for his medical bills.

Wanting to help him protect his client’s family’s assets Thomas suggested his client should apply for Accelerated Death Benefits.

Accelerated Death Benefits or Living Benefit Riders allow plan holders to access income tax-free death benefits to offset costs associated with chronic or terminal medical conditions, severe disabilities or long-term care.

For Thomas’ client it helped him eliminate debt, secured is family’s financial future and saved his dignity.

Provisions for accelerated or living benefits may be included in a policy when purchased or attached as a rider.  These are sometimes referred to as “accelerated death benefits” or “accelerated benefits riders.”  Requirements vary from company to company. Some companies only charge you for the option if you use it.  Some riders add extra cost to your monthly life insurance premium; however, an accelerated death benefit rider is usually included on most term life insurance policies at no additional cost.  These riders are usually a part of only term life insurance policies, since term policies have no cash value.  A permanent life insurance policy accrues cash value, and therefore a loan may be taken against the policy to cover the kinds of expenses that would need to be covered by an Accelerated Death Benefit rider.

Death benefits from a life insurance policy are usually left behind for your loved ones when the policy holder dies.  But what if you are faced with a terminal illness?  Certain medical circumstances can trigger eligibility for early payment of all or a portion of your policy’s proceeds, including

  • Terminal illness, such as cancer, with death expected with 24 months
  • Acute illness, such as acute heart disease or AIDS, which would drastically reduce life span without extensive treatment.
  • Catastrophic illness requiring extraordinary treatment, such as an organ transplant
  • Long-term care needed because you cannot perform a number of daily living activities such as bathing, continence, dressing, eating or toileting.
  • Permanent confinement in a nursing home

Once the insured meets the health impairment criteria, benefits are approved and the elimination period (if any) has been satisfied your fund will be available.  Funds can be used for:

  • Adult daycare
  • Assisted living
  • Family care
  • Nursing home care
  • Virtually any expense, even those unrelated to the illness

In general, accelerated benefits can range from 25% to 95% of the death benefit.  The payment depends on your policy’s face value, the terms of your contract, and the state you live in.  Some companies will permit you to accelerate 100% of your policy’s face value but will reduce the amount of your benefit to compensate for the interest it loses on early payout.  Additionally, any outstanding loans against your policy will also reduce your benefit.

Each life insurance contract or rider specifies the method of payment or options.  Payments may be made monthly or in a lump sum.  Some life insurance policies will allow the policyholder to choose the method of payment.

Since life insurance is usually purchased to protect a spouse, children, or other dependents from the financial burden of a premature death, if you use all or part of your policy benefits, there may be little left for your family.  The amount paid to beneficiaries upon the policy holder’s death is reduced by the amount they received from the Accelerated benefit.  If the policy proceeds are entirely depleted, no benefit is paid after death.

In most cases, accelerated death benefits are not subject to federal income taxes.  Under the federal tax code, a terminally ill person (defined as a person having only 24 months to live) would not have to pay taxes on accelerated benefits.  A chronically ill person is usually exempt but may have to qualify for the exemption by being certified each year.  To ensure compliance with current tax laws, check with a local tax advisor.

Accelerating death benefits may affect eligibility for Medicaid.  You cannot be forced to collect accelerated death benefits from your life insurance policy before qualifying for Medicaid, but if you choose to, that money could be considered income, which might affect your Medicaid eligibility.

Some states are now passing or trying to pass legislation that requires policy owners to sell a life insurance policy to the viatical settlement market if the face value is greater than $10K.  The purpose of such laws are to lower the financial burden on the state’s Medicaid Fund by requiring Medicaid applicants to spend down all of their assets before being accepted.

If the life insurance company denies your claim for accelerated death benefits based on their eligibility requirements, there may be other options available.  Taking a loan against the policy cash value may be an option or a viatical settlement is another alternative.

A viatical settlement is an alternative to accelerated benefits by allowing a policy owner to sell their life insurance policy to a state licensed financial institution in exchange for ownership and beneficiary rights to the policy.  With a viatical settlement, a viatical settlement company buys your life insurance policy, and pays you a percentage of the death benefit upfront in exchange for the ownership and beneficiary rights.  That viatical settlement company pays all the premiums and receives the full benefits when you die.  Your beneficiaries will not receive any benefits under a viatical settlement unless specifically negotiated as a term of the settlement agreement.

 

FOR FEDERAL EMPLOYEES ONLY

If you are a federal employee and enrolled in Federal Employees’ Group Life Insurance Program (FEGLI) you or a person holding your Power of Attorney may elect to receive a lump-sum payment called a living benefit if you are terminally ill and have a documented medical prognosis that you are not expected to live more than nine months.  Eligible annuitants may elect a full lump-sum payment equal to their Basic life insurance amount, plus any extra benefit for persons who are under age 45, which would be in effect nine months after the date of the Office of Federal Employee’s Group Life Insurance (OFEGLI) receives a completed claim for living benefits.  If the life insurance is reducing, the lump sum will be the reduced amount payable nine months after OFEGLI receives the completed claim form.  Annuitants cannot elect a partial living benefit payment; this option is available only to employees.

Your living benefits payment will be reduced by a nominal amount to make up for lost earnings to the Life Insurance Fund because of the early payment of benefits.

If you receive living benefits after retirement, no Basic life insurance will be payable after your death.  Basic life insurance premiums will no longer be withheld from your annuity.  If you elected living benefits before you retired, the amount of Basic life insurance payable after your death and the premiums withheld from your annuity will depend upon the amount of living benefits you received before retirement.

Your election of living benefits has no effect on the amount of any optional life insurance you may have.  Premiums for option insurance will continue to be withheld.

For more information or further assistance you may call the Office of Federal Employees Group Life Insurance at 1-800-633-4542 to obtain Form FE-8, Claim for Living Benefits.

 

Sources:

LifeInsurance.org

Welcomefunds.com

OPM

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Long-Term Care: Most Asked Questions Answered

Posted by Katie Lightfoot
Have you thought about the consequences living a long life will have on your family?

Although everyone’s situation is unique, I can only imagine there are millions of individuals who are concerned with aging.  Either an aging parent or how they themselves are aging.  And to make matters worse are terrified at the thought of possibly needing care.  Everyone wants to preserve their lives through dignified care in their final years.  I can also only imagine that those same individuals are probably looking for a professional to guide them through unfamiliar territory of planning for their care or the care of an aging parent.  The need for long-term care is one of the biggest financial threats you could potentially face.

Let’s start by defining what Long-Term Care is.  Long-term care involves a variety of services designed to meet a person’s health or personal care needs during a short or long period of time.  These services help people live as independently and safely as possible when they can no longer perform many everyday activities on their own.

Have you thought about what your responsibilities would be as a care giver if a parent wished to receive care at home?

Independent activities of daily living include:  chores, finances and managing prescriptions.  These duties usually are performed by a family member in the form of unpaid labor and referred to as “informal care”.

But what about the daily activities of living – such as: eating, bathing, dressing and toileting?  Most care givers feel those activities are better suited for health care professionals.

Once the difference between informal and formal care are understood it is easy to recognize how Long-Term Care Insurance is really there to help the family through a difficult time.

The need for Long-Term Care must be discussed

Many families are spread out across the nation, which amplifies the need for long-term care plans. Adult children who are geographically distant from their parents, can really feel the weight of this issue.  They have careers and families of their own and sometimes cannot shoulder the burden of taking care of their parent(s) should the necessity arise.  At the same time, it is important to them that their parents are cared for.  This is an important lesson to remember as you plan your own retirement.  No one wants to be a burden on someone else.

Financing Long-Term Care is critical in any retirement plan.

People work a lifetime to accumulate a portfolio which will generate sufficient income in order to maintain their standard of living.  Therefore, their portfolio is reduced to the income it generates.  If the money saved for that standard of living does not have money allocated to pay for care, where will the money come from?  Have you thought about the tax consequences of liquidating assets in order to pay for care?  What if the portfolio needs to be sold in a bear market?

If long term care is not part of a retirement plan, a client is forced to rely on either a government program such as Medicare, Medicaid, or the Veterans Administration, or must ultimately reallocate retirement income and assets.

Long-Term Care Insurance is a professional tool that, when used correctly, can protect a family and their assets from the devastating cost of providing care.  Long-Term Care Insurance is meant to assist families, not replace them AND Long-Term Care Insurance is for long term care, not just nursing home care.

Most people don’t have enough money to pay for all long-term care costs on their own, especially ongoing or expensive services like a nursing home.  Often, they rely on a combination of resources to pay for care.  Resources such as:  personal funds, private health insurance plans, private financing options, such as long-term care insurance, life insurance policies, and reverse mortgages.  Lastly, government health insurance programs, such as Medicare and Medicaid.  However, government assistance would usually not kick in until not only that person’s assets were virtually depleted, but the assets of their spouse as well, if the assistance is even available at all.  Therefore, anyone with assets to protect may want to consider this insurance.

There are many reasons to purchase Long-Term Care insurance.

It is not unlikely you’ll one day need long-term care and if you do, it could bankrupt you.  Statistically, 70 percent of those 65 and older will need long-term care, either at home or in a nursing home.

A life-changing occurrence can occur at any age.  If you are left paralyzed at 30, you could conceivable need life assistance of some sort for the next 60 years.  If you’re covered, you could be set.  If not, it’s too late.

Cost

LTC policies are complicated and expensive and cover a risk that most of us would rather not think about.  These policies are typically defined by how long they pay benefits (in years) and how much they pay each day (maximum daily benefits).  All are different. Make sure you fully understand the payout policy on any coverage you are considering.

If you’re considering ways to reduce costs and are forced to choose between flexible benefits and the length of coverage, trim back length before cutting options like inflation protection and home care.  Exhausting even a three-year policy is pretty uncommon.  That’s because most care begins at home or in an assisted-living facility where you’re likely to be spending less than your maximum daily benefit.

Policies also come with a deductible (called the elimination period) which is typically 90 days.  However, a policy’s deductible may run 30 days, 60 or 120 days. Which means the insurance will not pay for the first 30, 60, 90 or 120 days of your care.  With the average nursing home more than $200 a day – how much of this can you afford to fund yourself?

There is no “one size fits all” solution.  Your cost for insurance protection will be based on your age and health when first applying, as well as how much coverage and what options you choose.  You will never be younger or healthier than you are today.  Planning now gives you the most options and you may be able to qualify for good health discounts.  Discounts that remain even if your health changes.

Many policies include a clause that increases your benefit with inflation, without raising your premium.  Most analysts expect costs to rise 4% each year.  Be sure to ask about it.

Shared Care options are available for couples who wish to link their policies in order to share benefits in the event one person’s benefits become exhausted.  This could be an effective and inexpensive addition.

According to Thinkadvisor.com if you live in Kansas or Missouri consider yourself somewhat lucky.

Kansas ranks 11th least expensive for Long-Term Care Costs in 2014

Average annual cost of $42,005,

Adult day care: $18,200

Licensed home care: $41,184

Assisted Living:  $44,760

Nursing home (private room): $63,875

 

Missouri ranked 4th least expensive for Long-Term Care Costs in 2014

Average annual cost of $38,208

Adult day care: $19,500

Licensed home care: $43,472

Assisted Living:  $30,000

Nursing home (private room): $59,860

For a complete list of cheapest states and most expensive states visit:

Top 15 Cheapest States for Long-Term Care Costs:  2014
Top 15 Most Expensive States for Long-Term Care Costs:  2014

Types of policies:

While the wording may differ per policy, there are three basic categories into which care may fall:  home settings, assisted living and skilled nursing facility.  The ideal policy will cover all three since you never know which you will need.

Sometimes a complex product to understand.

Different policies dictate different reasons for the policy to kick in, such as a cognitive impairment, failure of ability to perform daily activities, and medical impairment.  But not all policies allow for all reasons, and some policies even refuse to consider medical necessity as a trigger.

When should you buy LTC?

Again, there is no “one size fit’s all” answer, but the sweet spot is in your late fifties.  The longer you wait the higher your premium will be.  A lifetime policy that costs a 55-year old couple $4,800 would cost $6,400 for 60-year olds.  Your risk of being turned down as you age also goes up.  In your 50’s you have a 1-in-7 chance of not qualifying.  In your 60’s there’s a 1-in-4 chance says the American Association for Long-Term Care Insurance.

Who should buy LTC?

For many purchasers it is the ability to preserve assets to pass on or to protect a spouse’s lifestyle.  If you have assets of at least $250,000, not including your home to protect, you should consider purchasing Long-term Care Insurance.

Why now?

Because changes in health happen and can make it impossible for you to obtain coverage.

As always with insurance, you hope you never need it.  But what if you do????  And worse yet, what if you had the chance to plan for it – but you didn’t??

 Got a Question

What’s my next step?

Find out what coverage costs

See if you can qualify

Ask what discounts you qualify for

Contact Benchmark Financial Group

 

Sources:

NIH Senior Health

American Association for Long-Term Care Insurance

Think Advisor

 

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Life Events – What Are They? And How Do They Affect Your Retirement and/or Health Benefits (for Employees and Annuitants)

Posted by Katie Lightfoot

Everyone has heard the phrase “Life Events” but do you really know what they are?  A life event can be explained as an important change, they include:

You move

You get married

You divorce

Your child reaches age 26

You reach age 65

Your spouse dies

Your former spouse dies or remarries before age 55

You die

All of the above will be address in this article.

 

Other qualifying events are:

You have a baby (or adopt)

You acquire a step-child or a foster child under age 26

Your child dies

You want to change your beneficiary designations

You want to assign your life insurance

You become disabled

You are terminally ill

You are injured on the job

You cannot handle your own money

 

Various life events may cause you to want to take actions concerning your benefits.  I will address each issue as they are listed above:

You move:   It is vital that you give your agency your new address especially if you have payroll checks or annuity payments mailed.   If state income tax is withheld, and you move to another state, you will need to stop tax withholding for the current state and authorized withholding for your new state.  Your new address will also be needed for benefits information and/or 1099R statements to be mailed to you.

Health Coverage:  You should contact your agency personnel office to review your benefit plan and confirm your service area.  You may need to complete Standard Form (SF) 2809 to change your health plan.  You have 60 days from the date of the event to make a health benefit change.

Vision and dental benefits are administered through BENFEDS and can be reached at 877-888-3337.

Change in financial institution:  You will need to give your agency the name, routing number and your account number at the new financial institution.  However, always leave your old account open until you know your payment are going into your new account.

 

You get married:  A copy of your marriage certificate showing the date of your marriage and the name of your new spouse will be needed along with their, date of birth, and Social Security.  If you want/need your name to be changed in the agency’s official records you will need to ask your agency personnel office to prepare the personnel action to do this.  You may also want to make changes to your family health benefits enrollment.  You have from 31 days before your marriage to 60 days afterwards to do this.  Otherwise, you will be required to wait until the next health benefits Open Season.  You will also need to complete a SF 2809.  If you already have a “family plan”, contact your carrier to include your new spouse (and if appropriate, step-children) in the coverage.

You may also want to change your Federal and State income tax withholding and/or request information about:

Beneficiary designations for life insurance or retirement; Standard Form 2808, Designation of Beneficiary (CSRS), Standard Form 3102, Designation of Beneficiary (FERS), and Standard Form 2823, Designation of Beneficiary, Federal Employees’ Group Life Insurance.

 

Or

Survivor annuities:  If you want to provide a survivor annuity for your new spouse, you must notify OPM within two years after the date of the marriage.

 

You divorce.  When you divorce, your spouse is no longer a family member and cannot be covered under your family health benefit.  However, your children can continue coverage.  Contact OPM, if your court order instructs you to continue to provide health benefits coverage for your former spouse.  You will have 60 days from the date of the divorce to do so.

A certified copy of your Divorce Decree (court order) and all attachments must be mailed to the U.S. Office of Personnel Management (OPM).  The federal employee’s name, federal employee’s social security number and date of birth of the federal employee will also be needed.

Other items to consider would be a change to your Federal and State income tax withholding.  As well as any change to your designation of beneficiary for life insurance or for retirement.  Standard Form 2808, Designation of Beneficiary (CSRS), Standard Form 3102, Designation of Beneficiary (FERS), and Standard Form 2823, Designation of Beneficiary, Federal Employees’ Group Life Insurance.

If the court order states that you must provide a part of your future annuity, and/or survivor annuity to your former spouse your former spouse (personally or through a representative) must apply in writing to be eligible for the court-awarded portion of an employee annuity.

Note:  A court order may require you to assign your life insurance to your ex-spouse.  This court order may pre-empt the order of precedence in the payment of benefits.  See pamphlets Court Ordered Benefits for Former Spouses, RI 84-1 and Assignment of FEGLI Insurance Form, RI 76-10.   WARNING! This form permanently transfers ownership of your
FEGLI insurance to another individual, trustee, or corporation (however, premiums continue to be withheld from your salary/annuity). An assignment is irrevocable, and cannot be changed later. DO NOT USE THIS FORM if you only wish to designate a beneficiary to receive your life insurance. Instead, use the available designation of beneficiary form.

To read more about this issue see the article on our website:  RETIREMENT AND THE ISSUES SURROUNDING A DIVORCED FEDERAL EMPLOYEE.

 

Your child reaches age 26.   Children who are age 26 and older cannot be covered by your family health benefits coverage (unless the child is disabled before turning age 26).  However, if you wish, you may obtain temporary coverage for up to 36 months.  Contact OPM within 60 days after the child reaches age 26.  OPM Pamphlet RI 79-2 has more detailed information.  Warning You will not be informed by OPM or by your health insurance carrier when a family member loses eligibility for coverage.

 

You reach age 65.  Since you have reached that magic age, you are now eligible for Medicare.    Contact the Social Security Office (800-772-1213) and apply for Medicare immediately to avoid any penalties.  The decision to sign up is voluntary during specific enrollment periods.  If you don’t sign up when you are first eligible, you may have to pay a late enrollment penalty from the time you apply until your death..  The late enrollment penalty will change each year but will be included in your premium for as long as you maintain the coverage.  Employees 65 and older can get Medicare Part A benefits at no cost; however, you will pay a premium for Part B.  You first become eligible for Medicare Part A and/or Part B during the 7-month Initial Enrollment Period.  If you’re eligible when you turn 65, you can sign up during the 7-month period that begins 3 months before the month you turn 65, includes the month you turn 65, and ends 3 months after the month you turn 65.

To read more about Medicare and the decisions you need to make see our article:  Are You Between 777 Months Old and 783 Months Old?  If so, You Have Important Decisions to Make.

At this point you may decide to change your health benefits enrollment to a less expensive plan.  This change may be made 30 days before you are 65 or at any time thereafter.

Your life insurance under the Federal Employees Group Life Insurance Program will start to reduce at the rate of 2% per month, and/or your Basic life Insurance will reduce to 25% of its face value.  For more detailed information see: Information for Retirees and Their Families RI 76-12

 

Your spouse dies.  A copy of your spouse’s death certificate must be provided.  Items that may change due to your spouse’s death are:  Survivor Annuity, life insurance, health benefits, federal and state tax withholding.  You will need to contact your agency payroll office to complete the necessary federal and state tax withholding forms.

If you are receiving a reduced annuity in order to provide a survivor annuity for your spouse, your annuity may be able to be increased after the death certificate is provided.

Option C – Family Life Insurance coverage.  If your spouse is covered by Option C you will need to complete and file a claim for benefits (Form FE6-DEP).  If no other family members are eligible for this coverage you should cancel Option C.  This can be done at any time – but it is not automaticStandard Form 2817 will cancel Option C.

If a change in beneficiaries is needed for life insurance or for retirement due to the death of a spouse, this must be done in writing on the appropriate forms.  Standard Form 2808, Designation of Beneficiary (CSRS), Standard Form 3102, Designation of Beneficiary (FERS), and Standard Form 2823, Designation of Beneficiary, Federal Employees’ Group Life Insurance.

Health benefits:  You may want to change to self-only enrollment if no other family members are eligible for health benefits.

 

Your former spouse dies or remarries before age 55.  OPM will require proof of the former spouse death or the marriage certificate as they may be able to increase your annuity after proof has been provided.

You may also want to change your Federal and State income tax withholding and/or request information about:

Beneficiary designations for life insurance or for retirement use Standard Form 2808, Designation of Beneficiary (CSRS), Standard Form 3102, Designation of Beneficiary (FERS), and Standard Form 2823, Designation of Beneficiary, Federal Employees’ Group Life Insurance.

 

You die.  OPM should be contacted immediately for many reasons:  (1) it is illegal to cash annuity checks made out to you, (2) it is illegal to withdraw money OPM has deposited into your account after your death; or to use funds remaining on any Direct Express Debit Mastercard.  Upon receipt of a copy of your death certificate, all the necessary forms will be sent to your family or representative with full instruction about how to proceed.

Family Health benefits will also need to be changed.

 

Sources:  OPM website and pamphlets

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Five Secrets for Long-term Financial Success

Posted by Katie Lightfoot

By Rhiannon Williamson

Future financial success is not a guarantee that any one of us can rely upon, no matter how wealthy we are now or intend to become.

There are however five future proofing financial steps that we can take to protect our current financial status, improve our future financial prospects and secure our long-term financial success.

1) Know The Different Between Good Debt & Bad Debt

Bad debt is any debt that accrues interest month after month on outstanding balances and includes credit card debt of course, which is now the most common type of bad debt that we are all burdened with. Other examples of bad debt include store card debt, home secured loans other than your mortgage and any money borrowed from lenders dealing with high risk borrowers as they charge the highest rates of interest and have the most restrictive and inflexible terms and conditions.

Good debt is really only your mortgage, although some people would argue with me and include car finance in this category even though a car is not an essential item for most people – if we’re honest with ourselves! Good debt in the form of your mortgage enables you to afford the roof over your head and for most of us it is the only way we will ever be able to afford a home.

A mortgage with an attractive and affordable interest rate will of course cost you money but at the same time it enables you to purchase a capital growth appreciating asset that you can later sell and redeem cash from or pass to your heirs upon death and that will be a positively tangible asset to benefit their financial futures.

2) Get Out Of Bad Debt

Examine all of the bad debt you have and prioritize the amounts to be paid off first by beginning with the most expensive debt in interest and charge terms. Every month pay off as much as you can afford from your number one debt and proceed with this approach right through every bad debt you have until you have no outstanding amounts remaining.

Then – take on no new bad debt! Keep out of credit card and loan hell.

3) Pay Off Your Good Debt

Having worked hard for as long as it takes to pay off all of your bad debt you can now turn your attention to your mortgage – some mortgage lenders penalize for early repayment so consider re-mortgaging if you can get a better or same rate of interest and you won’t incur arrangement fees, or try to arrange new terms with your current lender that will allow you to make regular lump sum repayments.

The shorter the life of your debt the less interest you will pay and the sooner you will own your own home – your most significant financial asset – outright. This will give you massive security and also free you up financially to enjoy life to the full and save more towards your retirement.

4) Save For Retirement

Most governments of the civilized world reward their citizens with tax breaks on retirement savings made. Furthermore many conscientious employers add to an employee’s contribution to a works pension scheme. Find out what benefits you’re entitled to and get a retirement savings plan in place immediately. It is never too early to start saving for retirement.

Whilst paying off your debt is an essential step on the road to long-term financial success, so ensuring your future is secured through saving today for your own financial wellbeing is an essential step. After all, if you don’t look after your best interests, no one else will.

Put as much as you can possibly afford each month into the best savings or investment product to suit your requirements and circumstances – and start today.

5) Protect Your Personal & Financial Assets

Insure your life, your family, your health, your business and your home – then use the services and advice of qualified taxation and trust professionals to find out whether there are legal and legitimate ways in which you can reduce your overall taxation burden and your estate’s future inheritance or death taxation burden.

Look after your personal interests today and ensure that your financial assets are protected for life.

 

About the Author:
Rhiannon Williamson is a freelance writer whose many articles about onshore saving and offshore investing have appeared in financial publications around the world. Visit this link to read her latest articles about Offshore Investment

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How To Keep Your Health Up and Costs Down

Posted by Katie Lightfoot

No matter your age, you can help keep your body healthy and your money out of the health care system by eating right, exercising and avoiding habits that contribute to chronic illness.  Having the appropriate insurance may also help your bottom line more than you think.  Follow this guide to see if you have what you need at various stages in life.

20′s

Younger people tend to have fewer medical issues, but that doesn’t mean you should ditch health insurance altogether.  To save money while making sure you’re covered, consider a qualified high-deductible plan.  Also known as a catastrophic health plan, this type of insurance typically covers costs for serious illness or unexpected accidents.  But you’re responsible for minor or routine expenses.  You’ll pay a lower monthly premium and a higher deductible than with a traditional plan.  It also comes with a powerful triple tax benefit:  Not only are contributions tax-deductible, but earnings and qualified withdrawals are tax-free too.

Here’s another option:  If you’re an unmarried dependent who doesn’t have access to employer-sponsored health care, you can stay on your parents’ health plan until you turn 26.

30′s

Consider broadening your coverage.  You may want to supplement your regular health insurance with accident insurance.  It can help cover emergency treatment and related expenses, such as transportation and lodging, if you or covered family members are injured.

While a health plan may cover much of your treatment costs, a critical illness plan typically pays a lump-sum benefit if you’re diagnosed with a significant illness or suffer a heart attack or stroke.  It may provide extra money for things like child care and housecleaning while you’re on the mend.  The benefits provided by accident and critical illness insurance help take away the financial stress so you can focus on recovering.

Health insurance can pay some of your medical bills, but what about the income you could lose if you become seriously sick or are injured and can’t work?  That’s what disability insurance is for.  Your employer may provide some coverage, but it usually isn’t portable, so consider a personal policy you can take with you if you quit or lose your job.

Consider a flexible spending account.  Your employer may offer one of these tax-advantaged plans that let you use pretax dollars to pay for medical expenses and dependent care, too.

40′s

While it’s smart to begin saving for retirement in your 20′s, most people start to focus a little more on the specifics once their 40′s roll around.  As you start crunching the numbers more seriously, be sure to factor health care costs into your assumptions about your spending needs in retirement.  Out-of-pocket expenses for a 65-year old couple could suck hundreds of thousands of dollars from a retirement nest egg, according to the Employee Benefit research Institute.

Start learning about long-term care insurance.  If you equate long-term care insurance with nursing home coverage, thing again.  While it can cover those costs, it generally does something even more appealing – help give you the resources you need to stay in your home.

50′s

Stop putting off long-term care insurance.  Long-term care expenses can pose a real threat to your retirement savings and lifestyle.  This insurance can be flexible in its design – you can typically vary the features of the policy to stay within a budget while still reducing risk to your assets.

If you’ve become a caregiver for a parent or other family member, tap into information resources such as care.com or those provided by the National Alliance for Caregiving to make your role as easy as possible.

60′s

Don’t go without.  If you retire early and lack employer-provided health insurance, don’t be tempted to cut costs and skip insurance until you’re eligible for Medicare at 65.  Consider buying an individual policy to bridge the gap, if you have no other option.  To avoid making important decisions under pressure, learn about your Medicare choices well before you have to make them.

 

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Thrift Savings Plans (TSP) Benefits and Challenges

Posted by Katie Lightfoot

by Carol Schmidlin for FedSmith

What can we expect from the markets and economy in the coming years and how will this affect decisions about investing in TSP? TSP is such an important component of your retirement plan and it is up to you, the contributor to utilize it to it’s fullest potential. It has been referred to as the model for 401(k) plans, however, like any type of investing “one size does not fit all,” so it is important that you have the knowledge to make prudent decisions based on your personal situation.

The Benefits:

  • There are huge economies of scale among the 5 TSP funds. While keeping it simple, it’s participants are still given exposure to the entire U.S. stock market, most of the international market, the U.S. bond market and a special government fund that yields long term bond returns without any loss of principal.
  • Access to the various Lifecycle funds, each consisting of the five (5) primary funds in varying portions, which become more conservative over time.
  • You are in control of how much to contribute up to the IRS limits: $17,500 for 2014, plus an additional catch-up of $5,500 if you are age 50 or older.
  • If you are in FERS the government matches your annual contributions up to 5%. Contributing less than 5% basically means you are giving up free money.
  • You have a choice of contributing to the Traditional TSP and getting a tax deferral on your contribution now, or contributing to Roth TSP and paying tax in today’s known tax rate environment. The goal of the Roth TSP is to accumulate and compound your earnings into a harvest of tax-free money.
  • TSP has one of the lowest expense ratios of any defined contribution plan.

The Challenges:

  • Managing your TSP is your responsibility. It is not enough to merely contribute to TSP, you need to determine what is the best investment strategy for your own goals and risk tolerance.
  • Knowing how much risk you can tolerate.
  • How should you allocate the TSP funds given your goals along with the current and future market conditions?
  • When the stock market is doing well and the TSP funds are going up, all is well. But when we are in a down or sideways moving market are there any protection strategies that can be used?
  • How do economic concerns such as: Unemployment; Fed Tapering; higher stock valuations; Euro crisis; housing rebound; The Affordable Care Act and other worries impact the TSP funds?

I am often asked what is the best approach to take in managing one’s TSP. You should first determine what approach you are going to take: a tactical or a strategic investment method. Either approach may be right for you, but it might help you to know the basic differences before choosing.

Tactical Investing

Tactical investing is a short-term approach that uses current information to determine the right tactic for an investment portfolio. This information may be drawn from market movements, specific indices, sectors, or countries. It may involve taking a long (ownership) position or using short (leveraged) positions. The tactics change as the information changes. There are many different tactical approaches to investing.

Here’s an example of a typical tactical investing strategy using the TSP:

As the pressure of rising interest rates continues to increase, it will have a direct impact on bonds in your portfolio. Over the past 15 years, the F Fund has generated solid returns and has been a cornerstone of protection for many federal employees. As the winds of change are upon us, a tactical investor with the view that interest rates could continue to rise might suggest finding better protection and potential value out of reducing this type of exposure and reallocating those assets to a position that does not have as much interest rate sensitivity, such as the G Fund.

At any given time, analysts believe certain sectors or asset classes are overvalued and that others are undervalued. Tactical investors and tactical investment managers follow this type of analysis and buy the undervalued sectors and avoid those that are overvalued.

Tactical investing requires ongoing monitoring and continuous analysis of the markets. If you do not have the knowledge or the time to do this on your own, it may help to work with a professional financial advisor. You will want to make sure the advisor is very familiar with the TSP funds, your personal objectives and risk tolerance, and can help you make smart decisions with your portfolio.

Strategic Investing

Strategic investing is a long-term approach based on asset allocation and Modern Portfolio Theory.* Strategic investors use long-term market characteristics to build portfolios they believe will equal the markets return over time periods of 5 years or more. Strategic investors generally use a passive approach composed of index funds.

Here’s an example of a typical strategic investing strategy:

An investor or investment manager builds an asset allocation of 50% equities, 45% bonds, and 5% cash.

Over the long term, the strategic investor allows this balanced position to play out. Knowing that they are well diversified and will be exposed to both good markets and bad markets, they count on a nice return through a full market cycle. They simply rebalance the portfolio periodically to maintain the 50%, 45%, 5%, weightings.

Combining Tactical and Strategic Investing

Both approaches have devotees who believe their method is better than the other. My belief is that most investors benefit by combining a strategic long-term asset allocation strategy with a shorter term, more actively managed tactical approach. The strategic approach helps investors find a balanced, diversified portfolio. The tactical approach offers the possibility of beating the market by being more defensive when asset class valuations are high and more aggressive when valuations are low. This combination of tactical and strategic methods is often referred to as “Core and Explore” investing. It provides the stability of the strategic approach with the potential benefits of tactical investing.

If any of these challenges affect you, you are not alone. TSP is an awesome tool to help you meet your retirement goals. Getting good information and knowing what to do with it can be both difficult and time consuming! So, where do you start?

* Modern portfolio theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. This is possible, intuitively speaking, because different types of assets often change in value in opposite ways. Source: Wikipedia.org

© 2014 Franklin Planning. All rights reserved. This article may not be reproduced without express written consent from Franklin Planning.

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Ask the Pharmacist: Expert Advice for Navigating Medicare Part D Enrollment.

Posted by Katie Lightfoot

If you’re confused about health care reform and Medicare you’re not alone.  Thousands of Americans are looking for answers too.

A new survey from Express Scripts titled “Fifty States of Confusion,” confirms that seniors are misinformed about how leath care reform will impact their Medicare benefits.

“It’s worrisome; one-in-five seniors think they’ll be able to enroll in health or prescription drug plan through a public health insurance exchange,” says Paul Reyes, an Express Scripts’ pharmacist and host of Ask the Pharmacist radio series.  “These exchanges are part of the Affordable Care Act, but are only for uninsured people under the age of 65.”

Although Medicare Part D has been around since 2006, with some states offering upwards of 36 different plans, the survey revealed that 60 percent of seniors still think that choosing the right Medicare plan is confusing.  And with more than half of seniors falsely believing they’ll be paying more for their prescriptions drugs as a result of health care reform, they are taking matters into their own hands.

“Seniors are skipping doctor’s appointments, delaying medication refills and skipping medication doses,” say Reyes.  “These misconceptions may not only cost seniors, but could also lead to decisions that may be bad for their health.”

Whether you are preparing to enroll into Medicare Part D plan or you’re helping a family member or friend, Reyes provides some tips to simplify the process.

1.  Know the basics:  You are eligible for Medicare Part D when you turn 65.  Each year during the Annual Enrollment Period, it’s smart to review your current prescription drug plan and compare it against other available plans in your area. Plan details and your healthcare & prescription needs can change, and you might just find a better option. Enrollment for 2014 has ended, unless you’re turning 65 this year. The next Annual Enrollment Period is October 15 through December 7, 2014, for coverage to begin January 1, 2015.

2.  Do your homework:  Consider the premium, deductible and co-pays when assessing the overall cost of the plan.  Make sure that the drugs you need to take are on the plan’s formulary (the list of covered medications).  Also, look at the plan’s network of pharmacies.   Some plans, like the Express Scripts Medicare Choice Plan, offer a preferred pharmacy network, which would save you money.

3.  Care and convenience:  Consider a plan with round-the-clock pharmacist access to help you get the support you need and the savings you want from your plan.  Pharmacists can identify shortcuts to help you stick to your treatment regimen and avoid potentially harmful drug interactions.

4.  Making the most of your Medicare dollars:  To achieve the most valuae from your Part D plan, make sure to take your medications as prescribed, use generic medications when clinically appropriate, ask about home delivery and take advantage of the free preventative screening and vaccinations under Medicare Part B.

To help seniors and caregivers make informed decisions Express Scripts’ developed a consumer eGuide titled “Navigating Medicare and Reform: A Roadmap for Seniors and Caregivers,” available at www.roadmapformedicare.com.  Seniors can also visit www.medicare.gov to learn more about the available Medicare Part D plans in their region.

 

 

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Are You Between 777 Months Old and 783 Months Old? If So, You Have Important Decisions to Make.

Posted by Katie Lightfoot

Life begins at 65.  And if you figured out that at age 65 you have lived 780 months you probably also figured out that you are now eligible for Medicare.  But what if you have FEHB.  Should you still sign up?  The decision to sign up is voluntary during specific enrollment periods.  If you don’t sign up when you are first eligible, you may have to pay a late enrollment penalty.  You first become eligible for Medicare Part A and/or Part B during the 7-month Initial Enrollment Period.  If you’re eligible when you turn 65, you can sign up during the 7-month period that begins 3 months before the month you turn 65 (or 777 months old), includes the month you turn 65, and ends 3 months after the month you turn 65 (or 783 months old).

If you do not apply for one or more parts of Medicare, you can still be covered under the FEHB program.  Your FEHB premiums will not be reduced if you enroll in Medicare.  The cost will not change even when Medicare becomes the primary payer.  Currently, they will remain the same unless you change to another plan or option.

Medicare:

Medicare is our country’s health insurance program for people who are:

  • 65 years of age or older;
  • Under 65 years with certain disabilities, such as, amyotrophic lateral sclerosis (Lou Gehrig’s disease); and
  • Any age with end stage renal disease (permanent kidney failure requiring dialysis or a transplant).

The program helps with the cost of health care, but it does not cover all medical expenses or the cost of most long-term care.

Different types of Medicare plans help pay for different types of coverage, depending on the plan or plans you choose.  Medicare has 4 parts.

Part A:  Hospital Insurance.  Helps pay for medically necessary inpatient hospital care, inpatient care in a skilled nursing facility, home healthcare and hospice care.  Thanks in part to all the payroll taxes you paid while employed, you likely won’t have to pay a monthly premium for Medicare Part A.  However, there will be a yearly deductible.  Part A pays about 80 percent of your Medicare-approved costs.  For 2014, the deductible is $1,216 for the first 60 days of hospital care and a daily coinsurance amount (approx. $304/daily) for hospital care each day from the 61st day up to a 150 day admission.  But Free is Free.  If you are entitled to part A without paying the premiums why wouldn’t you take it?  Even if you are still working.  It will help cover some of the out-of-pocket costs your FEHB plan doesn’t.  Such as:

  • Deductible
  • Coinsurance and
  • Charges that exceed the plan’s allowable charges.

Medicare also generally does not cover inpatient hospital care received outside the U.S.

Part B:  Medical Insurance:  Helps pay for medically necessary doctor’s services, outpatient hospital services and a number of other medical service and supplies that are not covered by Part A.  Most people pay monthly for Part B.  For 2014, the cost is $104.90 each month with a deductible of $147 per yearMedicare Part B pays 80% of most approved physician charges after you pay the annual deductible.  Current law requires some individuals to pay a higher amount for Parts B and D based on their income.  Word of caution:  If you wait 12 months or more, after first becoming eligible, your Part B premium will go up 10 percent for each 12 months that you were eligible for Part B coverage.  You will pay that extra premium for as long as you have Part B.  However, if you didn’t take Part B at age 65 because you were covered under FEHB as an active employee, you may sign up for Part B (generally without an increased premium) within 8 months from the time you or your spouse stop working.  Your FEHB coverage will be your primary coverage until you retire.

The following chart shows when your Medicare Part B becomes effective:

If you enroll in this month of your initial enrollment period: Then your Part B Medicare coverage starts:
One to three months before you reach age 65 The month you reach age 65
The month you reach age 65 One month after the month you reach age 65
One month after you reach age 65 Two months after the month of enrollment
Two or three months after you reach age 65 Three months after the month of enrollment

 

Part C:  Medicare Advantage/Your Private Insurance Plan.  Covers all Medicare Part A and Part B services and allows individuals with Medicare Parts A and B to get Medicare benefits through private healthcare plans.  Medicare Advantage is the term used to describe the various private health plan choices available to Medicare beneficiaries.  You may choose to enroll in and get your Medicare benefits from a Medicare managed plan.  These plans are generally organized as HMOs or PPOs.  In most of these plans, you may go to doctors, specialists, or hospitals that are part of the plan.  Medicare managed plans provide all the benefits that Original Medicare covers.  Some cover extras, like vision and dental care.  Most, but not all, Medicare Advantage plans also provide some prescription drug coverage.

Medicare D:  Medicare prescription drug coverage.  The newest addition to Medicare offers  prescription drug coverage for individuals entitled to benefits under Part A or enrolled in Part B.  You will pay a monthly premium and sometimes a deductible, as well as copayments for your drugs.  Most Federal employees do not need to enroll in the Medicare drug program, since FEHB and Medicare will coordinate benefits to provide comprehensive coverage for a wide range of medical expenses.

Medicare doesn’t cover all the care you might possibly need.  Each part of Medicare has exclusions.  What’s not covered by Original Medicare are:

  • Your monthly Part B premium or Part C or Part D premiums
  • Deductibles, coinsurance or copayments when you get health care services
  • Outpatient prescription drugs unless enrolled in a Part C plan which provides drug coverage or a Part D plan
  • Most dental care or dentures
  • Routine or yearly physical exams
  • Routine eye care
  • Routine  hearing tests or hearing aids
  • Most care while traveling outside the US
  • Long-term care
  • Custodial care (help with bathing, dressing, eating, etc)
  • Cosmetic surgery
  • Most chiropractic services
  • Routine foot care or orthopedic shoes
  • Acupuncture

 

So who pays first?

Medicare law and regulations determine whether Medicare or FEHB is primary.  As stated earlier, Your FEHB coverage will be your primary coverage until you retire.  Your FEHB plan must also pay benefits first, regardless of your employment status, due to End Stage Renal Disease (ESRD).  Unless Medicare was your primary payer on the day before you became eligible for Medicare Part A due to ESRD.

When you or your covered spouse are age 65 or older and have Medicare and you:

Have FEHB coverage on your own or through your spouse who is an active employee or a reemployed annuitant and your position is not excluded from the FEHB – FEHB is the primary payer

 

Have FEHB coverage on your own as an annuitant or through your spouse who is an annuitant or are a reemployed annuitant and your position is excluded from the FEHB – Medicare is the primary payer

Are enrolled in Part B only, regardless of your employment status – Medicare is responsible for Part B services and FEHB for other services

 

When you or a covered family member are eligible for Medicare solely due to disability and you:

Have FEHB coverage on your own or through your spouse who is an active employee or a reemployed annuitant and your position is not excluded from the FEHB – FEHB is the primary payer

 

Have FEHB coverage on your own as an annuitant or through your spouse who is an annuitant or are a reemployed annuitant and your position is excluded from the FEHB – Medicare is the primary payer

 

TRICARE:

TRICARE is the health care program for service members (active, Guard/Reserve, retired) and their families around the world. TRICARE is a major part of the Military Health System that:

  • Combines the resources of military hospitals and clinics with civilian health care networks
  • Provides access to high-quality health care
  • Supports military operations

For retired military or military spouses who want to find out how your retiree coverage works with Medicare, you should obtain a copy of your plan’s benefit booklet, or look at the summary plan description. You can also call your benefits administrator and ask how the plan pays when you have Medicare.

 


 

FOR MORE INFORMATION:

The SHINE program provides free, unbiased and up-to-date health insurance information, counseling and assistance to Medicare beneficiaries of all ages and their caregivers. The SHINE counselors help older persons (and younger disabled Medicare beneficiaries) understand their Medicare benefits and other health insurance options.    https://shipnpr.shiptalk.org

 

To help you further understand your FEHB and Medicare please contact:  www.fepblue.org/contact/customer-service/local-plan.jsp to find the resources in your area.

 

TRICARE  information can be found at: http://tricare.mil//.

 

Regardless of the plan you use, contact the plan provider and ask how your FEHB Plan works with Medicare.  You should be able to find contact information on your insurance card or plan’s benefit booklet.

 

Sources: 

Medicare.gov

OPM.gov/insure

Socialsecurity.gov

BC/BS Federal Employee Program

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Behind in Saving for Retirement? Approaches to Catching Up

Posted by Katie Lightfoot

Does the pace of your busy personal and professional life leave you feeling like you’re always playing catch up? From finally reading that best-seller that’s been sitting on your book shelf for a year to getting a solid eight hours of sleep to making sure you have enough money set aside for the future, it can be difficult to regain lost ground. If you were among the millions whose retirement savings and investments suffered during the recession, there’s good news: you can start to catch up with a few simple steps.

On average, baby boomers say they have saved or invested $275,000 for retirement, but believe they’ll need a median of $750,000 to live comfortably, according to a Boomers & Retirement Survey released by TD Ameritrade, Inc., a broker-dealer subsidiary of TD Ameritrade Holding Corporation. That means some boomers may face a shortfall of nearly a half a million dollars as they head into retirement.

Smart retirement planning, thoughtful choices and a handy -option called a “catch-up contribution,” can help boomers regain ground lost during the recession. A catch-up contribution allows people older than 50 to increase their contributions to their IRA or employer-sponsored retirement plans beyond the usual limits for such tax-deferred retirement plans.

Anyone approaching retirement should consider different opportunities, like catch-up contributions, that might make sense for their retirement investing plans. These catch-up contributions could help workers 50 years and older save thousands more – perhaps even hundreds of thousands of dollars more – toward their retirement. When planning for retirement, every dollar counts, especially when it’s going into a tax-deferred vehicle.

Guidance for baby boomers approaching retirement:

* There is no standard target amount for retirement. When setting a target for your retirement investing or savings, you need a realistic idea of how much you’ll need to maintain the standard of living you desire in retirement. Online calculators and tools, like those found on TD Ameritrade’s online retirement center can help you set goals by exploring various real-world scenarios that might impact your assets over time and at retirement. For example, do you have health challenges that may create medical expenses? Perhaps you and your spouse would like to travel when retired. Different objectives and circumstances will influence how much you’ll need to save in order to live comfortably.

* Don’t rely on Social Security benefits, but don’t overlook them, either. They should be a part of your overall retirement plan, but not the heart of it. Unfortunately, 65 percent of retired boomers said they rely on Social Security benefits, and nearly one-third said they wouldn’t be able to live comfortably without these payments, according to TD Ameritrade’s survey. The best way to avoid having to rely completely on Social Security is to set a retirement savings goal and work toward it prior to retiring.”

* Take advantage of catch-up contributions. As long as you will be 50 (or older) by the end of the calendar year, you may be eligible to contribute an extra $1,000 per year toward your IRA until you turn 70 (which is the last year to contribute to a traditional IRA). If you save an additional $1,000 per year for 20 years and get a 5 percent rate of return, you could have an additional $34,719 toward retirement. Fully fund your IRA with $6,500 a year between ages 50 and 70, and that could amount to an additional $225,675 for retirement.

Remember, it is never too late to start planning for retirement. If you experienced financial setbacks that stalled your retirement efforts, it may just mean you have to adjust your retirement expectations, work a little longer or think of other means of support that you may have not considered before. But it’s never too late to get started.

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The Best Day to Retire in 2014

Posted by Katie Lightfoot

by John Grobe for FedSmith

The concept of a “best” day to retire is more often than not related to financial considerations, specifically maximizing your lump-sum annual leave payment.  If you do not carry over a lot of A/L from year to year, or if you just want to retire absolutely as soon as you can, your “best” day may very well be different from the ones we mention in this article.

Using 2014 as an example, let’s look at the lump-sum leave payment.  One of the biggest reasons that employees choose to retire around the end of the year is to cash in a large amount of use or lose leave.  Assume we have an employee who earns 8 hours of A/L per pay period and carried over 240 hours of annual leave into the 2014 leave year.  If that employee manages not to use a single hour of the 200 hours of annual leave they will have earned by 12/31/2014, they will have a balance of 440 hours of annual leave for which they will be paid in a lump sum shortly after they retire.  (Shortly generally means four to six weeks).

The lump sum payment will be received in 2015 when, presumably, the retiree will be in a lower tax bracket.  Retirement contributions (currently 7% for CSRS and .8% for CSRS Offset and FERS) will not be deducted from the lump sum payment, neither will insurance premiums nor TSP contributions.  This will result in a larger payment, though your payroll office might withhold taxes at a higher rate than normal.  The increases in FERS contributions for employees hired after 01/01/2013 (3.1%) or 01/01/2014 (4.4%) are extremely unlikely to affect anyone who is eligible to retire at the end of this year.

When your payroll office computes the lump sum payment, they do it by looking at how much money you would have received if you began taking your annual leave on the first workday after you retired and continued to take it until it was used up.  If there is a salary increase for federal employees, all or most of your lump sum payment will be computed using a slightly higher salary; resulting in a slightly higher payment.

The leave year ends on a different date each year, often resulting in a different “best” day to retire from year to year.  Usually the “best” day is different for employees in CSRS and FERS due to different rules that affect the starting date of annuities.

Under the FERS system, an employee must be off the rolls for an entire month in order to receive an annuity for that month.

  • A FERS employee retiring December 31, 2014 will receive their first annuity payment on or about February 1, 2015, and the payment will represent the January annuity.
  • A FERS employee who waits until January 3, 2015 to retire will receive their first annuity payment on or about March 1, 2015, and the payment will represent the February annuity.  The employee is not entitled to any payment for January, as they were not off the rolls for the whole month.

Under the CSRS system, an employee must be off the rolls no later than the 3rd of the month in order to receive any annuity for that month.

  • A CSRS employee retiring December 31, 2014 will receive their first annuity payment on or about February 1, 2015, and the payment will represent the January annuity.
  • A CSRS employee who waits until January 3, 2015 to retire will receive their first annuity payment on or about February 1, 2015 and the payment will represent the annuity payment for January 4th through January 31st.  CSRS employees who retire up to, and including, the 3rd of any month are entitled to a pro-rated annuity for that month
  • A CSRS employee who waits until January 4, 2015 to retire will receive their first annuity payment on or about March 1, 2015, and the payment will represent the February annuity.  The employee is not entitled to any payment for January, as they were not off the rolls by the end of the day on the 3rd of the month.

The above rules have resulted in a general rule that FERS employees should retire on December 31st and CSRS employees should retire on January 3rd if they wish to maximize their lump-sum leave payments.  Of course, general rules have exceptions and, back in 2010 and 2011, January 3rd was not the “best” date to retire for CSRS employees as, in those years, the leave year ended prior to January 3rd.

The following chart shows the “best” days to retire from 2014 through 2020.  Exceptions are noted and they are explained below the chart.

Leave Year Ending Date Best for CSRS Best for FERS
2014 01/10/2015 01/03/2015 12/31/2014*
2015 01/09/2016 01/03/2016 12/31/2015*
2016 01/07/2017 01/03/2017 12/31/2016
2017 01/06/2018 01/03/2018 12/31/2017
2018 01/05/2019 01/03/2019 12/31/2018
2019 01/04/2020 01/03/2020 12/31/2019
2020 01/02/2021 01/02/2021 12/31/2020

In 2014 and 2015, FERS employees who have a lot of federal service and carry-over a lot of annual leave may want to crunch some numbers to see if working to the end of the leave year and forgoing a January annuity is to their advantage.  They should calculate the amount of salary and the lump-sum payment they will receive by working until the end of the leave year and compare it with amount of the January pension and the lump-sum payment they would receive if they retired on December 31st.  Here is an example for 2014:  Bill is a FERS employee who is eligible to retire with 30 years of service and a “high-three” of $75,000.

If Bill retires on 12/31/14, his monthly unreduced annuity will be $1,875 (using the 1% multiplication factor).  He will receive payment for 440 hours of annual leave (assuming a carry-over of 240 hours and no leave used during the year, a leave accrual rate of 8 hours a pay period gives him an additional 200 hours as of the date of his retirement).  At $35.94 an hour, the 440 hours will be worth $15,813.60.

Using the same assumptions, if Bill waits until 1/10/2015 to retire, he will earn $2,012.64 for working 7 days into January (OK, working 6 and getting paid for the New Year holiday). The salary he earned is greater than the annuity he would have collected for January had he retired on 12/31/2014.  He will receive a larger lump-sum annual leave payment as well; it will be for 448 hours of annual leave (as he has completed the 26th pay period), giving him $16,101.12.

In this circumstance it is slightly better from a financial perspective for Bill to work until the end of the leave year and forgo his January annuity.  If the additional 10 days of service result in his receiving an extra month of service time in his pension calculation (roughly a 1 in 3 chance), his FERS annuity will be marginally higher for the rest of his life.

Confusing?  Absolutely!  No one ever said that understanding the federal retirement systems was easy. When it comes to choosing retirement dates, or other decisions you will need to make, forewarned is forearmed.  Prepare yourself by attending a pre-retirement seminar.  If your agency is not offering such seminars, ask them to.  Federal Career Experts delivers pre-retirement seminars for federal agencies.

© 2014 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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Overcoming the top 5 challenges of being retirement ready in 3 simple steps

Posted by Katie Lightfoot

It’s no secret that Americans aren’t saving enough for retirement. Many people are coming up short when it comes to funding their nest egg. But why is the problem so wide-spread? Insight can be found in the human behaviors that tend to get in the way of saving adequately.

The top five challenges to being retirement ready include:

1. Living longer
Did you know a baby born today is more likely to live to 100 than to be born with blue eyes? The fact is, people are living longer, and it’s hard to know how long you’ll live. You may live many years beyond retirement, a time when you’re no longer creating income. The challenge is we still believe we’re living to 70 or 75 – but think about it. How old is the oldest person you know alive today? Chances are, you know someone who is well into their 90s. Saving for retirement now prepares you for the exciting possibility of having a longer retirement.

2. Procrastination
It’s human nature to procrastinate. And while some things take the same amount of time to do whether completed today or a year from now, others only get harder to do the longer you delay them. Saving for retirement is one example – every year you don’t save for retirement is less money you may have when it comes time to retire, making it that much more difficult to reach your goals and pursue your dreams.

3. Optimism
People in general are optimistic, which is a wonderful quality, except when it comes to retirement planning. It’s easy to think bad things won’t ever happen to us – including unexpected health issues, loss of a job, or a bad accident. It’s important to be realistic when planning for retirement, and always plan for the unexpected.

4. Following the pack
Humans are social beings. If enough people are doing something, we tend to want to follow because we assume there must be a good reason. The urge to follow the pack can get us in trouble, though, particularly when it comes to saving and investing. Make sure you define your own goals for retirement and work with a financial advisor to create an individual plan that works for you.

5. Instant gratification
The newest car, computer or video game – it’s easy for Americans to feel like they need to keep up with the Joneses. Spending too much on impulse purchases rather than funding savings can be devastating, particularly for your retirement. Learning to delay gratification and keep a budget is key.

We all want to imagine living out our dreams in retirement – rather than worrying about money. Whether you’re in your 20s or your 50s, retirement savings should be top of mind. In addition to knowing and conquering the top challenges of retirement readiness, here are three simple things you can do today to ensure you’re on the right path:

1. Workplace retirement opportunities
If your place of work offers a retirement program, sign up for it as soon as possible. From employer matches to potential tax benefits, retirement programs deliver numerous positives for employees. Remember, compound interest is an important factor in building retirement income, so it literally doesn’t pay to put saving off.

2. Diversification
Putting all your eggs in one basket is risky when it comes to retirement funding. A diversified investment strategy can help protect you from the unexpected.

3. Financial planner
Working with a professional can help you learn about various savings options for reaching your personal retirement goals. The expertise of a financial planner can make the stressful and confusing process easier.

For more information about retirement challenges and what you can do to become retirement contact us.  We are here to help.

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Will I Get Both My Social Security and Federal Annuity COLAs?

Posted by Katie Lightfoot

by Robert F. Benson for FedSmith

Will you receive both a Social Security COLA and a COLA for your federal annuity?

If you are receiving both benefits, the answer is “yes,” the full COLA increase will be applied to each in accordance with the provisions of the regulations of the Office of Personnel Management (OPM).

Social Security and the various Federally administered pensions (or annuities) are independent of each other.  That is, there is no right of “offset” among them.

Here is an example: You are mistakenly overpaid in your Federal annuity.  Social Security cannot reduce your payments to remedy this.  There are, however, two noteworthy exceptions to this general rule: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).

Windfall Elimination Provision (WEP)

This was a money-saving measure enacted in 1983.  It provided that if a person receives a pension from both a non-Social Security source and Social Security, the Social Security is reduced.  The first tier percent in the formula for the old-age benefit becomes 40% instead of 90%.  Example: a low earning person has been receiving an annuity.  Then he starts receiving a Social Security old-age benefit that would be, say, $620, which is 90% of $688; the 90% is changed to 40%, thus dropping the dollar amount of his benefit to $275.  The reduction is permanent.

As severe as the above might seem, there are safeguards:

  • The WEP reduction cannot be more than one-half the other pension
  • For 2013, the dollar amount of the reduction cannot exceed $395.50
  • If the person has 30 years or more of “substantial earnings” he is exempted from WEP.  (This exemption is phased in, starting with 21years.)
  • FERS retirees are not affected by the Windfall Elimination Provision, nor are those receiving a disability pension.

You can read the full explanation for more and there is also a calculator available online.

Government Pension Offset (GPO)

Like WEP, GPO became law in 1983, to save money.

If you receive a pension from a federal, state, or local government based on work where you did not pay Social Security taxes, your Social Security spouse’s benefit may be reduced.

Your spousal benefit will be reduced by two-thirds of your government pension.  In other words, if you get a monthly civil service pension of $600, two-thirds of that, or $400, must be deducted.  In this case, if your spousal benefit would otherwise be $500, you will receive ($500 – $400), or $100.

As with WEP, FERS employees are not affected by GPO.

There is a bill under consideration in both houses of Congress to repeal both the WEP and GPO.  This happens in nearly every session of Congress.  Just as in the past, it is not expected this bill has a realistic chance of becoming law.

Reference |  Online calculator

© 2013 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

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July 2013 LIMRA Survey

Posted by Katie Lightfoot

In July 2013, LIMRA conducted an online survey of 1,636 U.S. consumers to gauge their understanding and basic knowledge of disability insurance, government programs, and the risk of being disabled.

They asked consumers a series of true/false and multiple-choice questions on topics selected to measure how well consumers understand both disability insurance and the financial risk of disability.  Questions covered how disability plans work, common benefit features and associated costs, the risk of becoming disabled and government programs such as workers compensation and Social Security Disability.  The sample was weighted to be representative of the general population.

Correct answers are indicated in red:

What is the chance of a worker age 20 or older becoming disabled before they retire?

  1. 10% (14%)
  2. 20% (18%)
  3. 25% (19%)
  4. 33% (13%)
  5. Don’t know (36%)

What is the leading cause of disability?

  1. Serious accident (25%)
  2. Serious illness, such as cancer, stroke, heart disease (21%)
  3. Depression/anxiety (4%)
  4. Back/joint pain (17%)
  5. Lifestyle choices/substance abuse (5%)
  6. Pregnancy (2%)
  7. Don’t know (26%)

How long does the average long-term disability last?

  1. 1 year (13%)
  2. 3 years (14%)
  3. 5 years (8%)
  4. More than 5 years (18%)
  5. Don’t know (47%)

On average, how soon after someone becomes disabled will a long-term disability policy start paying benefits?

  1.  1-3 months (20%)
  2. 3-6 months (23%)
  3. 6-9 months (12%)
  4. 9-12 month (7%)
  5. Don’t know (38%)

Workers compensation covers injuries that occur on and off the job.

  1. True (18%)
  2. False (66%)
  3. Don’t know (16%)

Your disability payment may be reduced if you qualify for Social Security Disability payments.

  1. True (44%)
  2. False (11%)
  3. Don’t know (45%)

Disability benefits can be paid weekly, monthly, or as a lump sum.

  1. True (37%)
  2. False (21%)
  3. Don’t know (42%)

Disability benefits are not taxable

  1. True (28%)
  2. False (33%)
  3. Don’t know (39%)

Disability insurance replaces 100% of your salary, including bonuses.

  1. True (8%)
  2. False (67%)
  3. Don’t know (25%)

(Split sample of 50% getting part 1 and 50% getting Part 2)

Approximately, how much does an average disability policy/benefit obtained or purchased through work cost per year, regardless if you or your employer pays the premium?

  1. Less than $200 per year (11%)
  2. $200 – 400 per year (14%)
  3. $400-600 per year (11%)
  4. $800-1,000 per year (10%)
  5. Don’t know (54%)

Approximately, how much does an average disability policy that you purchase yourself outside of work cost per year?

  1. Less than $400 per year (12%)
  2. $400-600 per year (13%)
  3. $800-1,000 per year (10%)
  4. $1,500-2,000 per year (8%)
  5. Don’t know (57%)

What’s your most valuable asset?  The ability to earn an income.

When is the best time to buy Disability Insurance?  The moment you start earning a paycheck.

If you have questions or for more information, contact us.

 

Resource:  LIMRA

 

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I don’t know anyone who is disabled, so it probably won’t happen to me.

Posted by Katie Lightfoot

Did you know that disabled is more than a wheelchair?

Is your income needed each month to pay family expenses or is it extra cash?

Is there money left over after you pay your bills each month  or do you fall short?

Could you live on less?

If you are the primary bread winner how will you take care of your family?

Sick leave and vacation time can be used to cover expenses during a disability, but the benefits usually run out in a matter of weeks – at a time when the expenses are often increasing.  In many cases, a disability can last for three months.

What DO you think the chances are of becoming disabled at your age?  How about at age 40 or 50?

Do you know someone with a chronic illness?  Maybe you know someone with asthma, multiple sclerosis, cancer, diabetes, heart disease, or chronic fatigue syndrome.

Every street corner has a handicapped crosswalk.  Every building has handicap access

There are many causes and conditions that can impair mobility and movement. The inability to use legs, arms, or the body because of paralysis, stiffness, or pain is common.  It may be the result of birth defects, disease, age, or accidents.

Did you know that insurance statistics show that only nine percent of long-term disabilities actually resulted from serious accidents.  The top causes of disability are often triggered by more common, chronic conditions, including one out of four caused by muscle and bone disorders like back problems, joint pain and muscle pain.

Did you know that disabled individuals are the largest minority?

Everyone says they don’t know anyone who is disabled  ~ but that is because they don’t hang out where you do.  Yet living with a chronic illness involves more than the physical limitations created by the illness.  It also contributes to financial, relationship, and emotional challenges as well.

Family life may be vastly altered if the primary wage earner is unable to work or if treatment requires long-term changes in the family routine and activities.

What would you do?

Test your basic knowledge of disability insurance, and the risk of becoming disabled.

Click here to see the 2013 LIMRA Survey and take the test

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When Should I Start Taking Social Security Benefits?

Posted by Katie Lightfoot

You may be thinking about taking your Social Security benefits early. After all, you have paid Social Security on your earnings for years and you deserve to have them pay you for a change. And, since you are allowed by the government to take Social Security income as early as age 62, and “Normal Retirement Age” is 67 for all Americans born in 1960 or later, giving up those benefits for 5 years seems like way too much. What you may not realize is how much that early payout may cost you.

Taking early retirement benefits from Social Security affects how much you get for the rest of your life, affects your cost of living increases for the rest of your life, and affects how much your spouse will get if he or she is drawing based on your earnings. If you are in reasonable health, and can live without taking the benefits now, you may want to wait.

The biggest and most apparent bad effect of taking Social Security before your normal retirement age is that they cut the amount that you get per month — and they cut it by a lot. If you take benefits at age 62, you will have your monthly benefit cut by 30%. What this means to you in dollars is that if you were expecting Social Security of $1500 per month, your benefit is going to get cut to $1,050. Wow!

Basically, if you take your benefit early, your Social Security is cut by 5/9% per month for 36 months, then by 5/12% per month thereafter, up to the maximum of 60 months. So even taking benefits at what you may think of as still the right age for retirement — age 65 — reduces your monthly benefit and cost of living increases by 13 1/3%.

Obviously, if your health is poor and you have reason to believe that you only have a few years left, you may want to take what you can while you can, but that decision also affects your surviving spouse. The maximum survivors benefit is limited to what you received when you were still alive. So whatever percentage cut you take will affect his or her benefit (if it is based on your earnings record) for the rest of his or her life as well. Note that if your spouse would receive a benefit based on his or her own earnings record that is greater than what they would receive based on your record, they will receive the greater amount.

If you don’t need your Social Security benefits right away, you can delay taking them. Generally, if you were born in 1960 or later, you can get up to 8% more benefit each year for each year you delay taking your Social Security. So, you would have to live for as much as 12 ½ years (with no cost of living increases) for the delay to pay off, but given that your life expectancy may be as high as 88, you would get that extra 8% on both your starting benefit and your cost of living increases for as many as 20 years or even more.

The amount that you and your survivors will receive is based on a complex interaction between your own personal health and life expectancy, your normal retirement age, when you start your benefits and when your survivors take their benefits.  You can go to the nearest Social Security office to see a government employee who will explain the choices to you, but they can sometimes be rushed.  A financial planner can help you evaluate your alternatives for a fairly small fee.

Reprint with permission IARFC Register, Vol. 14 No. 10
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You’ve invested your money, but do you own it?

Posted by Katie Lightfoot

(BPT) – Many people don’t take enough ownership over what they pay when it comes to investing. A recent study by Charles Schwab in May 2013 of investors who are highly engaged in their everyday lives shows that most Americans do research before making a major purchase. Yet just 51 percent say they know how much they pay for their investments and only 16 percent who work with an investment professional have asked how fees and commissions impact their portfolio’s returns.

It can really pay to pay attention, says Mark Riepe, head of Schwab Center for Financial Research, who adds, “One way to reduce your investment return is to ignore fees.”

A seemingly small difference in fees can make a potentially big difference in your return. Here’s a hypothetical example: let’s assume you make a $10,000 investment that earns six percent each year for the next 20 years. If you were to pay one-half of one percent in fees each year on that investment, after 20 years your after-fee balance – or net return – would be about $29,000. But if your annual fee was closer to 1.5 percent, after 20 years that $29,000 would shrink to about $24,000 – or about 20 percent less.

So how can you make sure to take ownership over the money you’ve invested and your financial future? Knowledge is the first step – here are some of the most common fees to be aware of:

Commissions

Commissions are the fees you are charged when you place a trade with a brokerage firm. If you trade frequently, commissions can add up fast. There are many brokerage firms that offer commission-free products, such as certain exchange-traded funds (ETFs) and no-load mutual funds.

Portfolio management fees

If you use a professional to help you with portfolio management, there are two primary fees to keep in mind. The first is an annual fee, which is usually a set percentage and can vary depending on the advisor and the amount of assets in your portfolio. For example, you might pay one percent of $250,000 you have invested, or $2,500 per year. But there can also be fees for the underlying investments in your portfolio, including commissions and operating expenses that you pay on top of the annual fee.

Mutual fund fees

Mutual fund investors are charged a percentage of the fund’s average net assets. This is called the operating expense ratio, or OER, and it covers the fund’s management expenses. These fees can vary, so investors should always compare OERs before purchasing a mutual fund, especially when deciding between two similar funds. OERs are listed in the fund’s prospectus and most can be found online. Typically, the more complex the fund, the more management it requires and the more it costs. It’s important to know that OERs are charged on top of any transaction fees or commissions you might pay to invest in the fund.

Bond fees

In most cases with bonds, when you buy or sell you either pay a percentage or flat fee, however the yield on a bond is impacted by what you pay for it, so finding the lowest cost is to your advantage. It is a good idea to compare prices from multiple bond dealers before settling.

Exchange traded fund fees (ETF)

An ETF is a fund that can be traded like a stock. Depending on how frequently you buy and sell ETFs you may be more or less concerned with some of their fees. For example, if you trade ETFs more frequently, the commission you are charged for each transaction can add up quickly. You also want to pay attention to the bid/ask spread – the prices at which people are willing to buy and sell the fund. If you’re planning to hold an ETF over a longer period of time, the commission and spread become less important, since they are one-time costs. But “buy and hold” ETF investors should pay close attention to the fund’s expense ratio, which is a recurring fee.

Of course lower expenses do not necessarily translate into higher returns, but they are important to understand. One way to be more aware of the fees you’re paying is to regularly review your statement. Being an informed and engaged investor today can have a real impact on your ability to achieve your investing goals tomorrow, whether that’s retirement, saving for your child’s education or purchasing a home.

 

Scenario is hypothetical in nature and not intended to predict or project the performance of any specific investment product.

Investors should carefully consider information contained in the prospectus, including investment objectives, risks, charges and expenses.  Please read the prospectus carefully before investing.

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

Bond, investments are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, corporate events, tax ramifications, and other factors

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The Safety Net that Helps Americans with Disabilities Stay Afloat

Posted by Katie Lightfoot

(BPT) – John Miller never much thought about the possibility that he might one day become disabled; he was too busy building and renovating homes throughout suburban Washington, D.C. For 40 years, Miller (a pseudonym to protect his privacy) worked long days with his brother – until an unexpected illness and injury struck.

Like thousands of American workers who find themselves sidelined by illness or injury, Miller could no longer work. As in many jobs, if you don’t work, you don’t earn. Miller soon found himself in dire straits, both financially and in terms of his health. He had never accepted any kind of public assistance, but now he desperately needed help just to pay basic living expenses.

Miller knew nothing about Social Security Disability Insurance (SSDI), the federal program that provides financial support to millions of Americans unable to work because of injury or chronic illness. Learning about the program and securing benefits took months, but now Miller knows his monthly SSDI benefits will at least help him put food on the table.

“My benefits check is something I can count on every month,” he says. “I know that I’ll be able to eat and that I’ll be able to stay in my house for another 30 days.”

Established in 1956, SSDI is an important part of our nation’s Social Security system for disabled workers, retirees, dependents and survivors. Funded through payroll taxes, SSDI provides vital financial support for Americans with severe disabilities and chronic health conditions. Workers earn coverage for SSDI and other Social Security benefits through payroll tax contributions, and may only become eligible for benefits if they have earned coverage and their health prevents them from working.

Currently about 8 million Americans receive SSDI benefits. While the number of people receiving SSDI benefits has risen recently, the increase was expected, and experts say that influx will level off soon. Baby boomers reaching the disability-prone years of their 50s and 60s account for much of the increase. The growing number of women in the workforce also accounts for much of the rise, as they are now eligible for benefits in greater numbers than ever before. The rise in retirement age has also contributed to the increase.

Benefits are modest. On average, SSDI pays individuals just $1,132 a month and families just $1,919 a month. The requirements to qualify for benefits are very strict. Applicants must present extensive medical proof of significant disability. In fact, qualifying disabilities are so severe that about one in five men and one in six women receiving SSDI will die within five years of receiving benefits, and those eligible for benefits are three times more likely to die than other people their age, according to Kathy Ruffing of the Center on Budget and Policy Priorities.

Applying for SSDI benefits is a complex process, especially for people who are unfamiliar with how the system works or who are already dealing with significant illness or injury and the emotional and financial strain that accompanies poor health. Many people find that getting help from a disability advocate or lawyer can help ease the process and relieve some of the stress.

Securing approval for SSDI benefits took Miller 35 months. His experience is far from unique. Miller’s disability meant that after spending his entire career taking care of the homes of others, he wasn’t even able to perform needed maintenance on his own home. After nearly three years of waiting, he is finally able to use the benefits he earned while working on other peoples’ homes, to hire someone to repair his own home. “I’d love to go out there today and work,” he says. “Now I have to get someone else to do the work on my house that I had done for years.”

To learn more about Social Security Disability Insurance and to find help navigating the application process, visit www.nosscr.org.

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Planning Your Life After Retirement: A Guide for Federal Employees

Posted by Katie Lightfoot

by Jason Kay for KSADoctor.com

A recent report from CNN stated that the United States government is about to face a large wave of retiring federal workers. About 30% of current federal employees will reach the eligible age for retirement in the next three years. But have all of these upcoming retirees adequately planned for retirement?

Planning for your retirement is a necessity, especially given the uncertainty of the current economy. As a federal employee, you have the security of receiving federal pension benefits. These benefits are considerably more generous than plans in the private sector. The first way to begin planning for life after retirement is to understand the details of the Federal Employees Retirement System (FERS). With that knowledge, you can move on to the three important variables that will impact your life post-retirement: your health, your financial situation, and your goals.

Your Retirement Plan

The first step toward planning your retirement as a federal employee is understanding the Federal Employees Retirement System, also know as FERS. FERS provides you with benefits from three sources: the Basic Benefit Plan, Social Security, and the Thrift Savings Plan.

  • Basic Benefit Plan: The Basic Benefit plan, also known as the FERS annuity, is a defined benefit plan that is based on the length of your creditable federal service and the average annual rate of basic pay of your three consecutive years of work that were the highest paid. Note that “creditable federal service” may not include the entirety of your federal service. After retirement, you receive payments from the annuity every month for the rest of your life.
  • Social Security: FERS is covered by Social Security, which is the federal insurance program that provides retirement, unemployment, and disability benefits. You will receive Medicare benefits under Social Security. If you change employers prior to retirement, your Social Security will follow you.
  • Thrift Savings Plan: The Thrift Savings Plan (TSP) is an account automatically set up by your agency of employment. Each pay period, your agency deposits 1% of the basic pay you have earned during that pay period into your TSP account. If you contribute to your TSP, your agency will make matching contributions, which are tax-deferred. TSP will also follow you to your next employer if you change jobs before retirement.

One important aspect of FERS to consider is your eligibility. The federal government’s Office of Personnel Management (OPM) provides charts to determine your Minimum Retirement Age. There are also different eligibility requirements for immediate, early deferred, or disability retirement. These requirements are based on your age and years of service. OPM also provides FAQs on retirement information for federal government employees.

Check Your Health

Now that you are informed about the intricacies of FERS and have determined your eligibility, one daunting yet necessary conversation to have revolves around your health. Your health will have a large impact both on how long your retirement will be and what financial resources you will need. Experts recommend using life expectancy calculators that take into account a variety of information about your health and lifestyle to more accurately determine how long you may live. This will allow you to both plan financially and take steps toward improving your health, which will decrease your chances of struggling with expensive medical conditions.

It’s All about Money

Considering your life expectancy leads us to the most important aspect of retirement: how much money you will need to save. The U.S. Department of Labor reports that less than half of all Americans have calculated their financial needs for retirement. You should begin saving early, continue saving throughout your career, create savings goals, and stick to those goals. As financial experts reiterate, the upcoming generation of retirees has a vastly different outlook on retirement than that of their parents.

As a federal government employee, your advantage lies in a guaranteed pension, which have been declining in number since the 1970s. Still, as a growing majority of retirees are living longer, federal programs such as Social Security are facing a large amount of strain. Creating a personal savings plan in combination with your FERS benefits is recommended. U.S. News provides some helpful tips on saving for retirement. One especially useful idea is to start an IRA. Although FERS will provide you with the annuity and TSP, it cannot hurt to set up an Individual Retirement Account, or IRA, as well. Consider using your IRA to save money that you receive outside of your normal income, such as tax refunds, inheritances, credit card rewards, or bonuses.

What Are Your Future Goals?

Finally, one piece of retirement that many fail to consider is what exactly they want to do on a daily basis once retired. While the majority may simply look forward to the opportunity to relax and conduct their daily life free of work obligations, you should consider the fact that you will likely be in retirement for 20-30 years. There are a multitude of options for what you can choose to do with that time.

  • Traveling: Traveling is often a favored choice among retirees. The National Active and Retired Federal Employees Association (NARFE), which will be open to you as a federal employee, boasts multiple member perks revolving around travel. These include discounted plane tickets, car rentals, hotel stays, and vacation rentals.
  • Volunteering: Many retirees feel at a loss without the daily commitment of a job. Becoming a volunteer is an excellent way to feel satisfied through being actively involved in a cause that helps others. Volunteering provides the opportunity to take on a job that is new and interesting, and many find that it adds meaning to their lives.
  • Furthering Education: If you are intellectually minded, retirement can give you the opportunity you have been waiting for to further your education. NARFE provides discounted tuition for online degree programs.
  • Finding a Hobby: While it may seem cliché, retirement gives you the option to rediscover hobbies you may have neglected while you worked. Developing a hobby can lead to meeting new people, provide you with an enjoyable daily activity, and even bring in some extra money.

© 2013 KSADoctor.com. All rights reserved. This article may not be reproduced without express written consent from KSADoctor.com.

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Protecting Your Paycheck – for Today and Tomorrow

Posted by Katie Lightfoot

(BPT) – People insure their homes, their cars and even their vacations without giving it a second thought. But many do not think about insuring their most important asset – their income – from a disability caused by illness or injury. And it’s not just income during working years that is at risk. A disability can also put a serious dent in your ability to enjoy retirement.

That can happen in two ways, according to Sandy Botcher, vice president of disability income insurance at Northwestern Mutual. “When a family loses its usual source of income due to a disability, sometimes the only alternative is to dip into retirement savings to cover normal household expenses,” she says. “And even if you don’t have to take money out of savings to replace income, the other consequence of a disability is that it decreases your potential to contribute to your retirement plan.”

Botcher adds that from the moment you start working until the day you retire, your ability to earn an income is your most important financial asset.

Consider this example: A $60,000 annual salary results in $2.4 million earned over a 40-year career, and that doesn’t take into account inflation, salary increases, or the long-term growth potential of money invested in retirement saving vehicles along the way. If a disability prevents the individual from earning this income, or requires him to access a portion of what’s already been saved (often with a tax penalty), it can have devastating impact on retirement dreams.

Recent research demonstrates the need to prepare for the unexpected. Over the past three years, 22 percent of Americans had dipped into retirement savings and 22 percent had stopped or reduced their savings contributions, according to Northwestern Mutual’s 2013 Planning and Progress Study. More than half of those surveyed say unexpected expenses are to blame. Yet 23 percent of respondents say they want to be more cautious with their money, and feel they have a lot of catching up to do.

“The Great Recession has reminded us that we cannot afford to lose our incomes,” says Botcher. “But we also need to remember that our chances of losing our incomes are determined by more than just our employers’ viability or our career success.”

In the minds of consumers, few things seem more unexpected than a disability. Yet the Social Security Administration reports that about one in four 20 year olds today will become disabled before retirement.

One way to prepare for the possibility of being unable to work is disability income (DI) insurance, designed to help pay living expenses, maintain lifestyle needs and preserve assets accumulated for retirement and other purposes. Many employees think that coverage they get through their employer’s group disability policy is enough. They should think again.

Group DI typically has a cap at 60 percent of salary; other forms of compensation like bonuses or commissions may not be covered. In addition, the benefits are taxable. So, if earning less than two-thirds of one’s current salary would make it difficult to make ends meet as well as work toward goals like continuing to fund retirement, it’s important that another option be considered to bridge the gap.

That option is an individual DI insurance policy. Premiums for individual DI policies are paid after taxes, so the benefits are not taxed, and the policies are portable.

-”We can’t forget that the source of a retirement program is the ability to work. Having individual disability income insurance is a way to address one of the key risks to achieving your retirement goals,” Botcher says.

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Should I Stay or Should I Go?

Posted by Katie Lightfoot

by Ann Vanderslice

Should I stay or should I go now?
Should I stay or should I go now?
If I go there will be trouble
If I stay it will be double
So come on and let me know
Should I stay or should I go?

~The Clash

 

With all the early out offers, VERA’s, VSIP’s, and RIF considerations, this punk rock song is fast becoming the federal worker’s theme song. The considerations for whether to stay employed vs. join the ranks of the retired can often be emotionally based.

Federal employees are often being asked to do more work without any more reward.  A common lament is that the work keeps piling up as more employees leave,  and it just isn’t worth it if retirement benefits are going to be re-structured, on top of it.

 

Not sure what to do?

Before you let your current situation get the best of you, it’s a good idea to take a look at the actual retirement figures for your own situation.  Here are some tips, tricks and traps to help you analyze the pros and cons of retiring earlier than you may have planned.

Have your annuity calculations run with the date you planned to retire (you do have a date in mind, don’t you?),  and also have the calculation run based on the early-out offer date.  Comparing the two amounts is not enough.  You’ll want to have an analysis run taking into account current taxes, implications for Social Security, and the value of your TSP at the two points in time.

If you stop working early, your Social Security estimate will be inaccurate since they’re counting on you continuing to work and contributing to the system when they provide their estimate.  The TSP can be a double whammy because if you retire early, you may need to start withdrawing from the TSP for income.  Not only are you no longer contributing, you’re depleting your funds sooner than anticipated.

The lure of a Voluntary Separation Incentive Payment can be enticing.  You were thinking about retiring, anyway. Why not just consider the $25,000 as a nice parting gift and go?

If you really were planning to retire, then the VSIP is a bonus at the end of your career.  However, if you’re thinking that the $25,000 buyout is just what you’ll need to complete your retirement plan, face the facts.  $25,000 (~$17,500 after taxes)  is not going to make or break your retirement.  It’s just not enough.

Next, you need to determine whether your assets will last throughout your life expectancy accounting for reasonable withdrawal rates, rates of return on your investments, and inflation factors.  Remember, retiring early means you’ll have saved fewer years and need retirement income for a longer period of time.  If you’re married, survivor benefits have to be a consideration, as well.

While recent studies vary on the topic of life expectancy, the averages typically show that a couple at age 65 has a better than 50% chance that one member of the couple will live to be 90 and nearly a 20% chance that one of them will live to be 100!  For many federal employees, they will live longer in retirement than they spent in their career.

Everyone’s situation is different.  There are family dynamics, workplace issues, health concerns, and just being downright tired of the rat race.  Before you make a rash decision and leap too soon, make sure you understand the ramifications for you personally.

 

© 2013 Ann Vanderslice. All rights reserved. This article may not be reproduced without express written consent from Ann Vanderslice.

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Boomers turning 65 face complex healthcare choices

Posted by Katie Lightfoot

(BPT) – Every day, about 10,000 baby boomers turn 65 and become eligible for Medicare. Not everyone will sign up, but it’s important to understand the importance of early choices when enrolling in Medicare for the first time.

You can enroll in Medicare three months before turning 65, the month you turn 65 or up to three months afterward.

“Turning 65 opens the door to Medicare eligibility, but it brings with it some complex choices,” says Paula Muschler, manager of the Allsup Medicare Advisor, a personalized Medicare plan selection service. “Choices seniors make at this time can impact their healthcare costs over the long term and their entire family.”

Muschler offers the following key steps for Medicare first-timers.

1. Take a look at your existing group health plan coverage and think about how it will coordinate with Medicare. Many people work past age 65. As a result, Medicare-eligible individuals who have health coverage through their employer or their spouse’s employer may be able to wait to enroll in Medicare Part B, which covers outpatient medical care. This is not true in every case, however. This option depends on other factors, such as the size of the employer and how soon you expect to retire after reaching 65. You may want to consider enrolling in Medicare Part A, which includes hospital coverage, even if you defer Part B.

2. Consider the options for first-time enrollment, keeping in mind your current health needs and financial resources. If you choose traditional Medicare, you have an average of 31 Medicare Part D prescription drug plans from which to choose. You can also choose from 10 standard Medigap policies for supplemental coverage, ranging from basic to comprehensive coverage. The price for these plans also can differ from one company to the next.

Adding to the complexity, Medigap plans are not required to accept you after your initial enrollment period. This is one reason first-time choices are crucial. Seniors evaluating Medicare Advantage plans over traditional Medicare also have an array of options – an average of 20 plans, depending on where you live. “We’ve been able to help Allsup customers find plans that cost less and match their specific healthcare needs,” Muschler says.

3. Follow Medicare enrollment rules to avoid costly mistakes. Penalties are in place for decisions related to Part B and Part D coverage. The late-enrollment penalty is 10 percent for each full 12-month period you could have been enrolled in Part B. Likewise, Part D imposes a penalty if you go for more than 63 days without coverage after enrolling in Part B.

“Your first-time Medicare plan choices also are more complicated if you have retirement dates, COBRA coverage or dependent coverage to consider,” Muschler says. “These are good reasons to contact a Medicare specialist, who can help answer the right questions and provide guidance to seniors so they make choices that match their situations.”

4. Understand how higher income and changes in your income affect Medicare costs. Higher-income beneficiaries pay higher premiums for Medicare Part B and prescription drug coverage. For Part B, the 2013 monthly premium is $104.90 for joint filers with income of $170,000 or below ($85,000 for single filers). However, the premium increases to between $146.90 and $335.70 for those with incomes above these thresholds. Likewise, higher-income beneficiaries can expect to pay from $11.60 to $66.40 more each month in prescription drug premiums.

The Social Security Administration uses IRS records when determining premiums. Social Security may reduce an individual’s income-related monthly premium with verification. “Social Security has specific requirements about how you can document changes in your income when you are requesting reduced Medicare premiums,” Muschler explains.

5. Review healthcare coverage for your spouse and dependents to determine how your choices may affect their coverage. If you are nearing Medicare eligibility, you can find yourself at a crossroads when it comes to providing healthcare for your entire family.

Some employers may continue to provide coverage to a worker’s family, or you may need to purchase COBRA coverage or private coverage for family members. “One early step is to talk with your benefits plan administrator to see what options you may have and then plan for your family,” Muschler says.

Seniors turning 65 have seven months during their initial enrollment period to make critical decisions. But you can begin evaluating your options earlier to be better prepared. For a free brochure on “Turning 65 and Medicare Enrollment” or for an evaluation of Medicare options, call an Allsup Medicare Advisor specialist at (866) 521-7655 or go to Medicare.Allsup.com.

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Making Your Money Last Through a Multi-Decade Retirement

Posted by Katie Lightfoot

by John Grobe  For FedSmith

 

Just thinking about the subject of this article made me think “Are we lucky, or what”?  A federal retiree has much less to be concerned about than the vast majority of American retirees.  Why is that, you ask?

First, we have a pension.  The Office of Personnel Management insists on calling it an annuity, but whatever you call it, it is lifetime, inflation adjusted income.  Not too many private sector retirees are getting old-fashioned pensions anymore; even less are receiving cost-of-living adjustments.

Let’s look at three examples, one CSRS and two FERS.  In all three examples the employee worked 32 years and had a high-three salary of $70,000.

  • A CSRS retiree would receive a pension of $42,175 before deductions/reductions.
  • A FERS retiree who retired prior to the age of 62 would receive a pension of $22,400 before deductions/reductions.
  • A FERS retiree who retired at the age of 62 or older would receive a pension of $24,640 before deductions/reductions.

The above examples are for regular retirees.  Special category retirees (e.g., law enforcement, firefighters, air traffic controllers, etc.) would receive more as would Congresspeople who took office prior to January 1, 2013.

Second, many of us have Social Security.  FERS retirees will get an unreduced Social Security benefit, as will some CSRS Offset retirees and FERS transferees.  CSRS retirees who have earned 40 or more Social Security credits will receive a Social Security benefit, but it will be reduced by the Windfall Elimination Provision (WEP).  Many retirees who are CSRS Offset or FERS transferees will also be subject to the WEP.

The average Social Security benefit is $15,132 in 2013.  A FERS retiree is likely to receive a higher benefit than the “average” as federal salaries are higher than the average private sector salary.

Let’s say our retiree wanted to keep the same standard of living in retirement that they had while working.  A rule of thumb often used by financial planners is that 80% of pre-retirement gross income is sufficient to maintain the current standard of living.  Of course there are many exceptions to this rule, so tread carefully when using it.  An individual who was still carrying a large mortgage, or who still was supporting children might find the 80% rule a little tight.  80% of our high three of $70,000 would be $56,000.  How close are our hypothetical retirees to this amount?

  • Our CSRS retiree (I assumed no SS) would be $13,825 short.
  • Our FERS retiree who retired before the age of 62 (I assumed $18,000 of SS) would be $15,500 short.
  • Our FERS retiree who retired at age 62 or older ( I assumed the same $18,000 of SS) would be $13,360 short.

All of our hypothetical federal retirees ended short of 80% of their pre-retirement gross income.  Using financial planners’ rules of thumb (here we go with those general rules again – remember that they do not apply to everyone) of beginning withdrawals at a 4% to 5% rate and adjusting it annually for inflation, we come up with an amount somewhere between $300,000 and $350,000 being necessary to generate the level of income needed to hit the 80% target.  Where’s that money going to come from?  From your TSP or other investments.  Is that possible to save that much?  Absolutely, if you began saving early enough.  I am fond of telling participants in Federal Career Experts’ mid-career and early-career retirement planning classes that “there’s no such thing as having too much money in your TSP”.

From here on in the article we will assume that you were able to save up that amount of money and are wondering how to withdraw it so that you will not run out of money before you run out of time.  We will also assume that you amassed the money within your Thrift Savings Plan.

If you are going to count on your TSP to generate a stream of income during your retirement, you will likely choose one of these two options; an annuity or monthly payments.  You can make this choice either in or out of the TSP.  First let’s look at our options within the TSP.

With the TSP withdrawal choice called “substantially equal monthly payments”, your money remains invested in the TSP and you elect a monthly payments based on two choices.  They are: 1) payments of a specific dollar amount; and 2) payments based on the IRS life expectancy table.  If you choose payments of a specific dollar amount they cannot be less than $25 per month and can be changed once a year, during an open season in December.  As long as you retire in the year in which you reach the age of 55 (or later) you will not be subject to the 10% early withdrawal penalty on any monthly payments from the TSP.

When choosing the monthly payment option, be aware that, if you withdraw your funds aggressively, you might end up running out of money before you run out of time.  With the IRS life expectancy option, be aware that when you hit the age of 70 ½ you will be switched to the minimum required distribution rate, which will significantly reduce your payments from what you were getting at age 69.  Many financial planners recommend beginning your withdrawals at a 4% or 5% rate and adjusting the amount annually by inflation.  Studies using “Monte Carlo Simulation” tools have shown that, with a balanced portfolio, your chance of running out of money in 30 years is less than 10%.  Let’s look at the annual amount that could be withdrawn at a 4% or 5% rate.

  • 4% of $300,000 is $12,000; not enough to bring our retirees to the 80% level;
  • 5% of $300,000 is $15,000; this will do it for two of our three hypothetical retirees;
  • 4% of $350,000 is $14,000; this also will do it for two of our three hypothetical retirees;
  • 5% of $350,000 is $17,500: enough to take all of them over the 80% level.

The other choice for those who leave their money in the TSP is purchasing a TSP annuity.  TSP annuities are sold by MetLife.  A TSP annuity will guarantee that you will not run out of money in your lifetime.  Joint annuities provide that protection for spouses as well as for those who have an insurable interest in your life.  There are no early withdrawal penalties with TSP annuities, regardless of your age when you begin payments.

The interest rate index used in the computation of TSP annuities is very close to its all-time low level.  When this article was written in March 2013, the index was 2%.  This results in our retiree not receiving enough annual income to achieve the 80% replacement rate.  The most generous computation for a 62 year old that was spending $300,000 on a joint annuity with a cash refund feature and a 50% survivor annuity came out at $10,476 per year.  Spending $350,000 for the same annuity increases the annual payout to $12,216.

The book, Withdrawing Your TSP Account After Leaving Federal Service, has detailed information on these two withdrawal methods (as well as other methods).  The book is available on the TSP website.

The TSP website has calculators that can help you estimate the amount of money you might be able to receive under both of the above options.  Do be aware that the calculators are not the most sophisticated ones available, particularly the monthly payment calculator.

Of course, you are not required to leave your money in the TSP.  Many retirees choose to move their money into an Individual Retirement Account (IRA).  Within an IRA you can set up monthly payments, just like you can in the TSP.  IRAs however, give you more flexibility in changing the amount of your payments.  You can change the amount at any time.  In fact, your payments do not even have to be taken monthly.  You could set them up bi-monthly, semi-annually, or however you want.

Once you roll money into an IRA, you will face the 10% early withdrawal penalty on any money you withdraw before you reach the age of 59 ½.

Money that is in an IRA can also be used to purchase an annuity.  You should thoroughly investigate any annuity investments, because all annuities are not created equal.  Make sure you completely understand what you are getting in to before you invest your money.  There are no early withdrawal penalties with annuities.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

 

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How Much Does the Government Pay to Fund Your Annuity?

Posted by Katie Lightfoot

by Robert F. Benson

FedSmith.com user recently claimed that 95% of annuity costs are paid by the Government.  This sounded high to me.  However, unlike the complex “which retirement system is better” issue, this one is a matter of simple fact, and can thus be put to rest with a bit of research.

The retirement trust fund is administered by the Office of Personnel Management (OPM).  As stewards for this huge pool of money, they know better than anybody how much is in the fund, how fast it is being paid out, how much is deposited by who, etc.  In the OPM series of Benefit Administration Letters (BALs), there is one each year on cost factors for the retirement fund. (There is just one fund for both annuity systems, by the way.)

Note BAL 12-307, Cost Factors.  Each percentage figure below represents the nominal total paid into the fund, as a percentage of the employee’s salary.  Employee contributions ares in parentheses:

CSRS Regular CSRS Law Enforcement FERS Regular FERS Law Enforcement
29.8 (7.0) 50.9 (7.5) 13.7 (0.8) 29.7 (1.7)

FERS is the predominant retirement system, and it will continue growing for years, while the ranks of CSRS folks are dwindling to the point where they will become extinct.  So, to clarify the meaning of the above FERS numbers, let’s look at them in terms of dollars.  Both below employees have a salary of $54,000.

Contribution
Type of Retirement Employee Agency* Total Percentage from Agency
Regular $432 $6,966 $7,398 94.16%
Law Enforcement $918 $15,120 $16,038 94.27%

Imputed Costs

The above cost factors are for accounting purposes and are sometimes called “service costs.”  Just to ensure confusion, “imputed costs” are the result of subtracting the actual contributions by both employee and agency from the service costs.  This is explained in BAL 03-309.

Who pays the imputed costs?  The taxpayers.  There is an annual appropriation by Congress for augmentation of the retirement fund.

FERS Revised Annuity Employees (FERS-RAE)

Most employees hired on/after January 1, 2013 are placed into FERS-RAE.  The RAE is for “Revised Annuity Employee.”  Ironically, despite the terminology, these new employees will NOT be receiving a revised annuity; instead, they will be paying a revised contribution to the retirement fund – 3.1% instead of 0.8%.  It appears total service costs will be unchanged from the “old” FERS, with the only difference being more paid by the employee and correspondingly less paid by the agency.

In other words, FERS-RAE is identical to FERS except employees must pay more.  This is the basis of the “savings” policy makers credit to FERS-RAE

In conclusion, for employees in the “old” FERS, the assertion that Government pays 95% of retirement costs is essentially correct.  For those in FERS-RAE it is a different picture.  The 3.1% they pay into the fund represents 22.6% of costs, with 77.4% paid by Uncle Sam..

(In one sense, the 95% paid-by-government claim is false.  That is, over the years, the money deposited into the retirement fund grows a great deal, due to the miracle of compound interest.  So, it could be said that the interest is a major contributor.  But this is kind of picky, or even misleading.)

This is just my opinion, but it looks like non-CSRS employees who want to ensure a decent income at the end of their Government careers need to invest heavily in the Thrift Savings Plan.

My website for calculation of federal benefits is here.

*as augmented by the annual congressional appropriation

© 2013 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

 

 

 

 

 

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The History of Fireworks

Posted by Katie Lightfoot

Fireworks originated in China some 2,000 years ago. The most prevalent legend has it that fireworks were discovered or invented by accident by a Chinese cook working in a field kitchen who happened to mix charcoal, sulphur and saltpeter (all commonly found in the kitchen in those days). The mixture burned and when compressed in an enclosure (a bamboo tube), the mixture exploded.

Some sources say that the discovery of fireworks occurred about 2,000 years ago, and other sources place the discovery sometime during the 9th century during the Song dynasty (960-1279), although this could be confusion between the discovery of gunpowder by the cook and the invention of the firecracker.

A Chinese monk named Li Tian, who lived near the city of Liu Yang in Hunan Province, is credited with the invention of firecrackers about 1,000 years ago. The Chinese people celebrate the invention of the firecracker every April 18 by offering sacrifices to Li Tian. During the Song Dynasty, the local people established a temple to worship Li Tian.

The firecrackers, both then and now, are thought to have the power to fend off evil spirits and ghosts that are frightened by the loud bangs of the firecrackers. Firecrackers are used for such purposes today at most events such as births, deaths and birthdays. Chinese New Year is a particularly popular event that is celebrated with firecrackers to usher in the new year free of the evil spirits.

(Source:  fireworks.com)

 

Check out VisitKC for information on where to find firework displays in your area:

http://www.visitkc.com/events/july-fourth-kc

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Are You Prepared for Your Retirement? Most of You Aren’t

Posted by Katie Lightfoot

By: Kim Kirmmse Toth

I read a lot about the lives of women after 50. Being one myself and even though I am a business coach, clearly there are other things going on for us. One of them is our retirement. It’s frightening out there and most women do not feel confident. How are you going to support yourself in your older years?One very sad statistic is that 50% of women fear becoming a ‘bag ladies’. That’s half of all women!! And yet, another statistic says women control a larger share of personal wealth in the U.S. than ever before by 66%.This worry of how to finance your retirement has gotten worse since the recession. Employer retirement plans have gone downhill and many employers have laid workers off to save their own bottom lines.

As women, older women, you are resilient, savvy and can accomplish many goals. What can you do now to be rest assured you can support yourself in the years to come?

Many women have to catch up on retirement savings, if you have any, because you either stayed at home to raise children, have been care takers to parents, got divorced, being widowed or a myriad of other reasons to not have enough sacked away. For some of you the lack of planning and preparation has put you in a difficult situation. Too many women will work into their 70′s so they can supplement their social security. It’s one thing to work because you want to, it’s another thing to work because you have to.

Another statistic: From the 2013 Women, Money & Power Study nearly half of all women have the fear of being a ‘bag lady’, even 27% who make over $200,00.00 per year. This study also stated that the root of the problem is that most women don’t know where they honestly stand financially.

So, do you know where you stand? Are you brave enough to really take a good hard look at your numbers? Your retirement depends on it. How late in life you work depends on it. How confident you feel depends on it.

In this day and age you have more earning power than ever before. Are you using it wisely? Are you really taking a good hard look and knowing where you stand?

This is not a time to put your head in the sand. I read articles all the time of the challenges and fears of older women in their retirement years. I don’t want to be a part of this statistic and I don’t want you to be either.

How are you going to take care of yourself? What is your plan? Are you working now? For someone else or for yourself?

Be brave and look at your financials. If you are not ‘retirement ready’ now or in the next 10 years, what are you going to do about it? It may be time for a plan, not a dream, a plan.

 

Article Source:  http://www.ArticleBiz.com

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Are You Financially Ready to Retire?

Posted by Katie Lightfoot

by Jason Kay for FedSmith

There are several considerations to make when one is considering retirement from the government. While you may have been consistently contributing to your retirement fund over the years, perhaps the recent economic downturn or receiving fewer hours at your current job have made you wonder when the right time to retire might be.

Here are some questions to ask before making such an important decision:

1)      Do you want to retire yet?

As much as retirement is a financial decision, it is also an emotional one. What is it that you wish to do if you did not have to work at your current position? Do you still feel a drive to go to work every day? Would you miss your job if it were gone tomorrow?

2)      What is your definition of retirement?

Retirement can mean different things to different people. If you are emotionally prepared for retirement, consider what sort of lifestyle you wish to live after retirement. From there, you can determine how much money you will need to put away in order to afford a certain standard of living once you retire. Traveling frequently will, of course, require greater savings than if you plan to stay close to home to spend time with family or if you intend to downsize to a smaller home.

3)       What income level will you need to retire?

After deciding on the lifestyle that you hope to live, it is then time to sit down and figure out how much money you will need to retire. Looking at the numbers on paper will bring you back to reality and will enable you to plan effectively for a satisfactory retirement.

According to financial planners, people need roughly 80% of the income they received while working in order to have a good standard of living once retired. Why only 80%? Consider that you will not be saving up for retirement as you once had been. In addition, the percentage of your wages that you were contributing to taxes will also no longer be a factor. You will no longer need to drive to work every day nor will you likely be spending as much money on food.

That being said, you might find that you will spend more on healthcare, travel, or long term care insurance.

The best thing to do is to create a worksheet that compares your current expenses with your estimated expenses after retirement to help you formulate an effective plan.

4)      What will your income be after retirement?

  • Pension: You are part of a shrinking number of people in the workforce if you have a defined benefit pension from your present or past employer. You can ask them for a projection of that pension so that you can better expect what sort of income you can plan on.

Once it is time for you to collect your pension, be sure to choose a payout option that covers your spouse or any dependents in the event that you pass away. It is also wise to consider opting for a cost of living adjustment if it is available. This will prevent inflation from reducing the value of your pension over time.

  • Social Security: You can obtain an estimate of your benefits based on your actual earnings record from the Social Security website. You can decide when you want to begin collecting those benefits. You may choose to take it as early as age 62, but it would be best to postpone it until later if you can afford to do so. This is especially true if you are healthy and predict that you will live longer than other people your age.

The reason why it would pay to wait is because your monthly benefit will grow by around 8% for every year that you delay to collect on it until it maxes out just after age 70. You can also apply for a spousal benefit if you are married and wait until you are full retirement age. You can allow your benefit to increase and then collect on it later.

If you choose to take advantage of your benefit before full retirement age, you will receive only the higher of either your spousal benefit or your reduced benefit. You cannot go back on your decision, so it is very important that you choose carefully.

  • Additional Income Sources: Consider any other income sources such as rental income or an annuity. There is also an opportunity to work part time or make one of your hobbies into a business.

5)      What do you have saved for retirement?

This is the time where you should add up all of your retirement accounts or other investments so you have an idea of what your supplementary income will be. The plan is to make this money last as long as you plan to. This way, you can better plan for what you will be investing your savings in upon retiring.

6)      How long will your savings last?

Once you determine your expenses, income, and savings, you can enter them into a spreadsheet in order to see how long they will really last. There are retirement-specific calculators you can use as well, so that you can determine factors like net income or you can predict how inflation will affect your savings.

It is always better to plan on the side of caution. Avoid the risk of outliving your money by ensuring that you would run out before you turn 95 or even 100, in some cases.

If your plan falls short of what you want, there is always the option to earn additional income after retirement as mentioned earlier by taking up a part time job or starting a small business. Cutting back on expenses is also a safe option, in addition to pursuing a more aggressive investment option.

Always keep in mind that even the healthiest people will not be able to work forever. Also, investing carries a degree of risk, so it is always safest to cut back on expenses when planning how long your savings will last you after retiring.

© 2013 KSADoctor.com. All rights reserved. This article may not be reproduced without express written consent from KSADoctor.com.

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Taking the Intimidation out of Saving for Retirement

Posted by Katie Lightfoot

Saving for retirement is a scary prospect for many Americans. In fact, just 14 percent feel confident they will have enough money to live on when they retire, according to the 2012 Retirement Confidence Survey by the Employee Benefit Research Institute. And 60 percent say they have less than $25,000 saved for retirement, the survey reveals.

Retirement planning and saving doesn’t have to be frightening or fruitless. Knowledge is power, and when it comes to preparing financially for retirement, the more you know, the more likely you are to succeed – and feel secure about your future in your golden years.

How much is enough?

Uncertainty over how much they need to save is a big concern among workers. Thirty-four percent of Americans have no retirement savings at all, according to a poll by Harris Interactive. How much you need to save now in order to have a good life when you retire depends on many factors, including your current income and age, the age at which you plan to retire and the expenses you anticipate you’ll face during retirement.

Fortunately, retirement calculators can help you get a better picture of how much you need to save. You’ll find plenty of calculators and information about saving for retirement from resources like freecreditscore.com. The calculators can give you an idea of how much income you’ll need from investments to live on during retirement, and how much of your current income you need to save between now and retirement.

Crunching credit numbers

Another important consideration is how you will interact with credit when you retire. It’s important to manage credit wisely during retirement, just as it is throughout your adult life.

Studies show that many Americans don’t regularly monitor their credit, which can be a costly mistake. In fact, 65 percent of Americans have not ordered a copy of their credit report within the past year, and 31 percent don’t know their credit score, according to the National Foundation for Credit Counseling’s Financial Literacy Survey.

Your credit report and score are important during retirement for a number of reasons. First, your score directly affects the cost of many important financial needs, such as auto insurance and interest rates. Also, while you should strive to minimize debt during retirement, it may not be practical – or even desirable – to completely eliminate credit use in your golden years. Finally, not keeping an eye on your credit report and score may mean you fail to quickly catch instances of fraud or identity theft. Senior citizens are often a favorite target for identity thieves and scammers.

Understanding your credit – leading up to retirement and during – should be a key part of your retirement planning. Websites like freecreditscore.com can help by offering enrolled members monthly statements, credit reports, credit score alerts, identity protection alerts and fraud resolution support.

Understanding your Social Security benefits

Too often, people planning for retirement either rely too much on Social Security or overlook it altogether. Neither route is best. It makes sense to incorporate Social Security as part of your overall retirement saving plan, as long as you understand what to expect from the program.

The Social Security Administration provides every taxpayer with statements about how much they can expect to receive when they retire. Your SSA statement is now available online. Simply log on to www.socialsecurity.gov/myaccount for an estimate of the amount of Social Security benefits you could receive upon retiring. Knowing how much you can expect from Social Security can help you plan your retirement savings strategies.

Saving for retirement doesn’t have to be intimidating. It’s never too late – or too early – to take control of your retirement savings goals.

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Don’t Let These Myths Rain on Your Retirement Party

Posted by Katie Lightfoot

Do you dream of the day you can retire, but aren’t sure how to get there? You’re not alone. Many people find it easier to avoid reality when it comes to planning for retirement.

That can lead to big mistakes in your retirement income planning.

Here’s a look at five common myths that could derail your expectations for income when you retire.

Myth 1: You won’t be around long enough to go through your money

The reality: Life expectancies are at record highs in the United States, so it’s important to acknowledge that you or a family member may spend as many years in retirement as you did working. According to a 2010 report by the National Academy of Social Insurance, for a 65-year-old married couple, there’s a 48 percent chance that one spouse will live to age 90.

To help stretch your money, consider incorporating immediate and deferred annuities into your planning. Created to provide guaranteed, lifelong income in retirement, they can also offer guaranteed growth while you’re saving for it.

A long retirement extends your exposure to one of financial planning’s most subtle enemies: inflation. As you invest, it’s important to seek a mix of assets that guard against the declining value of the dollar and that is in line with your risk tolerance and goals.

Myth 2: You should get out of stocks when you retire

The reality: Stocks can help provide the long-term growth you need to make your assets last longer since your retirement could span several decades.

You’ve probably heard you should reduce your investment risk as you age. But with traditional pensions being replaced by 401(k) plans, you’re wholly responsible for making asset allocation decisions.

Dampening portfolio risk at retirement doesn’t mean getting rid of stocks entirely.  Rather, regularly reviewing, and if necessary, rebalancing your portfolio based on your risk tolerance can lock in gains from strong-performing asset classes and allow you to buy those that underperform at cheaper prices.

Myth 3: You can just keep working

The reality: Counting on being able to work as long as you want is dangerous.  Employers are feeling pressure to cut costs, and with high unemployment, finding work is always a challenge.  A disability also could force you to stop working prematurely.

Many people think they can simply work longer if they don’t have enough money to retire. According to a recent survey by the Employee Benefit Research Institute, 74 percent of workers plan to work at least part time during their retirement years, as working in retirement has become a necessity for many.

Good planning doesn’t rely on good fortune. Rather, your plan should both keep you from having to work the rest of your life and deal with the consequences of unexpected surprises that prevent you from earning a paycheck.

Myth 4: An inheritance will bail you out

The reality: You may be hoping for an inheritance as a potential retirement boost. But hope is not a strategy, and counting on an inheritance can create big problems if it doesn’t come through.

Many people who expect to inherit money never do. And even for those who do inherit money, it’s often too little or comes too late to make a difference in their retirement planning. The safer thing to do is to treat an inheritance as an unexpected bonus rather than relying on it.

Myth 5: Your taxes will be lower in retirement.

The reality: Big government deficits make future tax increases much more likely. Also, taking money out of retirement accounts, such as traditional IRAs and 401(k)s, creates taxable income that can push you into higher tax brackets.

One suggestion is to consider converting part of your eligible retirement assets to a Roth IRA. By doing so, you’ll pay taxes now, but you’ll create a tax-free pool of money to tap in retirement. Diversifying with both Roth and traditional IRAs is a possible way to handle future tax uncertainty.

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Boomerang kids: When your empty nest fills up again

Posted by Katie Lightfoot

A survival guide for parents with recent graduates and young adults moving back home

With a slowly growing economy and a still sluggish job market, there has been a continued increase in children moving back home after having lived independently on their own. These so called “boomerang kids” are popping up more frequently and when this situation is managed improperly, it can cause serious tension in a family.

However, many parents are viewing this “boomerang” as an opportunity. It can allow youth to begin saving money for the future, continue a job search or to get out of debt, but only when expectations are clear and roles are known.

This is not necessarily the troubling scenario it was once thought to be and this can actually be a very productive time for both children and parents if it’s handled well. When children move back home a closer bond can form between young adults and their parents, and this can lead to the young adults receiving financial, practical and emotional support from their parents.

In May, sociologists Karen L. Fingerman and Frank F. Furstenburg reported that “in 1988 less than half of parents gave advice to a grown child in the past month, and fewer than one in three had provided any hands-on help. Recent data show that nearly 90 percent of parents give advice and 70 percent provide some type of practical assistance every month.”

This type of increased financial co-dependence between parent and child can lead to strain when living together again after a separation. If you are a parent with a young adult at home, it is important to communicate about expectations and responsibilities and to help your child build a solid financial foundation for their future.

Reviewing these tips can smooth the transition and can guide both the child and parent through a tough time:

1. Set expectations

Discuss with your child how much he/she should contribute to household expenses and tasks. A key to making the transition easy on everyone is having clear expectations for everyone involved both financially and otherwise.

2. Review your insurance and taxes (and theirs)

Save time and money by seeing if your boomerang child is covered by your health and/or car insurance. Also see if you are able to claim your child as a dependent.

3. Consider having them “pay rent”

Consider having your child pay rent or at least a token amount for living expenses. This gets the child into the habit of paying a monthly amount. Or have a set amount of money go into a saving account monthly that the child could later use for a down payment on a house or car.

4. Help them keep busy

While waiting to get hired, your child could continue to expand their resume. For example, remind them to consider volunteering, joining a professional organization, connecting with a networking group or participating in an internship, even if it’s unpaid.

5. Focus on your own finances first

You may be tempted to use retirement dollars toward financial assistance for your child, but don’t derail your own financial plans. Make sure your savings and retirement plans remain intact. Not sacrificing your own livelihood and continuing to invest in important options like life insurance, disability income insurance and long-term care insurance is critical to maintaining your overall financial health.

Though you may not have planned on it, helping support your child after they’ve left home can be a springboard toward a healthy financial future for them. Following these tips can help ensure that the boomerang experience remains positive and the relationship remains strong.

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Tips to take charge of your financial future in the current tax environment

Posted by Katie Lightfoot

With the agreement reached at the eleventh hour of 2012 to avert components of the so-called “fiscal cliff,” nearly all taxpayers will be affected in some way.- With that in mind, there are still many things you can do this year to prepare for potential additional tax changes and to take control of your financial situation.-

Below are 10 options for you to consider as you prepare for your financial future in 2013 and beyond.

1. Consider an IRA-qualified charitable distribution.

People 70 1/2 and older, who are required to take minimum distributions from their traditional IRAs, may give up to $100,000 directly from their IRAs to qualified charities. This will satisfy the required minimum distribution, or RMD, requirements and no taxes will be due on the amount of the contribution.

2. Know your tax bracket.

Now that tax rates are higher at some levels, it’s more important than ever to know which tax bracket you fall into. Ask your financial representative and accountant about strategies to keep your taxable income at a reasonable level.

3. Consider converting a traditional IRA to a Roth IRA.

Given current historically low federal tax rates, you may want to consider locking in now and paying taxes while rates are low for most people. If you choose to convert later, you may be doing so at a higher rate.

4. Look closely at your 401(k) contributions.

You may want to consider making after-tax Roth 401(k) contributions, due to the low tax rates. Conversely, higher-income earners may want to focus on making pre-tax 401(k) contributions to decrease their taxable income.

5. Consider investing in municipal bonds.

The interest earned on municipal bonds is generally exempt of federal income tax and can help to diversify your overall portfolio.

6. Consider cash value life insurance.

In addition to protecting your family financially after you die, fixed cash value life insurance also can help you reach your broader financial goals while you’re living by helping you to diversify your assets.

7. Understand the benefits of inherited IRAs.

They can help your beneficiary take distributions over the maximum period allowed by federal required minimum distribution (RMD) rules, and give your assets the potential to continue to grow tax-deferred for your heirs.

8. Consider harvesting long-term capital gains.

Sell eligible assets while top tax rates for most taxpayers on long-term capital gains is just 15 percent.

9. Consider using unneeded life insurance and annuity contracts to pay long-term care insurance premiums.

The exchange may be free of federal income taxes and help preserve your estate and way of life. This is especially important to households hit by the 3.8 percent Medicare surtax and higher income tax rates.

10. Review your financial and estate strategies

Based on history and our debt situation, it’s likely federal (and state) income tax rates will increase sometime in the future. Review your financial and estate strategies and take appropriate actions now that estate law is permanent.

Taking the opportunity to take a closer look at the recent changes and how they might affect your financial future is critical.  Change seems to be constant and working with a financial services professional can help to ensure you’re adequately prepared no matter what happens in 2013.

EDITOR’S NOTE:

The discussion of taxes in this piece is not intended to be comprehensive and is subject to change at any time. Tax law and regulations are complex and depend on individual circumstances. We make no guarantees regarding tax treatment – federal, state, or local – of life insurance or other assets.

Benchmark Financial Group, LLC and its respective associates and employees cannot provide legal, accounting, or tax advice or services. Work with your Benchmark representative, and as appropriate your attorney and/or tax professional for additional information.

Securities and Advisory Services Offered Through Client One Securities, LLC Member FINRA/SIPC and an Investment Advisor.

 

1 Municipal Bonds are subject to risks which include, but are not limited to, credit risk and interest rate risk. Some issues may be subject to state and local taxes and/or the alternative minimum tax. Any increase in principal value may be taxable. Bonds are subject to price change and availability. If you sell prior to maturity, you will receive current market price, which may be more or less than you paid. Interest generated from municipal bonds is generally expected to be free from federal income taxes. If the bonds are held by an investor resident in the state of issuance, state and local income taxes such as interest income, may be subject to federal and/or state AMT. Investing in municipal bonds for the purpose of generating tax-exempt income may not be appropriate for investors in all income tax brackets. Please consult your tax advisor for detailed discussion on your specific situation. These and other risks are described in the Fund’s prospectus.

Investing in a mutual fund involves risks, including the possible loss of principal. The prospectus contains more complete information on the investment objectives, risks, charges and expenses of the fund, which investors should read and consider carefully before investing.
For additional information, please contact Benchmark Financial Group, LLC.

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Risk Tolerance and Retirement Planning

Posted by Katie Lightfoot

By Michael Canet, JD LLM, for FedSmith

Investments and planning for retirement are a daunting task and in this current economic climate, it is even more important than ever to have the necessary tools to make informed decisions.

If you are concerned that your current retirement plan may have too much risk or you are just plain tired of the fluctuations of the stock market and the risk associated with it, this article may provide you with some simple and straightforward guidance on how to navigate these turbulent times.

Let’s start with “the math” and explain the realities of loss.  If you have $100,000 invested into a mutual fund and that fund experiences a 20% loss, the resulting value on your next statement from the mutual fund company will show an account value of $80,000.

So, will a 20% gain get you back to even? No. Let’s crunch the numbers:

$80,000 x 20% = $16,000

$80,000 + $16,000 gain = $96,000 ($4,000 LESS than your original investment)

A 20% loss followed by a 20% gain does not get you your principle back.  In fact, to regain your original principal balance you will need to get a 25% return ($80,000 x 25% = $20,000; $80,000 + $20,000 = $100,000).

A recent Gallup poll indicated more and more American’s are worried about their investments.  As we get older, our investment time horizon gets less tolerant to market losses due to the amount of time it may take to get a significant double-digit return just to get back our own money.

Therefore, the best defense to market losses is often thought to be proper asset allocation and diversification but what exactly constitutes proper asset allocation?

Frequently investors think that they can reduce their risk through diversification.  As MorningStar suggests, they will invest their money among various asset classes in the stock market and feel adequately diversified.  Unfortunately, in today’s economic climate, all they really have done is purchase multiple funds all exposed to the same market risk that really does little to provide a cushion to the economic risks associated with investing in the market.

As a solution, many financial advisors take the traditional approach to reduce risk:  the old rule of thumb was to allocate your age to principal protected vehicles such as CD’s, Treasuries, EE Bonds, and Fixed Annuities.

By way of example, a 65 year old may put 65% of his retirement savings into one of the principle protected vehicles and the rest of their nest egg would be exposed to market fluctuations.

However, in a recent study from Putnam Institute, they put the old adage to test and they suggested that as you enter into retirement, no more than 5-25% of your assets be exposed to market risk if your goal is sustain your nest egg and the ability to make lifetime withdrawals.

Even Jim Cramer is quoted as saying:

“If you want to retire at sixty, I would put more than half of your retirement money in fixed income in your forties.  If you intend to work for years after sixty, I would put much less in those placeholders.  Your fifties begin the shift toward more fixed income.  And finally, in your sixties, unless, again, you keep working, fixed income should dominate.  Your opportunities to grow your money are now limited and the reward isn’t worth the risk.”

Source: Rick Bueter, The Great Wall Street Retirement Scam. May 2011.

Too often people make investments without clearly defining a goal for that investment.  The starting point is to understand the ultimate goal and then take the risk necessary to accomplish that goal.  Notice that it asks is the risk necessary.  That is different than what you may have experienced in the past where the question was “how much risk can you tolerate”.

As retirees near or enter into retirement, let caution take hold and review your diversification so that you don’t let a lifetime’s worth of savings be wiped out by a swift downturn in the market right before you need the money.

Michael Canet and his team at Prostatis Financial Advisors Group LLC have been providing comprehensive financial planning to their clients for more than 20 years. With a legal background in estate planning, a Masters Degree in taxation, and being a financial planner – Michael has the necessary skills to guide his clients into and through retirement by creating a simple-to-understand financial plan.

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What Happens to Your Federal Benefits If You Leave Before Retiring?

Posted by Katie Lightfoot

By John Grobe,  for FedSmith

What Happens to Your Benefits if You leave before you retire?  As many of us periodically think of leaving federal service for various reasons (the grass is greener or the boss from Hell are common reasons) this information is important and can help us make the right decision when or if the time comes.

You will get an automatic 31-day extension on your health insurance.  At the end of the 31-days you can convert to an individual policy or continue your current coverage for 18 months under temporary continuation of coverage (TCC).  Costs and coverage on an individual policy will vary.  The cost for TCC are your share + Uncle’s share + a 2% administrative fee.  In both situations, no physical is required and there is no ban on pre-existing conditions.

You can convert your life insurance to an individual policy.

If you leave your retirement funds on deposit, you will be entitled to a CSRS or FERS pension at a later date as long as you have at least five years of federal service.

Your annual leave, credit hour and comp time balance will be paid to you in a lump sum shortly after you leave.

Your sick leave will do you no good, unless you return to federal service.  If you return, you can have it re-credited.

You have many choices with your TSP.  You are not required to withdraw your TSP contributions and have the option of leaving them in the TSP.  You will still have the same ability you currently do to make interfund transfers.  You could also transfer the TSP to an IRA or a subsequent employer’s tax-deferred retirement plan.  If you choose the transfer option, make sure it is a direct transfer (directly from the TSP to the new plan) in order to avoid any withholding.

If you withdraw any money from the TSP before reaching the age of 59 ½, you will be subject to a 10% early withdrawal penalty in addition to taxes.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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Spousal Rights and Your TSP

Posted by Katie Lightfoot

by John Grobe    for FedSmith

What rights does your spouse have regarding your TSP account while he/she is still alive?  What are their rights to the TSP after your death?  This article will look at both situations.

Spousal rights to the TSP while you and your spouse are both alive vary significantly based on whether you are covered under CSRS or FERS.

The spouse of a CSRS employee/retiree will be notified of the employee/retiree’s withdrawal choice.  That’s it; the spouse has no further rights.  A CSRS retiree could empty out their TSP account and spend it foolishly and their spouse would have no legal say-so.

The spouse of a FERS employee/retiree has veto power over the employee/retiree’s withdrawal choice.  The spouse must give his/her written and notarized consent for any loan or withdrawal choice other than a specific type of TSP annuity.

Why the big difference?  There are two schools of thought as to why, and I suspect that the truth is somewhere between the two.

The first school of thought is that Congress assumed that the value of the TSP to a FERS retiree would be far greater than it would be to a CSRS retiree.  That was a fair assumption back in the late 80’s when TSP rules were being developed.  For a CSRS employee retiring in 1990, why give a spouse veto power over an account of just a few thousand dollars?  Of course, a CSRS employee retiring today might have well over $100,000 in their account.

The second school of thought is that representatives in Congress, which was composed exclusively of CSRS representatives at the time TSP rules were developed, were looking after their own interests.  They didn’t want their spouses telling them what to do with their future TSP accounts.

What happens after you die?  Following are beneficiary rules for the Thrift Savings Plan.

First and foremost, the TSP will not honor wishes expressed in a will or a trust.  They will only honor wishes expressed in form TSP-3, Designation of Beneficiary (available under “forms and publications” at http://www.tsp,gov).  If there is not a valid TSP-3 on file (i.e., no form was filed, or those named on the form pre-deceased the federal employee/retiree), the Thrift Board will follow the standard order of precedence for federal benefits.  The standard order of precedence for the TSP is:

  1. Surviving spouse;
  2. Child or children in equal shares;
  3. Parents;
  4. Executor or administrator of the estate;
  5. Next of kin based on the law of intestacy in the state that was your legal residence on the date of your death.

The information in the above paragraph and list does not mean that you cannot make your trust (or your estate) your beneficiary on your TSP-3 form.

Let’s assume that you have a valid TSP-3 on file.  How your beneficiary receives the money from the TSP depends on their relationship to you.  If your beneficiary is:

  • Your federally employed or retired spouse, he/she may roll your TSP account into his/hers, elect an inherited IRA or take the money out.
  • Your non-federally employed or retired spouse, he/she may take ownership of your TSP account, elect an inherited IRA or take the money out.
  • A non-spouse, he/she may elect an inherited IRA or take the money out.

Now that we’ve finished discussing beneficiaries, I have one question for you.  Do you know who your named beneficiary is for your federal benefits? For more information, see Should You Designate Beneficiaries For Your Federal Benefits?.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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Why Alzheimer’s should factor into your retirement plan

Posted by Katie Lightfoot

(BPT) – In an ideal world, you will retire and enjoy many years fulfilling your dreams and spending time with those you love the most. Your retirement years can be some of the happiest and most enjoyable years of your life. But while we all hope for the best outcome possible, it may be prudent for you to plan for the possibility that life may deal you a difficult hand.

Your retirement plan should address the very real possibility that a chronic illness could strike – whether it’s you, your spouse or another loved one that’s affected. For many retirees, there is a good chance the chronic illness they may face later in life will be Alzheimer’s disease.

Today, more than 5.4 million Americans have Alzheimer’s and nearly half of people 85 and older have Alzheimer’s. So, while living well past your retirement age is desirable to practically everyone, living a long life does come with challenges.

The financial costs associated with Alzheimer’s

Put frankly, Alzheimer’s is an expensive disease to deal with. According to the Alzheimer’s Association, payments for care associated with Alzheimer’s totaled $200 billion in 2012. That’s just for care related directly to treating the patient; it does not factor in lost wages or other expenses loved ones may incur when caring for the person with Alzheimer’s. And care received in a nursing home or assisted living facility can easily run $3,000 a month or more, according to U.S. Department of Health and Human Services.

The good news is that planning ahead can help put you in a position where you can afford chronic care. It should be part of any discussion you may have concerning life insurance and chronic care needs in retirement.

“A plan for dealing with the costs of chronic care needs to be implemented before you develop Alzheimer’s or another chronic disease,” says Dr. Robert Pokorski, chief medical strategist for The Hartford’s life insurance programs.

The Hartford offers a couple of optional add-ons to its life insurance policies that are designed to help retirees combat costs associated with chronic care. The LifeAccess Accelerated Benefit Rider(R), for example, allows an individual who becomes certified as chronically ill and satisfies the terms of the rider to access the death benefit in the insurance policy, and the benefit can be used for both medical and non-medical expenses.

You are not powerless in fighting Alzheimer’s

“It’s important to remember that while there’s no known cure for Alzheimer’s, living a heart-healthy lifestyle can help delay the onset of the disease,” Dr. Pokorski says.- He offers this “AGELESS” prescription for living a long, healthy life:

  • Attitude – see the glass as half full
  • Good medical care – see your doctor regularly
  • Exercise – it has mental benefits as well as physical
  • Learn – exercise your brain by learning new skills, playing games, reading, traveling, engaging in hobbies and interests
  • Eat right – eat a balanced diet to help maintain a reasonable weight, cholesterol level and blood pressure
  • Sleep – try to get at least eight hours each night
  • Socialize – spend time with friends and loved ones

No one wants to be diagnosed with Alzheimer’s, but lifestyle and financial decisions you make today can help you avoid many of the hardships that come along with it. For more information on life insurance policies and riders that can help you plan for a financially secure retirement, visit www.hartfordinvestor.com/livingbenefits.

EDITOR’S NOTE:

The LifeAccess Accelerated Benefit Rider(R) is supplementary to the primary need for death benefit protection and is available at issue for an additional cost. Licensed health care practitioner certification of chronic illness must recur annually and must state the insured is in need of services under a plan of care that is likely to be needed for life. The Rider may not cover all of the costs associated with the chronic illness of the insured. Receiving benefits under the rider will reduce the death benefit available to the policy’s beneficiaries. Rider benefits may be taxable depending on the owner’s particular circumstances.- A tax adviser should be consulted.

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Expert Advice on the Do’s and Don’ts of Planning for Retirement

Posted by Katie Lightfoot

(BPT) – As with most things in life, it’s never too early to plan. And even if you are not at the doorstep of retirement, there are some critical do’s and don’ts related to retirement planning that anyone could benefit from.

We’re offering these tips with one goal in mind: helping Americans achieve a more secure retirement.

1. Don’t think of your home as a retirement asset.

Whether you are a new homeowner or near retirement, you should not think about your home as a retirement assets, for these reasons:

  • A home is, first and foremost, a place to live, and you will always need a place to live.
  • Your home is an inherently un-diverse investment.
  • A home may be subject to debt, which means it is less valuable than it appears and could be an ongoing expense when living in retirement.
  • Relying on a home as retirement savings tends to discourage other savings.

2. Don’t think maximizing investment return is a savings plan.

Maximizing investment return is an important focus of retirement planning. However, sometimes we fall into the trap of seeking outsized returns to compensate for our failure to save consistently over our lifetime. There is no substitute for disciplined and regular savings.

3. Do maximize Roth assets.

A Roth IRA or 401(k) can provide tax-free income, if you hold the account for five years and have attained age 59 ½. Roth IRAs also have the added benefit of being exempt from the tax rules requiring distributions starting at age 70 ½ .
Prior income limits on converting a traditional IRA or 401(k) to a Roth IRA were eliminated in 2010, which makes these unique retirement planning products more broadly available. Of course, converting a non-Roth retirement asset into a Roth retirement asset triggers recognition of the tax gain on the converted value.

4. Do have a retirement income plan.

Some financial professionals suggest 80 percent of your pre-retirement income is a good retirement income goal. With this goal you can then compare your expected monthly retirement income from Social Security and any pension plan to your target monthly retirement income amount. Any shortfall is the amount you will need to make up each month by tapping your other savings. Also consider an annuity contract from a life insurer to provide additional guaranteed lifetime income, which will both cover more of your target income and manage the risks that you invest poorly or live longer than expected.

5. Do plan for inflation and increasing health care costs.

Inflation and health care costs are twin traps that can erode the value of your retirement plan if you do not consider and plan for them. On strategy is to calculate a more modest income at the beginning of retirement and then increasing the income amount each year by the inflation rate.

6. Do maximize Social Security as insurance protection.

For most Americans the decision to defer Social Security payments as long as possible is an important action to ensure not outliving one’s assets. Social Security is typically a large source of retirement income, and its value is enhanced because it is government guaranteed and provides inflation-adjusted payments.

7. Do stress test your retirement plan.

The 2008 economic recession gave rise to bank ballouts and, in turn, the stress testing of banks to ensure ongoing viability. This thinking can and should also be applied to your retirement planning. For example, how would your retirement plan work if your investments grow at 3 percent a year instead of 8 percent? What if your income declines over time?

Stress testing your retirement plan could suggest you change your planning assumptions. You might decide to work longer, which reduces the number of years that you will need your retirement assets to support you. Other adjustment that you can make include saving more now, changing the risk profile of your investments, and buying products with a lifetime income guarantee so that you are less exposed to market risk and the risk that you will live longer than expected.

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1099R Statements, Replacement Copies, & Upcoming Changes

Posted by Katie Lightfoot

By:   Dennis V. Damp, host of www.federalretirement.net

My 1099R arrived from OPM this week and annuitants should have also received their Notice of Annuity Adjustments, Form R1 20-53 (REV. 12/12), that outlines your new 2013 status and payments. The annuity adjustment statement includes the 1.7% COLA increase [2] and lists any changes to your insurance and elective payments.

Each year we receive many queries from federal and postal retirees that have not received their 1099R. If you need a replacement copy read the article titled 1099R Replacements [3] that I wrote last year on this subject. It will walk you through the process. For federal employees reading this column the 1099R replaces the W2 that you receive for your wages when still employed by an agency. Retirees must report their retirement income to the IRS and the 1099R shows how much federal tax you paid and how much of your annuity is reportable for federal tax.

Government continues to go paperless. Social security [4] payments must now be deposited into a bank account or the annuitant can elect to receive a debit card, you can’t buy paper savings bonds and soon OPM will be asking all annuitants and survivor beneficiaries to sign up for electronic 1099R and tax  withholding statements. All annuitants will be asked to visit their website at www.servicesonline.opm.gov [5] and opt-in to receive electronic distribution of the 2013 1099R form. I can’t imagine that OPM will make this mandatory considering that many retirees don’t have computers to access this account.

In the meantime, if you haven’t accessed Services Online lately, you can prepare for the upcoming online elections and check on your annuity status plus much more. I use this site and it is helpful. You can change allotments, print out missing annuity statements, download replacement 1099R forms, change your mailing address, and elect state income tax withholdings and much more.

OPM advises users not to worry if you don’t remember your password. You can request a new one from the main page of Services Online. If you have set up your security questions and have an email address on file, you may choose to receive your password by email. However, if you don’t have an email address on file or haven’t set up your security questions your password will be sent by mail. Unfortunately, Services Online is currently unavailable for use by persons OPM has approved as “Representative Payees” for annuitants and survivors.

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Women Face Concerns About Reaching Retirement Goals

Posted by Katie Lightfoot

(BPT) – Women today exude confidence, juggling work and home life responsibilities seamlessly. One area where they are not so sure of themselves though is their ability to maintain their standard of living during retirement.

While women are taking greater responsibility for their own and their families’ finances, women earning more than $50,000 per year have become less confident about maintaining their lifestyle in retirement, according to a recent study. -Prudential Financial’s latest biennial study on the “Financial Experience and Behaviors Among Women” shows that a majority of women doubt their ability to achieve their retirement goals. The study also shows that with women in more control than ever of their finances, they face significant challenges when it comes to financial decision making, and admit to a lack of knowledge about financial solutions that can help them.

So what’s really behind this lack of financial confidence? Research points to a few culprits, including the country’s financial downturn. As many as 30 percent of women surveyed are struggling to make ends meet, a situation which can psychologically undermine even the most financially savvy among us.

The study also found a difference in the level of confidence between women younger than 35 and female baby boomers. Both groups have clearly defined financial goals, but younger women see themselves as novice investors and feel ill-equipped to make important financial decisions. Amid all this uncertainty, women of all ages are encouraged to begin taking baby steps toward planning for a secure retirement. The good news is some of the best confidence-boosters are fairly simple:

* Take stock. How much have you saved already? How long do you plan to work? Will having children impact your ability to save for the future? Getting a clear picture of where you are will help you see where you need to go.

* Protect yourself. If you are married, have you and your spouse established adequate financial safeguards such as life insurance or long term care insurance? While these conversations can be difficult, they are an important aspect of a solid financial plan.

* Do your homework. The Internet offers a wealth of educational materials to help you build confidence and knowledge when it comes to financial products and services. Make use of online tools and checklists to help you prepare for a meeting with a financial professional. Then take the next step and make an appointment.

Taking action can help boost your confidence and give you the tools you need to secure your financial future.

Contact us, we would be glad to help you with your financial future.

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‘Til Death Do Us Part, But How Do You Handle ‘In Sickness And In Health’?

Posted by Katie Lightfoot

Survey highlights gender differences in long-term care perceptions

(BPT) – Apparently “in sickness and in health” can mean different things to men and women. As the population ages and the need for extended health care increases, a recent nationwide omnibus survey of 1,005 American adults shows that men and women approach the issue of long-term care planning and insurance from different perspectives.

Those differences, according to the Thrivent Financial for Lutherans survey, could have a significant impact on their retirement years – and their family relationships.

Men vs. women

With women living longer than men, there should be some concern about who will actually foot the bill of the costs should a woman require long-term care. With married couples, the woman is more likely to need long-term care – she will likely care for her husband during his final days, and then may rely on long-term care herself since she is likely to outlive him.

Despite that, according to Thrivent Financial’s survey, males seem more versed in the topic of long-term care insurance than females. The survey indicated that men are more likely than women to own or plan to buy long-term care insurance. For example:

* 12 percent of females surveyed currently own long-term care insurance.

* 19 percent of males surveyed currently own long-term care insurance.

* 60 percent of females don’t intend to buy long-term care insurance in the future.

* 53 percent of men don’t intend to buy long-term care insurance in the future.

* 27 percent of both men and women surveyed plan to purchase long-term care insurance in the future.

In short, men seem to be coming around to the necessity of preparing for long-term care, while women appear to be slower to acknowledge the need.

The sandwich generation issue: stuck in the middle – but continuing to work?

When it comes to providing care, the differences between the sexes continue. When asked how they would care for both their children and one or both of their parents or another loved one at the same time, male and female respondents had differing opinions.

* Twenty-six percent of women reported they would quit their job to be the primary caregiver for a loved one should the need arise.

* Only 14 percent of men said they would consider that option.

* Thirty-three percent of men said they would rely on the savings and assets of those needing care and continue working.

* Only 21 percent of women would rely on the savings and assets of those needing care and continue working.

And what will you do in retirement?

Long-term care in retirement is an important issue facing both men and women but it is often overlooked during the retirement planning process. According to Thrivent Financial’s survey:

* Only 10 percent of women considered the possibility of caring for someone else while retired.

* Only 6 percent of men considered the possibility of caring for someone else while retired.

In contrast, 43 percent of women and 41 percent of men plan to retire fully and devote their time to travel, philanthropy and/or hobbies. Unfortunately, many don’t stop to consider the impact to those plans should the need for extended care arise. What will be given up to pay the expenses? Are family members trained to provide the type of needed health care? Who is willing to alter plans when push comes to shove?

“The disconnect between our expectations for a long, healthy and independent life and the reality of the chances of needing long-term care is staggering,” says Dean Anderson, product leader at Thrivent Financial for Lutherans. “Planning ahead is critical for both men and women, given the potential the consequences to the emotional, physical and financial well-being of your family.”

The moral of the story

Taking the time to discuss priorities and plans when it comes to future care needs can help alleviate worry and stress in relationships – and ensure that expectations are appropriately set and finances allocated. Women should be especially sure to consider all the benefits that long-term care insurance brings. For more information about long-term care, contact us.

 


EDITOR’S NOTE:

About the Long-Term Care Insurance Survey
Data for this survey was collected via national omnibus survey by Ipsos. Interviewing took place between Aug. 31 and Sept. 4, 2012, among a national cross-section of 1,005 adults age 18+ of whom 49% were male and 51% were female.

Long-term care insurance may not cover all of the costs associated with long-term care. You are advised to review your contract carefully. The contract has exclusions, limitations, reductions in benefits and terms under which the contract may be continued in force or discontinued. Contract provisions and benefits may vary by state.

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Federal Retiree’s Contact List

Posted by Katie Lightfoot

The following list of key contacts, with links to comprehensive guidance, is available for your use.  The report provides contacts you need to plan for retirement and manage your annuity and benefits.  You may copy and distribute this report to all federal employees and annuitants.

OPM – Retirees must contact OPM to initiate changes to their benefits, change allotments or direct deposit, report an annuitant’s death, or to obtain duplicate 1099-R tax forms and request other services.

Web Address:  http://www.opm.gov/retire,    E-Mail:  [email protected]

Toll Free 1-888-767-6738 (weekdays between 7:30 AM to 7:45 PM EST),

Fax requests to 1-724-794-6633, or

E-mail questions to: [email protected].

Call early in the day if possible to get through and you must have your retirement claim number or Social Security Number available.  OPM advises that “the internet is not a secure environment for transmitting personal information via email.  Replies via email typically take 15 days or more.

To report a death:  call toll free 1-888-767-6738 or our mailing address is:  U.S. Office of Personnel Management, Retirement Services Program, P.O. Box 45, Boyers, PA  16017-0045.  Be sure to include the full name of the deceased, date of death, retirement claim # and/or Social Security Number and include your name, address and phone number.

On-Line Services:  Federal retirees can sign up for online support, add or change allotments, purchase savings bonds, print out duplicate 1099-R statements, and view monthly pay statements at http://www.servicesonline.opm.gov.

You must obtain a user ID from OPM to access the site.  If you call OPM at 1-888-767-6738 they will send you a user ID and password to access their site.

For Direct Deposit forms and instructions visit:  http://www.fms.treas.gov/eft/1199a.pdf

For questions regarding:

Helpful Information:

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Government Employee Discounts

Posted by Katie Lightfoot

By:  Jason Kay for FedSmith

Government jobs come with many perks and perhaps one of the best perks is the amount of discounts that Government employees are entitled to. These discounts are offered by various companies and are meant to be sort of a thank you to all those who work for the Government. This includes military and non-military Government jobs and the savings that can be enjoyed can wind up being quite substantial.

There are many discounts that Government employees are entitled to. Some discounts are a specific percentage off and others are special offers that are far cheaper than the offers an average person would receive. Here is a small sampling of some of the welcomed discounts that are available to Government employees:

  • Geico: Geico offers discounts on auto insurance for active or retired Government employees that are GS-7 and above. The offered discounts are available in most states and the District of Columbia. Learn more about this program by visiting http://www.geico.com/information/discounts/federal-employee-discounts/.
  • GovArm.com: No matter what a Federal employee is looking for travel wise, they can likely find a discount on it at GovArm.com. This site specializes in finding special discounts for all military personnel and Federal employees in areas such as car rentals, condo rentals, vacation packages, hotel reservations, and more. Learn more about their services at http://www.govarm.com/.
  • FedRooms.com: FedRooms.com offers special discounted hotel rooms for Government employees. While the main page of the website focuses primarily on official Government travel, there are sections of the website that also offer ways to save when you are traveling for leisure. Learn more at https://www.fedrooms.com/.
  • Apple: If your Government job requires you to use an iPad, iPhone, or any other Apple product, you are entitled to a discount. Apple offers a special discount for all Government employees on even their most popular products and more information can be found at http://www.apple.com/r/store/government/.
  • Dell: Dell is another large tech company that offers special discounts to Government employees. Dell Honors employees and retirees of the Federal Government and their families with up to 30% computer discounts and best price guarantee for members. Go to www.dell.com/epp/federal to receive your discount. To receive free 2nd business day shipping on personal purchases and get a 5% gift card back on everything you purchase in addition to your discount sign up for Dell Advantage at www.dell.com/advantage4military  and use Member ID CS25031666.
  • Carbonite: This online backup service protects your computer files by saving copies of them on a remote server. If you ever lose a file due to theft, accidental deletion, or anything else, just login and download the backed up versions. Learn more and receive a 10% Carbonite offer code at http://www.remoteonlinebackup.net/coupon/carbonite-offer-code/.
  • Verizon: Verizon offers some Government employees a huge savings for all their cell phones, cell phone calling plans, and cell phone accessories. You can see if you are eligible to take advantage of Verizon’s savings at https://www.verizonwireless.com/b2c/employee/emaildomainauthentication.jsp.
  • Microsoft: Government employees can get discounts on some of the top Software that is offered by Microsoft thanks to their Home Use Program. Learn more about this special discount program at http://www.microsoft.com/industry/government/licensing/homeuseoptions.aspx.
  • American Auto Assurance: American Auto Assurance offers discounts on fully insured vehicle protection plans if you are a Government employee or current or retired military. Their service allows you to have a vehicle that is protected from break down even if the vehicle in question is soon to be out of warranty. Learn more the discount and get a free quote at http://aaagovdiscount.com/.
  • Absolute Security of America: Absolute Security of America is an authorized dealer of ADT and gives special packages to all Government employees seeking home security. These offers are not available to the general public and more can be learned at http://www.absolutesecurityofamerica.com/govexec/.
  • Avis: If you are a Government employee or active military and looking to rent a car, then Avis has specials for you. Not only do they offer special discounted rates, but they also offer other specials like free upgrades and the like. Learn more about their specials for Government employees and military personnel at https://www.avis.com/car-rental/profile/go.ac?A555084.
  • Budget: Another rental car company that Government employees can take advantage of is Budget. Budget offers free upgrades, discounts like $25.00 off a week long rental, and even two free days of GPS use. Learn more about all the savings Budget has to offer at http://www.budgetcarrental.com/budget/fastbreak/index.html?V053905.
  • Alamo: Alamo car rental service also gets in on the action and offers a wide variety of discounts and special services for all Government employees and military personnel seeking to rent a car. This includes unlimited miles, special leisure rates, free upgrades, and more. Learn more about these Alamo perks at https://www.alamo.com/index.do?action=/hotDealsTemplate&msg=AL_GOVRNR_Splash.
  • Pods:  Pods revolutionized self storage several years ago by making it portable. They bring a mobile container to your house and let you pack it at your convenience. Then they pick it up and store it for you or deliver it to your new home. Use a Pods promotional code and save 5% off local or one-way moves.

These are but a very small example of the many companies that offer discounts to Government employees. It should be noted that many companies will not openly advertise that they do have such specials so it always pays to ask if they do. While the savings may not be significant, any savings is good savings and if you are entitled to it as a Government employee, then you should get it.

© 2013 KSADoctor.com. All rights reserved. This article may not be reproduced without express written consent from KSADoctor.com.

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Your Unused FERS Sick Leave: How Much is it Worth At Retirement?

Posted by Katie Lightfoot

By Robert F. Benson For FedSmith

Until late last year, FERS employees in the twilight of their careers were faced with a dilemma: “What should I do about my sick leave?” If I use it up (“burn it”) during the year or so prior to retirement, I will be cheating. But if I am honest about it, then I will lose something of real value—the sick leave will simply    vanish at retirement. What should a FERS employee do?

Fortunately, Congress passed and the President signed into law, a bill to remedy this situation. (See President Signs Defense Bill: Includes Credit for Sick Leave and Abolishes NSPS)

FERS employees now receive credit for their sick leave, at retirement.

Here is how this works.

When a FERS employee retires, he or she receives 1% of his high-three salary for each full year of service, and one-twelfth of 1% for each month.

At retirement, the sick leave balance used for his annuity is reduced by half. Then, for each 348 hours of sick leave, one month is added to his service time. Beginning in 2014, the hours will no longer be reduced by half; instead, the employee will be credited at the rate of one month for 174 hours.

Here is an example:

  • Frank has a high-three of $74,287 and a sick leave balance of 1,292 hours. First, the 1,292 hours are    reduced by half, to 646.
  • The 646 is then divided by 174 and rounded down to the nearest whole number (646 / 174 = 3.71, rounded = 3).
  • This equates to three additional months of service, or 0.25% of the high-three.
  • One quarter of 1% times $74,287 = $185.71.
  • The $185.71 is then divided by twelve to arrive at the exact increase in Frank’s monthly annuity: $15.47.

A person with the identical figures as Frank, retiring on/after January 1, 2014, will see an increase of $30.94, because the sick leave balance will no longer be halved.

What happens to the “leftover” sick leave?

In Frank’s case this amounts to 124 hours. Unfortunately, it is lost, unless…if the leftover service time, combined with the leftover sick leave hours, is equal to or greater than one month, then Frank gets credit for one additional month.

How much is FERS sick leave worth? Not a great deal, but certainly better than nothing!

To do the above arithmetic quickly and easily, just go to fedbens.us and click number 7 on the menu. (Editor’s note: The program referenced will not work on all computer systems.)

© 2013 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

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Your MRA

Posted by Katie Lightfoot

By John Grobe for FedSmith

Your MRA, or Minimum Retirement Age, is based on the year in which you were born. A FERS retiree who was born before 1948 would have a MRA of 55. However, if born in 1970 or later, the MRA would be 57.

Here is a chart that demonstrates how this works:

Minimum Retirement Age + 10

Year of Birth MRA
Before 1948 55
1948 55 and 2 months
1949 55 and 4 months
1950 55 and 6 months
1951 55 and 8 months
1952 55 and 10 months
1953-1964 56
1965 56 and 2 months
1966 56 and 4 months
1967 56 and  6 months
1968 56 and 8 months
1969 56 and 10 months
1970 and later 57

The 5% penalty applies to FERS retirees who leave under the MRA + 10 provision.  FERS employees who are under age 62 and retire under other provisions face no reduction at all.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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Your Buyout Can Be Less Than $25,000

Posted by Katie Lightfoot

By Robert F. Benson for FedSmith

The buyout (VSIP, or Voluntary Separation Incentive Pay) is payable for resignation/retirement from specified jobs within certain agencies only with approval from the Office of Personnel Management (OPM). It is calculated the same way severance pay is calculated, with an important difference: severance pay can be as much as a full year’s salary, while the VSIP money is capped at $25,000.

To understand how the buyout pay can be less than $25,000, you need to know how it is calculated. The basic amount is one week’s pay for each of the first 10 years of Federal civilian (not military) service, plus two weeks’ pay for each year above 10. Each 3 months = one quarter of a year’s payment, with service rounded down to the nearest quarter.

Age bonus. The age bonus is 10% of the basic amount for each full year over 40, with the same 3-month proration (i.e., 2.5% of the basic amount for each quarter).

Here are four examples for an employee making $60,000 annually (weekly = $1,149.97):

Age Years Basic Amount Age Bonus Total
26 4.25 $4,887 0 $4,887
36 14.5 $21,850 0 $21,850
41 19.75 $33,924 $3,392 $25,000 MAX
46 24 $43,699 $26,219 $25,000 MAX

Note: one week’s pay is: (annual salary / 2,087) * 40

So, be advised: it is possible for the buyout to be less than $25,000.  Clearly, once an employee hits 40, the number increases faster!

To get a fast, accurate calculation, go to fedbens.us and click no. 2 on the menu.

© 2013 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

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What Happens to Your Federal Employee Benefits if You Die While Still Working?

Posted by Katie Lightfoot

By John Grobe for FedSmith

What Happens to Your Benefits if You Die While Still Working?

This is a question we do not want to ponder, as we all plan on living long after we retire. When it comes to Ben Franklin’s quote, “Plan like you’ll live forever; pray like you’ll die tomorrow”, we all tend to focus on the first part. However, it is helpful to know what will happen to our federal benefits, should we die while still employed.

Your health insurance will no longer do you any good, but it may be a great deal for your surviving spouse. If your spouse is enrolled with you on a self and family policy on the date of your death, he/she will be able to continue federal employee health benefits and Uncle will continue to pay his share.

Your life insurance will be paid to your designated beneficiary. If the amount of your insurance is $5,000 or greater, your beneficiary will not receive a check. Rather, they will receive a money market account and a checkbook for the account.

Speaking of beneficiary forms, do you know who your beneficiaries are? If you have any doubt, you may wish to check your Official Personnel Folder (OPF). The last thing you want is having your ex-spouse walking off with all you have saved over your career.

If you are married at the time of your death, the survivor benefits your spouse will receive are dependent on your retirement system. If you are CSRS, your spouse will receive a full survivor annuity (55% of what your annuity would be). In the unlikely event you have less than 22 years of service, your spouse will receive a “guaranteed minimum” annuity.

If you are under FERS, your spouse will receive a lump-sum death benefit of ½ of your final salary (or high-3, if higher) and $30.792.97 (in 2012). If you have worked ten years or more, your spouse will be entitled to a full survivor annuity (50% of what your annuity would be).

Under both retirement systems, if your surviving spouse remarries before the age of 55, he/she forfeits the survivor annuity.

Your annual leave, credit hour and comp time balance are considered “unpaid compensation” and will be paid to your designated beneficiary.

Your TSP will go to your designated beneficiary. Your beneficiary may either take the money all at once (paying all the deferred taxes at once) or spread it out over his/her lifetime (paying all the deferred taxes a little bit at a time). If your spouse is a federal employee, they may combine your TSP account with their own.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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USPS offers early outs, buyouts

Posted by Katie Lightfoot

The U.S. Postal Service said it would offer buyouts and early outs to the nation’s 21,000 postmasters.  USPS announced the voluntary early retirement authority and special incentive offer on May 9, the same day the Postal Service rolled out its plan to cut window hours at rural post offices as way to keep them open for business.
The buyout offer consists of a one-time, $20,000 cash incentive, payable in two installments in December 2012 and December 2013. Part-time postmasters who accept the deal will receive pro-rated payments on the same dates.
Postmasters who leave by voluntary resignation and those who separate under the VERA both are eligible for the cash incentive. Postal career executive service postmasters are not included in the offer. Postmasters will have until June 22 to accept the offers, and must agree to leave by July 31, USPS said.

The Postal Service said it would furnish a retirement kit and an annuity payment estimate to all eligible postmasters next week.

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Two Significant Changes to FERS

Posted by Katie Lightfoot

by John Grobe for FedSmith

Co-authored by Ehren Clovis and John Grobe

You wouldn’t expect the “Middle Class Tax Relief and Job Creation Act of 2012” to affect federal employee  retirement benefits, would you?  But it does.  In fact, it makes two significant changes to the Federal Employees’ Retirement System (FERS).

First significant change:  New employees who are hired on or after January 1, 2013 will  pay more for their FERS retirement coverage than current employees. The increase (2.3% across the board) will raise deductions for new regular employees from 0.8% to 3.1%, and deductions for new “special category” and Congressional employees from 1.3% to 3.6%.  Employees paying the new higher rate will be called FERS “Revised Annuity  Employees,” or FERS-RAE.

Thinking about returning to federal service after a break?  Be warned:  “New” employees include employees who are rehired with less than 5 years of creditable or potentially creditable FERS service as of 12/31/2012.  Employees with more than 5 years of creditable or potentially creditable service as of 12/31/2012 are exempt from the new FERS-RAE provisions and will remain under FERS at the old rates.

Example:  Eric was employed under FERS from December 1997 through June 2005, then left federal service for a private sector job.  If Eric returns to federal service in 2013 or later, he will be covered under FERS, not FERS-RAE, because he had 5 years of creditable FERS service as of 12/31/2012.  But if Eric had left in 2001, he would be under FERS-RAE when he returned.

“Potentially creditable service” is service for which there are no funds currently in the FERS system, but for which redeposits or deposits can be made to FERS.  This includes FERS service for which the employee contributions have been withdrawn (aka “redeposit service”) and service for which FERS deposits can be made (aka “deposit service,” including Peace Corps and VISTA volunteer service, most Temporary service before 1989, and most active duty military service performed while on leave from a civilian federal position).

Are you thinking that FERS-RAE employees will get a larger retirement benefit, since they are paying more?  Think again: there’s no change in the way most retirement benefits are computed (see the next paragraph).

Second significant change:  The new law changes the way pensions are computed for “new” Members of   Congress and Congressional staffers who begin service in 2013 or later.  Their pensions will be computed the same way as those of regular employees.  They will no longer receive a higher benefit similar to that of “special category” employees.  Yes, that’s right: they’ll be paying more and getting less than before.

One thing federal employees can be grateful for is Congress’ penchant for grandfathering current employees and shielding them from negative changes to federal benefits.  Those who are employed on 12/31/2012 and rehires who have at least 5 years of creditable or potentially creditable FERS service are exempt from the new provisions.  This should give some small comfort to current federal employees who are concerned about other possible changes (e.g., high-five, future contribution increases, etc.).

More information about the new FERS provisions can be found in the Office of Personnel Management’s Benefits Administration Letter 12-104, dated 10/3/2012.

Ehren Clovis recently retired after a career in retirement and benefits with the Bureau of Public Debt.  She provides individual retirement counseling (“Federal Benefits on Call”) for federal employees.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

 

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The ‘Fiscal Cliff’ and Your Paycheck

Posted by Katie Lightfoot

by John Grobe for FedSmith

What impact will the recent “fiscal cliff” legislation have on you as a federal employee?  Will you be better off hanging around or retiring?  Should you dust off your résumé and look for work elsewhere or should you just hunker down and ride it out?  Is the brouhaha surrounding the resolution of the manufactured fiscal cliff crisis much like what Shakespeare’s Macbeth called “…[a] tale told by an idiot, full of sound and fury, signifying nothing.”?

There is no one-size-fits-all answer to these questions (except perhaps the last one).  Employees at different stages of their careers will make different decisions.  In this article we will look at the changes one at a time.

First we’ll look at the federal income tax increase (from 35% to 39.6%) on those with incomes over $400,000 (single) and $450,000 (joint).  I bet you can count the number of federal employees or retirees (excluding members of Congress) who are affected by this on the fingers of one hand.  According to OPM, the average federal salary in 2010 was $76,231.  With salaries having been frozen since then the average hasn’t increased by much.  CNN tells us that only 0.6% of the population will have incomes high enough to be hit by this tax increase.

The limitation of itemized deductions for those with incomes over $250,000 (single) and $300,000 (joint) will affect a few additional employees.  You would have to be looking at a highly paid fed with a highly paid spouse to reach an income of $300,000.  The vast majority of federal employees will not lose any deductions.  Even fewer retirees will be affected.

One change that will hit federal employees is the end of the “payroll tax holiday.”  Employees who have Social Security deducted from their salary (FERS and CSRS Offset) will now be paying the normal 6.2% Social Security tax, rather than the 4.2% they have paid for the last two years.  Our average federal employee will have about $58 more withheld for Social Security each pay period.  The payroll tax holiday was called a “holiday” for a reason; it was not designed to be a permanent reduction in the amount that workers pay in Social Security taxes.

The elimination of the payroll tax holiday will not hit retirees (unless they work during retirement), because payroll taxes are not taken from pension income (CSRS or FERS), TSP payments, or Social Security.

The permanent inflation indexing of the Alternative Minimum Tax should help many middle and upper income federal employees and retirees.

The making permanent and indexing of the $5,120,000 unified exemption for the Federal Estate Tax will impact few feds (except perhaps some of the aforementioned members of Congress).

What other items are changing for employees and retirees going in to the New Year?

  • Health insurance premiums are going up; however they go up equally for employees and retirees.

It does not appear that the Round 1 decisions made in DC over the New Year’s holiday will have much effect on federal employees’ decisions as to whether they should remain a federal employee, retire, or seek work elsewhere.

But wait! The main thing that was done by the agreement on the “fiscal cliff” was to postpone decisions on many items, including some that threaten federal employees and their benefits.  As a result, the one thing that remains the same is uncertainty about federal pay, benefits and retirement.  Some of the major items that can affect federal employees and retirees and still remain outstanding are:

Will Congress overturn the 0.5% pay increase for current federal employees?  The House has already done so.  The Senate is not expected to agree.

  • Will retiree’s COLAs (as well as all other inflation indexed federal benefits) be computed using a less generous “chained” Consumer Price Index?  President Obama and Speaker Boehner agreed on this a couple of years ago, but it was not implemented then due to lack of agreement on other issues.  Although it was part of the President’s plan in the Round 1 discussions, it did not clear the Senate.
  • Will retirement contributions be raised for current employees?  There is still some sentiment to do so.
  • Will the dreaded high-five ever happen?  It has been threatened for decades and was backed by both House Republicans and the Simpson-Bowles commission.

Federal employees and retirees cannot sit back and assume they got off scot-free.  They dodged a haymaker in the first round, but their enemies in Washington will come storming out of their corner when the bell signals the second round; and it looks like the second round will be upon us soon as discussions over the debt ceiling commence.

Will all of these items get resolved in Round 2 or Round 3?  Don’t bet on it.  It doesn’t appear that any side in the political battle has the power to deliver a knockout punch.  We may be in for a fifteen-rounder with a split decision.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

 

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The Earnings Test for Your FERS Annuity Supplement

Posted by Katie Lightfoot

By Robert F. Benson for FedSmith

The only thing 100% clear about the FERS annuity supplement is that it ends at age 62, which is when the retiree first becomes eligible for Social Security.

For retirees under age 62, some get the supplement and others do not.  Some are subject to the “earnings test” while the rest are exempt.  Some receiving the supplement are penalized for earning too much    money.  Among those who are penalized, some over-report income, and lost money needlessly.

Who does not get the supplement?  If the employee retires on a VERA—Voluntary Early Retirement Authority—and is less than the minimum required age (MRA), then he will not receive the supplement   until he reaches the MRA.  So, you can retire and be too old for the supplement, but you can also retire and be too young.  Also, note that it is possible to retire on a VERA and still be subject immediately to the    supplement and the earnings test.  This would happen, for example, if the person is 58 years of age and has 26 years of service—such a person has the age but not the years, and needs the VERA in order to retire.

An important exception to the preceding is special employees: police, fire fighters, and air traffic controllers.  These employees can retire earlier than others, and they receive the supplement immediately, without regard to their age.  Thus, a special employee can, by law, retire as early as age 43 with 25 years’ service, and he will receive the supplement for the next 19 years.  And he can make an unlimited income from working, while being exempt from the earnings test, but not for the entire period.

Once they reach the MRA, special employees are subject to the earnings test, just like everybody else.

The Earnings Test

An excellent source of accurate, dependable information is RI-92-022, the 2010 Annuity Supplement Earnings Report.  In summary, it states that for persons receiving the supplement, in 2010, the first $14,160 in earnings are exempt, after which there will be a reduction of $1 for every $2 earned.  Wages earned after retirement and net earnings from self-employment are reportable, but—a common mistake—annual leave paid upon retirement and separation incentives are not.

The reduction is applied starting in July for earnings during the previous year.  The earnings threshold increases annually.  Form RI 92-22, which is required to be submitted annually by retirees to whom it applies, also lists various kinds of income which are reportable vs. non-reportable.

© 2013 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

 

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Roth TSP debuts: Information and tips for federal employees

Posted by Katie Lightfoot

Most all TSP forms have been update atwww.tsp.gov with April 2012 dates.  It would be best to go down load the new forms.

Roth TSP debuts: Information and tips for federal employees

The Thrift Savings Plan Roth option launched May 7.* Certified Financial Planner Edward A. Zurndorfer offers some information and tips below to help federal employees understand how the new option works.

Participation. All full-time and part-time federal employees and uniformed service members are eligible to contribute to the Roth TSP. It makes no difference their age, tax filing status or income level.

Contributions. Contributions to an employee’s Roth TSP account are made via payroll deduction, identical to how contributions are made to an employee’s current “traditional” TSP account. However, unlike the traditional TSP account in which contributions are made with “before-tax “dollars (salary), contributions to an employee’s Roth TSP account will be made with “after-tax” dollars (salary).

•Limits on Roth TSP Contributions. Employees and uniformed service members can continue to contribute to the traditional TSP and contribute to the Roth TSP. However, an employee’s combined contributions to the traditional TSP and to the Roth TSP during calendar year 2012 cannot exceed $17,000 (“regular” contributions) and for those employees who will be age 50 or older as of Dec. 31, 2012, there is a limit of $5,500 in “catch-up” contributions.

•Rollovers and Transfers. An employee or uniformed service member can roll over or transfer an existing Roth 401(k), Roth 403(b) or Roth 457(b) account into the employee or uniformed service member Roth TSP account. A Roth IRA account may not be rolled over or transferred to the Roth TSP, however. There is no limit as to how many eligible Roth accounts may be rolled over or transferred, and such rollovers and transfers have no effect on an employee’s annual contributions via payroll deduction to the Roth TSP.

•FERS Employees Agency Automatic and Matching Contributions. Those employees who are covered by the Federal Employees Retirement System will have their agency’s automatic 1 percent (of the employee’s gross salary) and 4 percent matching contributions deposited into the employee’s traditional TSP account. This is the case even if the employee contributes only to the Roth TSP.

Contributions to a Roth IRA. An employee who is eligible can also contribute to a Roth IRA (as much as $6,000) in addition to contributing to the Roth TSP. Roth IRA eligibility and participation rules are separate from the Roth TSP rules.

• Advantages and Disadvantages to Roth TSP Participation. The biggest advantage to Roth TSP participation is that all qualified withdrawals from a Roth TSP account will not be subject to federal and state income taxes. Also, a Roth TSP account can be rolled over to a Roth IRA, resulting in continued tax-free growth while in the Roth IRA and no requirement starting at age 70.5 to make minimum required distributions from the Roth IRA as will be required from the Roth TSP. A disadvantage to an employee’s Roth TSP participation is the fact that the employee loses a current tax deduction, thereby possibly resulting in higher income taxes during the years of contributions. Also, by contributing to the Roth TSP using after-tax dollars, an employee’s adjusted gross income (AGI) will be higher resulting in the possible loss of other tax credits and deductions that depend on an individual’s AGI.

•Which Employees Benefit Most from Roth TSP Participation. Generally speaking, those employees and uniformed service members who expect to be in a higher tax bracket after they retire compared to their current tax bracket should give serious consideration to Roth TSP participation. Both federal and state income tax brackets should be considered, especially those employees and uniformed service members who expect to retire to states with high income taxes.

•Enrolling in the Roth TSP.  An employee’s or uniformed service member’s enrollment in the Roth TSP will be done the same way as enrolling in the traditional TSP, namely through the employee’s agency electronic enrollment or via form — civilian employees use Form TSP-1 and Form TSP-1-C (“catch-up” contributions) and uniformed service members use Form TSP-U-1 and Form TSP-U-1-C (“catch-up” contributions).

•TSP Loans. TSP loans — both general purpose and residential — are disbursed proportionately from an employee’s traditional accounts and Roth TSP accounts.

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Roth TSP implementation date is May 7, 2012

Posted by Katie Lightfoot

Roth TSP implementation date is May 7, 2012 — Agencies and services can begin accepting elections for Roth (after-tax) contributions at that time. The Roth TSP feature will give participants greater flexibility in the tax treatment of their accounts. Roth contributions are tax-free when withdrawn; their earnings are also tax-free when withdrawn (as long as certain IRS requirements are met). Participants should check with their agencies or services to find out when they will be ready to participate in Roth TSP. See the press release for more information.

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Retirement Planning for Federal Employees

Posted by Katie Lightfoot

By Jason Kay for FedSmith

Federal employees are entitled to some of the very best in retirement options, but that also means that they are faced with many challenges when it comes to their retirement planning.     Retirement planning for Federal employees can be a lot more challenging versus retirement  planning in the private sector as there are so many rules and regulations that you need to consider and each benefit will have its own qualifying measures that need to be looked at.

While there are other types of retirement plans for Federal workers, the most common that you will see is the FERS plan, which stands for Federal Employees Retirement System. When you look at the FERS plan it is important to note that you are actually looking at three different components of your retirement planning including your FERS pension, your social security, and your Thrift Savings Plan, or TSP. These are broken down further as follows:
FERS Pension

Sometimes you will hear this referred to as a FERS annuity. Basically, when you work for the Federal Government, each time you receive a paycheck you will have a little bit of money deducted and then put towards your FERS pension. While the amount that is deducted is usually about 0.8%, that is not what is used to calculate your final FERS pension payments.

What you will receive will depend on a number of factors such as your years of credible service and how much you made when you were working for the Federal government. You also have to take into consideration what kind of retirement you choose. You can choose Immediate FERS Retirement, Early FERS Retirement, Early Out FERS Retirement, Deferred FERS Retirement, and Disability FERS Retirement.

Each type of FERS retirement has its own requirements for age and years of service, so you need to know your Minimum Retirement Age, or MRA. If you do not know what your MRA is, you need to find out as this can greatly impact the amount of money you receive from your FERS pension.

Social Security

Typically, if you are covered under the FERS plan, then you will be eligible to receive Social Security when you retire. Each pay period, your Federal employer will take out 6.2% of your paycheck and put it towards Social Security, but again, this is not how your payment is calculated.

Instead, what you receive is based on how long you have been working at a particular Federal job and how long you have been contributing to Social Security. This is just like with most other jobs,

You can find out for sure what you can expect to receive when you look on your Social Security Statement that gets sent to you on an annual basis. You should always be sure to carefully review this statement each and every time you get it. If there is a mistake, you need to address the issue sooner rather than later as you only have three years to catch any glitches before you are simply out of luck. Social Security can end up being a major part of your retirement income, so you need to be sure that all the pieces are properly in place.

You should also look into whether or not you are a Federal employee who is eligible for a program known as the FERS Supplement. This program allows you to retire before your Social Security receiving age of 62 and will supply you with funds that will help you bridge the money gap until you have reached that magical age of 62 where your Social Security benefits will then kick in. This program is not widely known and not all FERS plan participants will be eligible, but it is certainly worth looking into.
Thrift Savings Plan, Also Known as TSP

Your TSP will act much like a civilian 401k and will allow you to contribute a certain amount of money to your TSP in order to help you save for retirement. This is the part of your FERS plan that you will have the most control over. That’s because you are allowed to invest the money in a number of different ways. With your TSP you can choose to invest in:

  • G Fund: A government securities fund considered the least risky.
  • F Fund: A fixed income fund also considered less risky.
  • C Fund: A common stock fund, which tracks the S&P 500 Index.
  • S Fund: A small capitalization stock fund, which tracks the Dow Jones US Completion TSM Index.
  • I Fund: An international stock fund, which tracks the MSCI EAFE Index.

In order to get the most out of your TSP, you have to know how much you can put in and what your risk tolerance is. By putting in as much as you can, you allow yourself the most amount of saving possible, plus most Federal employers will match a certain percentage of what you invest.

By knowing your risk tolerance you can then decide which fund, or funds, you want to invest in. If you make no choice, then you will automatically be put in the G Fund.

Even if you have no clue as to how you should invest your money, you can easily look into a program that was started in 2005 called the Lifecycle Funds. This program will take your contributions and invest it in a variety of the funds depending on how long you’ve been building your   government resume, or in other words how close you are to  retirement.  Essentially, the further away you are from retirement, the more risk you can take for more chance of potential reward.

Retirement planning for Federal employees is retirement planning that requires a lot of thought and careful consideration. If you are planning your retirement from your Federal job, be sure that you look into all the variables and try to consider all of your available options so that you can be sure to get the most amount of money for you and your family when you finally do get to retire.

© 2013 KSADoctor.com. All rights reserved. This article may not be reproduced without express written consent from KSADoctor.com.

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RETIREMENT AND THE ISSUES SURROUNDING A DIVORCED FEDERAL EMPLOYEE

Posted by Katie Lightfoot

By:  Richard S. Wetzler, J.D.

Understanding the effects a divorce has on a federal employee’s retirement is important.  Three types of retirement plans that will be addressed are the Federal Employee Retirement System (FERS), the Civil Service Retirement System (CSRS), and the Thrift Savings Plan (TSP).

 Federal Employee Retirement System & Civil Service Retirement System

Divorce affects FERS and CSRS similarly.  The Office of Personnel Management (OPM) handles the administration of these two retirement plans.  In a divorce, specific language in a court order divides FERS and CSRS.  Courts can issue orders awarding benefits to legally separated spouses, former spouses, and children of current employees, former employees, and retirees.  Benefits that can be awarded include:

  • Retirement benefits (while federal employee and former spouse are still living)
  • Survivor benefits (payable upon federal employee’s death before or after retirement)
  • FERS basic death benefit (payable upon the death of a FERS employee)
  • Refund of federal employee’s retirement contributions
  • Return of retirement contributions upon the death of a federal employee or recent retiree
  • Continued enrollment in the Federal Employees Health Benefits Program (under certain circumstances)
  • Federal Employees Group Life Insurance benefits paid to a former spouse upon federal employee’s death
  • Thrift Savings Plan funds.

Any of the above benefits must be specifically spelled out in the divorce agreement (in the form of a court order).  Otherwise, the former spouse will not be entitled to the benefit that is not spelled out.  In addition, the necessary court order in this process is not a qualified domestic relations order.  That type of order is used for private pension plans.

Thrift Savings Plan

A TSP, similar to a 401(k) plan, is operated by an agency of the federal government.  However, unlike FERS and CSRS, a TSP is administered by the Federal Retirement Thrift Investment Board, so there are additional requirements that must be satisfied in order to divide a TSP.  A TSP account can be divided in two ways.  First, it can be divided by means of a court decree of divorce.  Second, it can be divided by means of a court order or court-approved property settlement agreement, which is part of a decree of divorce.  A court order may be issued at any stage of a divorce, and a TSP refers to a court order as a “retirement benefits court order.”

After receiving a court order that is issued in an action for divorce, the TSP will “freeze” a federal employee’s account as soon as possible.  Once an account is frozen, no new loans or withdrawals are permitted from the account until the action is resolved.  All other account activity will be permitted, including investment decisions and payments on existing loans.  The freeze on a federal employee’s TSP account can be removed in one of the following ways:

  • If the account was frozen upon receipt of an incomplete court order, the freeze will be removed if a complete copy of the order is not received within 30 days of the TSP’s written request for a complete copy.
  • If the account was frozen in response to a court order issued to preserve the status quo (freeze order), the freeze will be removed when the TSP receives a court order that removes the freeze, or when the TSP receives a court order that purports to require a payment from the TSP (described below).
  • If the account was frozen in response to an order that purports to require a payment from the TSP, or in response to a freeze order, the freeze will be removed as follows:
    • If the court order requires a payment from the TSP, the freeze will be removed after the payment is made.
    • If the court order is not qualifying, the account will remain frozen for 45 days from the date on which the TSP informs the parties in writing that the order does not qualify.  The freeze will be removed sooner if the TSP receives a written agreement – signed by both of the parties involved in the divorce proceeding – that it may be removed.

A TSP account can also be garnished with a writ, order, summons, or similar document in the nature of a garnishment that is brought to enforce a federal employee’s child support or alimony obligation.  The TSP refers to this type of document as a “legal process.”  A federal employee who is liable for alimony or child support can be prevented from withdrawing from his or her TSP account.  The federal employee’s account will be frozen as soon as possible after the TSP receives a legal process that 1) expressly names the TSP and 2) either requires a payment from the TSP to satisfy a child support or alimony debt or requires the TSP to withhold a portion of the federal employee’s account in anticipation of an order to make such a payment.  The freeze will be removed 1) if a legal process requires a payment from the TSP and the payment is made or 2) if a legal process does not qualify to require a payment from the TSP.

A divorce is a difficult time for anyone, and it is crucial for federal employees to understand the issues surrounding their retirement during a divorce.  These issues can be complex, and consulting an attorney is in one’s best interest.  At the very least, one should contact the Office of Personnel Management because it has a court order unit that reviews orders and determines if the court orders are acceptable for processing.

The author of this article may be contacted at:

Richard S. Wetzler
Martin, Pringle, Oliver, Wallace & Bauer, LLP
6900 College Boulevard, Suite 700
Overland Park, KS 66211
Tele:    (913) 491-5500
Fax:     (913) 491-3341
[email protected]

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Phased Retirement: How Would It Impact Your Federal Annuity?

Posted by Katie Lightfoot

By Robert F. Benson for FedSmith

The Senate has passed a bill (S. 1813) providing for what the bill refers to as “phased retirement.” So far, details are lacking, but for comparison, let’s take a look at what is already available for federal employees; specifically, for employees late in their careers who would like to work fewer hours while still contributing to their pension, and Social Security, and Thrift Savings account. What is this existing program? How does it work?

It’s called part-time. To enroll – at any age – just ask your supervisor.  Once your new hours are approved, your hourly rate will be multiplied by the actual hours you work, to arrive at your new gross pay.

Proration

This is the arithmetic process that corrects for reduced contributions to the pension fund, in calculating your annuity.

Here is a simplified example: An employee wants to work part-time his last year and then retire. For the first six months he works 32 hours weekly and for the final six months he works 24 per week, then he retires.   Divide the hours he actually worked in his career by the number of hours he could have worked, if he had been full-time all the way.

61,776 (62,400 – 624 hours “missed” in final year) / 62,400 (30 * 2,080)   = 0.99

The 0.99 is the proration factor.

Now calculate the annuity the usual way, then multiply by the proration factor to get the corrected annuity.  Example: He has 30 years service (30%) and a high-three salary of $70,000.

This yields an annuity of $21,000.

Multiply the 21,000 by 0.99 and the annuity becomes $20,790.  The annuity decrease in this case is $210   annually, or $17.50 per month.

The new phased retirement will allow older employees to work part-time, paying into the retirement fund in the usual way, and simultaneously provide a pension for the years already worked.  That’s right – put money into the pension fund every two weeks for working and take money out of the pension fund once each month, for retiring (part-time)! Sort of like a piggy bank. But pension funds do not usually operate this way!

Details are lacking

How will they figure the part-time pension? How will the pension be affected when the person retires?  Will this replace the current proration provision? How much additional time & effort wlll this take for payroll offices and OPM? OPM in particular, as we all know, is already struggling to catch up with a crushing backlog of retirement cases. All they need is one more complication!

Will this be a net benefit for employees?  Hard to say, but we already have a pretty good clue.  According to the Federal Times article:

The amendment, sponsored by Sen. Max Baucus, D-Mont., would use the estimated $465 million saved by allowing semi-retirements to pay for public roads, schools and forest-related economic development projects in rural areas.

How long will it take to “save” the $465 million? Where is the $465 million coming from? I think you know.  (Hint: federal employees.)

This is just my opinion, but it seems the current part-time program is comparatively clear and equitable.

It is uncertain at this point, but I hope that if the detailed reality of ”phased transition” is as complexly bleak as it seems so far, older employees will stay away from this initiative!

Note: all the above applies to FERS employees, not to CSRS.  Reference: Chapter 55, CSRS and FERS Handbook.

Visit my website.

© 2013 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

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Medicare, Retirement and Federal Employees

Posted by Katie Lightfoot

By John Grobe for FedSmith

Medicare, Part B or Not Part B: That is the question facing many federal employees and retirees nearing the age of 65. 2011 is the year that the first cohort of “Baby Boomers” reaches 65.  Fedsmith has been receiving more inquiries than usual about whether choosing Part B is a wise choice. Complicating any choice we face is the fact that we can carry our federal employees health insurance (FEHB) into retirement. Many private sector employers do not allow their employees to carry their health insurance into retirement, let alone past the age of Medicare eligibility.

A Word of Caution

Here is an introductory word of caution. The Medicare Trustees say that Medicare will become insolvent in 2024 if changes are not made to the program. They state that the payroll tax would have to double (1.45% to 2.9%) or that benefits would have to be cut by more than half (51% to be exact).

It is possible that Congress will act sometime before insolvency hits. We do not know when and we do not know how Medicare may be changed. In fact, House Republicans in their “Path to Prosperity” recommend turning Medicare into a voucher system. Therefore, this article deals with how Medicare is currently structured. Premiums listed in the article are those for 2012.

It Depends

The answer to the question of whether we should elect Medicare Part B or not is “it depends.”  Let’s look at the two major items on which it depends.

First, it depends on your ability to afford carrying both Part B and your FEHB. For example, the retiree premium for Blue Cross/Blue Shield Standard Option (the most popular of the FEHB plans) is $185.42 per month for self-only. Add that to the $99.90 per month for Part B and you come up with $285.32 per month for one person. Using the self and family monthly premium of $430.04 and two Part B enrollments and you’re facing a monthly bill of $629.84. OUCH! Of course. these are the premiums in 2012, premiums in future years are likely to be higher.

Due to a means test, Part B premiums are higher for high-income retirees. For example, a retiree with an income of greater than $170,000 (joint filing status) would pay another $40 per month ($139.90) per person for Part B. The income levels where the means test kicks in are high enough that it is unlikely that they would hit too many federal retirees.

Second, it depends on your usage of medical services. Almost all FEHB plans will waive their deductibles and co-pays (except for prescription drugs) if you sign up for Part B. They will also pay your share (deductible and co-pay) of Medicare. Individuals who use a lot of medical care might come out ahead financially by selecting both Part B and the FEHB even if they are paying premiums for both of them. What is difficult is determining your need for medical care in future years. We also have to consider the penalty for late enrollment in Part B (more on that later).

If you are curious about whether or not your plan waives all deductibles and co-pays, read the section on coordination of benefits in your FEHB plan’s brochure. Some plans have additional information that can be helpful to the Medicare eligible federal retiree. The question of whether or not to choose Part B often comes up in the Q&A section of the NARFE magazine, NARFE. A while ago, they advised that if you could afford it, the best possible coverage was under both Part B and FEHB. However, a few years ago a NARFE official was quoted in the Chicago Tribune as saying that healthy retirees might want to wait to enroll in Part B for a few years.

The Cost of Delay

The problem with delaying enrollment in Part B is that, for each year you delay, there is a 10% late enrollment penalty tacked on to the premium. For example, if a 67 year-old enrolled in Part B now, their premium would be $119.88 per month due to the $19.98 late enrollment penalty.

Medicare and Tricare for Life

We haven’t yet addressed the issue of the Medicare eligible military retiree who has Tricare for Life. Tricare for Life requires that you elect Medicare Part B. Having Tricare for life also allows federal retirees to suspend their FEHB while covered under Tricare.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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Maximizing Your Federal Employee Benefits

Posted by Katie Lightfoot

By Jason Kay for FedSmith

As a Federal employee you will get to enjoy a wide range of benefits that are simply not available to the everyday blue collar worker. However, all the benefits in the world are not worth anything if you are not utilizing them and taking full advantage of them.  Once you start maximizing your Federal employee benefits, you will quickly see why you are so fortunate to be a Federal employee.

In order to maximize your Federal employee benefits, you must first know what they are. Here are some of the most common benefits that you will enjoy as a Federal employee and how you can maximize each one:

  • Thrift Savings Account, or TSA: Your TSA account can be a great way to help you save towards retirement. Your TSA will act much like a 401k in the private sector. This means you can get a tax sheltered way to save for your retirement by putting in a certain percentage of your pay. Additionally, you will have a percentage of what you put in matched by the Federal government giving you more bang for your buck. In order to maximize your TSA, you need to carefully look at the different investment options that are available to you and then select the best course of action to take according to your risk tolerance. If you take no action then any money that you decide to put in will be automatically invested for you and while the investment vehicle will have little risk, there will be little reward to go along with that. You should also be certain to contribute as much as you can so that your employer match will be maxed out each and every year. After all, that’s like getting free money.
  • Federal Employee Health Benefits Program, or FEHB: FEHB is a special type of health care coverage that will be made available to you as a Federal employee. There are many different plans that you can choose from so, in order to choose the one that is right for you and maximize the benefit, you need to do your homework. Look at each individual plan and weigh the good and the bad and relate it all to your    personal circumstances. Select the plan that will cover you and your family the best for the least amount of money for total maximization.
  • Federal Employees Group Life Insurance, or FEGLI: Covering over four millions Federal employees, FEGLI is the largest group life insurance coverage in the world. This coverage is usually provided for you automatically and is in the form of term coverage. So, you will not build any cash value like you would with a whole life policy, but you will be able to have the government share in the cost of the premium. To be sure that you are maximizing this benefit, be sure that you are actually a part of it. While many Federal employers will automatically make you a part of the program and begin deducting the premium cost from your paychecks unless you opt out, it is not always a guarantee. SO, you need to be certain that you are in fact enrolled in the program. Life insurance is a great way to ensure that your loved ones are taken care of even after you are gone and the FEGLI program is a wonderful way in which to take advantage of great life insurance coverage at a very low cost to you.
  • Federal Long Term Care Insurance Program, or FLTCIP: FLTCIP can help you pay for the everyday things in life should you need long term care down the road for any number of reasons. While most Federal employees and their immediate family members who qualify for FEHB will usually be able to  apply for the FLICIP program, not all can, so you should check and see if you will be able to do so. If you are able, then it is certainly in your best interest to participate as you never know what life can throw your way.
  • Student Loan Repayments: One of the many ways that the Federal government can entice people to come to work for them is by offering to pay back some or all of their student loans. If you are applying for a Federal government job, then you should find out if this is an available benefit. Even if you already have a Federal government job, you should see if you qualify to have some or all of your student loan repaid for you.  This often overlooked benefit is a great way to reduce your debt.
  • Other Benefits: There are many other benefits that you will be entitled to as a Federal employee. Some of the more prominent benefits are child care subsidies, employee development programs, retention incentives, various recruitment bonuses, paid holidays, and paid leaves. While there are many more benefits that a Federal employee enjoys, these certainly top the list.

Each benefit that you may be eligible to receive as a Federal employee will come with its own previsions. Furthermore, where you find Federal employment may help determine how many of the specific benefits are offered and how many of the specific benefits you are eligible for.

In order to take full advantage for your Federal employee benefits you should first start by asking the human resources office where you work to provide you with a list of all your available benefits. Once you have this list, take some time and comb through it. Check off what you think you may be able to take    advantage of and if need be, go back into the human resources office and see if you qualify or contact our office for help with the decision making process.

You may be missing out on a number of great Federal employee benefits right now. If you never look at what you have, then how will you know what you should be taking advantage of? Maximizing your Federal employee benefits starts with you making the effort to find out first what you are eligible for and then taking action to ensure that your benefits are working hard for you.

© 2013 KSADoctor.com. All rights reserved. This article may not be reproduced without express written consent from KSADoctor.com.

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Is the Long-Term Gain Worth the Short-Term Loss?

Posted by Katie Lightfoot

By Robert F. Benson for FedSmith

This is a true story.

My good friend, Joe (not his real name), was a dedicated Federal employee.  At age 61 he was intending to stay on the job until 65, or later, despite the fact that he was quite close to achieving 41 years 11 months creditable service, which would earn him the maximum 80.0% of his high-three (old CSRS retirement).

In late March everything changed.

He was found to have blockage in two heart arteries, and the next day he underwent emergency bypass surgery.  After six days in the hospital, Joe went home to recuperate.  Because of previous health problems his sick leave balance was negligible.  He found that his sick leave and annual leave, together, would be exhausted long before his doctors said he could return to work.

Although Joe loved his job, financial considerations made it impossible for him to be in LWOP (leave without pay) status for an extended period of time.  So, reluctantly, he filed for retirement.  He made it effective May 3 – any date after the third of the month would have meant no  annuity payment for the month.  However, his 41 year 11 month “anniversary” would not occur till May 14.  The only way he could reach this would be to be in a non-pay status for 11 days, and  retire on May 14.  (Note: an employee can be in a non-pay status for up to 6 months in a given year, and still receive full credit for service time purposes.)

In order to receive the full 80.0%, Joe would have had to “pay” for it by missing out on his annuity payment for the month of May.  His annuity at the 41 year 10 month level was $6,519 monthly – this was too much to sacrifice, so Joe stayed with the May 3 retirement.

By opting to retire before reaching the 80.0% max, how much did Joe lose?

Staying on the job without pay until May 14 would have given Joe $13.61 more, monthly ([one twelfth of 2.0% of high-three] / 12 ).  He gave up $13.61 per month for the balance of his life in   exchange for the May annuity payment of $6,519.  If Joe lives 18 more years (his approximate life expectancy) the higher annuity would have meant an additional $2,940, plus COLAs.

It appears Joe did the right thing.  He gave up a possible long-term gain of a few thousand dollars for a certain, immediate gain of $6,519.  It is always a good idea to o the arithmetic.

© 2013 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

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Is the Roth TSP Right for Me?

Posted by Katie Lightfoot

By Carol Schmidlin for FedSmith

Do you want to pay taxes on the seed or the harvest?  The soon to be available Roth TSP may provide you a significant tax reduction on your future income.  Think of the original tax-deferred TSP as paying tax on the harvest.  You get a tax deduction on your contributions, which can grow tax deferred while you are accumulating savings, but at distribution, the harvest (contributions plus earnings) will be subject to tax.  The Roth feature in the TSP will be available during the second quarter of this year, and will allow you to just pay taxes on the seed (your contributions).  Any growth in the account comes out tax free, as long as the Roth account has been established for 5 years and you are 59 1/2 or better.

It is great having choices.  You can now customize TSP for unique and individual situations.  You can contribute to the original tax-deferred TSP, the new after tax Roth TSP, or a combination of both!  The maximum contribution combined for 2012 is $17,000 and if age 50 or better, an additional $5,500. If you   contribute to both the Roth TSP and the Traditional TSP, your combined contribution may not exceed the IRS elective deferral limit.  If you are in FERS, the match of up to 5%, will go in the pre-tax TSP.

Get Informed Before Making a Decision

There are several considerations you will need to make when deciding whether to contribute to the Roth TSP or the Traditional TSP. Let’s examine them:

1.  Your net paycheck: Taxes are deferred when you contribute to the Traditional TSP, which means less  money is taken out of your paycheck.  Adversely, taxes will be paid up front on contributions to the Roth TSP, which means more money will come out of your paycheck.

2.  Withdrawals from a Traditional TSP are taxed as ordinary income when withdrawn.  In comparison, withdrawals from a Roth TSP will be entirely tax-free if five years have passed since January 1 of the year you made your first Roth TSP contribution, AND you are age 59 1/2 or older.

3.  If you chose to contribute to the Roth TSP be aware:

  • The increased income may affect the taxability of Social Security income, Medicare Part B premiums, income tax deductions, exemptions, and the ability to use tax credits.
  • The increased income may also affect your children’s eligibility for scholarships and financial aid.

4.  Contributing to the Roth TSP will take the uncertainty out of future tax rates and their impact on your retirement income.

5.  A Roth TSP can be rolled over to a Roth IRA and provide an income tax legacy for your children and grandchildren who can stretch distributions over their own life expectancies.

There are similarities and differences between a Roth IRA and a Roth TSP:

Similarities

  • Contributions are made with after-tax dollars and can be withdrawn income tax-free if you are 59 ½ and follow the 5 year rule, which says a Roth has to be established for at least 5 years in order to allow earnings to come out tax-free.
  • Paying the tax in today’s known tax environment may prove to be a valuable tool during the retirement distribution phase.

Differences

  • You are not required to take minimum distributions from a Roth IRA.  You are required to begin taking  minimum distributions from the Roth TSP by April 1st following the year you turn age 70 1/2 if you are no longer employed by the federal government.
  • There are income restrictions to contribute to a Roth IRA ($183,000 joint, $125,000 single).  There are no income restrictions on contributions to the Roth TSP.

Tax Diversification

On a personal note, I am very excited that the Roth TSP will soon be available. All though there are a lot of personal implications to consider, the opportunity to have tax efficient vehicles for income in retirement is one of the best benefits you now have.

If you wish to learn more about Roth IRA’s and traps to avoid, please email us for our free report: “Roth Re-characterization Traps and How to Avoid Them”.  Please include “Roth” in subject line.

If you would like Carol Schmidlin, Author of FedSavvy – Tools and Tips to Maximize Your Federal Benefits to conduct a one hour workshop: “Maximize Your Social Security Benefits”, for your agency or association, please get in touch with us at 856-401-1101 or at [email protected]. If you would like a copy of the “Social Security Timing Report”, please email us with that in the subject line of your email and we will get that out to you.

© 2013 Franklin Planning. All rights reserved. This article may not be reproduced without express written consent from Franklin Planning.

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How Is Your Federal Employee Retirement Income Taxed?

Posted by Katie Lightfoot

By John Grobe for FedSmith

“If you drive a car, I’ll tax the street. If you get too cold, I’ll tax the heat. If you try to sit, I’ll tax the seat. If you try to walk, I’ll tax your feet.” If you retire from the federal government, I’ll tax your pension, TSP and Social Security.  I’m the taxman.

Exactly how is your retirement income taxed for federal income tax purposes? Let’s look at it one piece at a time.

Most of your CSRS or FERS pension will be taxable. You receive your already taxed contributions back without having to pay any more tax on them. Unfortunately, you receive them back over your life expectancy. For a retiree who is age 55, that is 360 months, or 30 years. The bulk of the pension you receive consists of Uncle’s contributions and earnings on both Uncle’s contributions and your contributions. Each year OPM will send you a form 1099-R which lists your total annuity, the taxable portion of your annuity, and your total contributions to the retirement fund.

If you die before receiving your contributions back, your survivor (if you have elected a survivor annuity) will continue to receive your contributions back tax free. If you have no survivor, or if your survivor also dies before recouping your contributions, the remaining contributions may be taken as a miscellaneous itemized deduction on the tax return your executor files for the year of your death. The deduction is not subject to the usual 2% floor that is applied to miscellaneous itemized deductions.

If you live past your life expectancy, you will have gotten all your contributions back and your entire annuity will be taxable.

There is an exception, but you do not want to find yourself eligible for it. It is called the “alternative form of annuity”. If you have 9 months or less to live, OPM allows you to recoup all of your contributions in a lump sum. That would leave the (slightly) reduced annuity that you receive fully taxable.

Your TSP is fully taxable (but you knew that already). You paid no tax on the money you contributed and it grew tax free. With the TSP, unlike an IRA, if you retire in the year in which you turn 55 (or later) there will be no early withdrawal penalty assessed for withdrawals. You must begin taking TSP distributions by April 1st of the year after the year in which you turn 70 ½ or April 1st of the year after the year in which you retire if you are age 70 ½ or older when you retire. Your TSP distributions are taxed as you receive them. The Roth TSP (planned for spring of 2012) will be taxed similar to Roth IRAs.

Up to 85% of your Social Security can be taxable as well. To determine the portion of your SS which is taxable you add up ½ of your SS, all your taxable income and certain tax-exempt income. The following chart shows how much SS might be subject to tax.

Filing Status Taxable Income Taxable SS
Single Under $25,000 None
Single $25,000 to $34,000 Up to 50%
Single Over $34,000 Up to 85%
Joint Under $32,000 None
Joint $32,000 to $44,000 Up to 50%
Joint Over $44,000 Up to 85%

All of your retirement income is taxed at your rate for ordinary income for federal income tax purposes.

States vary widely in their tax treatment of retirement income. Members of NARFE (National Active and Retired Federal Employees Association) have access to detailed information on the state treatment of federal annuities on their website http://www/narfe.org.   The Retirement Living Information Center has more information on the taxation of retirement income on their website http://retirementliving.com.

John Grobe is a retired federal employee with over 25 years of experience in federal human resources and President of Federal Career Experts, a training and consulting firm that specializes in federal employee retirement and career transition issues.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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Helping FERS Employees With Redeposit Questions

Posted by Katie Lightfoot

Redeposit service (also known as “refunded” service) refers to a period of federal service that the employee worked and paid into a retirement system (in this case, FERS) but separated from service and withdrew their retirement contributions at the time of separation. Often, employees elect to do this if they do not plan on returning to federal service.

It wasn’t until the signing of the National Defense Authorization Act in October of 2009 that FERS employees were even allowed to make a redeposit of previously refunded contributions. This marked a big step for FERS employees.

After the employee rejoins federal service and begins contributing to a retirement system again, they may decide that they would like to make a redeposit for the time that they initially withdrew in order to gain full credit for the time. The redeposit amount plus interest is due when making a redeposit. All redeposits must be made prior to retiring.

There are two ways a person can get credit for their refunded service:

  • toward the number of years of service required to be eligible to retire, and/or
  • toward the number of years counted in the retirement annuity calculation.

The rules for FERS employees to receive credit for their refunded service are shown in the table below:

                        FERS credit for refunded service
If under FERS on or after: And a redeposit is: Retirement eligibility Annuity computation
October 28, 2009 Paid * *
October 28, 2009 Not paid *

 

Below are examples of employees in different circumstances and how the annuity is impacted. In all of these examples, the employee has:
  • 30 years total service (5 of those years were refunded to them)
  • Their high-3 average salary is $50,000
  • They owe a $4,000 redeposit (for the 5 years of refunded service-including interest)
  • They retire at age 60
EMPLOYEE A: (retiring on or after October 28, 2009)
Scenario #1: They DO make the redeposit of $4,000:

Calculate the FERS regular annuity formula using all 30 years of service:

$50,000 x 1.0% x 30 = $15,000

FULL ANNUITY = $15,000/year

Scenario #2: They DO NOT make the redeposit of $4,000:

Calculate the FERS regular annuity formula using only 25 years of service:

$50,000 x 1.0% x 25 = $12,500

PENALIZED ANNUITY = $12,500/year

EMPLOYEE B: (retiring prior to October 28, 2009)

Since FERS employees retiring prior to October 28, 2009 are not permitted to make redeposits for refunded service, that time cannot be recaptured for credit for any purpose. Therefore, this time is treated as if it did not exist (neither for years required to be eligible to retire, nor in the calculation of the annuity).

Scenario #1: They are NOT PERMITTED make the redeposit of $4,000:

Calculate the FERS regular annuity formula using only 25 years of service:

$50,000 x 1.0% x 25 = $12,500

PENALIZED ANNUITY = $12,500/year

One way to determine if it’s “worth it” or not to make a redeposit is to see how long it would take to get your money back out of the program once you begin drawing your retirement check. If it is a relatively short period, then it probably makes sense to make the redeposit if permitted to do so.

To determine the redeposit amount owed, FERS employees should use form SF-3108,  Application to Make Service Credit Payment.

Mitchel R. Newstadt, ChFEBC
National Director Civil Service Marketing
GPM Life Insurance Company
10140 Poydras Street
Shreveport, LA  71106

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Getting More Bang for Your Retirement Buck

Posted by Katie Lightfoot

By Ashby Daniels for FedSmith

If you’re investing for retirement, the Roth IRA is a sometimes overlooked option worth considering. Unlike your TSP, investments in a Roth IRA are not deductible from current income. But like your TSP, the earnings in your account are allowed to compound tax-free. And here’s the best part: when you begin withdrawing money from your Roth IRA in retirement, you won’t owe taxes on any of it!

That’s a powerful retirement-savings boost. To understand just how powerful, let’s look at the     hypothetical example of a 35-year-old investor who begins investing $250 per month in a Roth IRA —and continues doing so until retiring at age 60*.

Total investing years: 25

Assumed annual rate of return: 8%

Monthly investment: $250

Total amount invested: $75,000

Total amount accumulated: $228,750

*This is a hypothetical investment for illustration purposes only and is not a guarantee of past or future performance.

In this case, our investor realized total earnings of $153,750—and owes taxes on none of it. In fact, even if the money continues to grow after retirement, there will still be no taxes due. So, if    tax-free retirement income appeals to you, a Roth IRA might be the right investment.

Are there situations in which a Roth IRA might not be the best choice? Absolutely. If you are a FERS employee, your TSP includes matching contributions. You should always contribute the full amount that qualifies for matching.  It never makes sense to turn down free money! But, the TSP only matches the first five percent of contributions—and most employees need to invest more than that to achieve their retirement objectives. So if you plan to contribute more than the amount that qualifies for matching, a Roth IRA might still be an option.

A Roth IRA isn’t the best choice for investors concerned about lowering their current tax bill either. They can reduce their taxable income by investing pre-tax dollars in the TSP or, if their income falls below the IRS-specified minimum amounts, in a Traditional IRA. But think carefully about whether you would rather defer taxes on your retirement accounts until retirement – or whether you prefer to pay those taxes during your working years so that you don’t have to deal with them in retirement.

Finally, the government will soon offer a relatively new breed of retirement savings plan – the TSP Roth 401(k). These plans offer benefits identical to Roth IRAs, but with considerably higher contribution limits. So, when the TSP Roth 401(k) is available, you may prefer the convenience of having all of your retirement investments deducted directly from your paycheck. Just keep in mind that you can choose from a wider array of investment options within a Roth IRA.

So how does a Roth IRA work? At first glance the rules are pretty straightforward. To be eligible to contribute, you must have earned income. But not too much – if your adjusted gross income (AGI) exceeds IRS-specified income limits, you cannot contribute to a Roth IRA. These limits vary         depending on your filing status.

How much can you invest in a Roth IRA? The current maximum annual contribution for those under age 50 is $5,000. But to help workers age 50 and over prepare for their impending retirement, the IRS has a subset of rules that allow these workers to make “catch-up contributions” of up to $1,000 per year.

Let’s review the rules governing distributions, or withdrawals, from a Roth IRA. There are two forms of distributions—qualified distributions and early distributions. A qualified distribution is one that   occurs when the IRA owner is at least 59 ½ years old and at least five years after the account was established. There are no taxes on qualified distributions.

Early distributions are those made prior to age 59 ½, or before the account has been in place for five years. Early distributions are subject to a 10% tax penalty—with exceptions made for first-time homebuyers, qualified education expenses and disability.

Think a Roth IRA sounds right for you, but not sure where to find the money to fund your account? Consider investing your tax refund. The IRS estimates that about 70% of taxpayers get refunds, and last year the average check totaled $2,348. That cash would make a great start to your Roth IRA. But, no matter how you get started, the earlier the better to allow many years of compounding….tax free!

 

© 2013 First Command Financial Services, Inc., parent of First Command Financial Planning, Inc. (Member SIPC, FINRA), First Command Insurance Services, Inc. and First Command Bank. Financial planning services and investment products, including securities, are offered by First Command Financial Planning, Inc. Insurance products and services are offered by First Command Insurance Services, Inc. Banking products and services are offered by First Command Bank. In certain states, as required by law, First Command Insurance Services, Inc. does business as a separate domestic corporation. Securities products are not FDIC insured, have no bank guarantee and may lose value. A financial plan, by itself, cannot assure that retirement or other financial goals will be met.

 

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Full Annuity Payments – How Fast?

Posted by Katie Lightfoot

By:  Robert Benson for FedSmith

FedSmith.com recently conducted a survey of our readers which asked about recent retirements and how long it took before retirees started receiving their full (as opposed to interim) annuity payments.  The questions we asked retirees were:

1.     What was your retirement date?

2.     Are you CSRS or FERS?

3.     Have you received your full payment yet?  If so, when?

There were a total of 347 responses, 56.8% CSRS vs. 43.2% FERS. Based on comments from some respondents, feelings about how OPM is handling the retirement process were mixed as some retirees were pleased but others were very unhappy

                 Received Full Payment       Median Wait (months)        Still Waiting     Total Respondents

CSRS              121 (61.4%)                       5                                 76 (38.6%)        197
FERS                66 (44.0%)                       7                                  84 (56.0%)       150
Total               187                                                                      160                   347

Clearly, OPM is faster at processing CSRS cases. Almost certainly the reason is calculation of the FERS annuity supplement, payable generally when the retiring employee is under 62. The average completion rate for these cases, per worker, is just 3 per day.  In contrast, they can do 8-10 CSRS claims per day. When Mr. Berry, OPM head, was asked by Congress earlier this year how this can be, he had no answer.

Unfortunately, it is only going to get worse. Despite hiring 100+ new employees during the last two years, the rate of FERS retirements continues to increase steadily. Currently, it is only 44%, but it will gradually climb until it approaches 100%.  At the same time, phased retirements will be starting, requiring more calculations!

When calculation of the supplement is so data intense, intricate, and lengthy, you may ask why doesn’t OPM simply find and purchase one of the commercial software packages dedicated to this task?  This software can, typically, do a full calculation of the supplement in just a few minutes. With the magnitude of the workload, OPM could even pay to have the selected software customized for their purposes. Why don’t they do this? I do not know.

Visit my website: fedbens.us

© 2013 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

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FEHB and That 5-Year Requirement

Posted by Katie Lightfoot

By John Grobe for FedSmith

FedSmith.com recently posted an article of mine (See The Five Year Requirement Under FEHB) that dealt with the requirement that an individual must have been enrolled in Federal Employees Health Benefits (FEHB) and Federal Employees Group Life Insurance (FEGLI) for the five years immediately preceding retirement in order to carry said insurance into retirement.  One of the points made regarding FEHB follows:

  • The five years refers to your enrollment.  Your spouse does not have to be enrolled for the five years immediately preceding your retirement in order to be covered.  You can bring your spouse on your insurance at any time before retirement, or even after retirement.  Do be aware that if you die after retirement but before bringing your spouse on your FEHB, your spouse will not be able to continue FEHB, even if you have elected a survivor annuity.

I was concerned that many employees who contacted me after the article appeared had been told by their human resources offices and by pre-retirement seminar providers that the five year requirement also applied to the employee’s spouse.  Some other readers said that they were told that their spouse needed to be enrolled at least one day before the employee retired.  Nothing could be further from the truth.

The Office of Personnel Management (OPM) clearly lists the requirements for a spouse to continue FEHB coverage after an employee’s or retiree’s death in both the FEHB Handbook and the FEHB FAQS.  The requirements are as follows:

  • The spouse must be enrolled on a self and family plan as of the date of the employee/retiree’s death.
  • The spouse must be entitled to receive a survivor annuity.

That’s it.  OPM lists no further requirements.  As long as the two requirements above are met as of the date of the employee/retiree’s death, it does not matter whether or not the spouse was enrolled at the time of retirement or five years before.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

 

 

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FEDERAL RETIREMENT THRIFT INVESTMENT BOARD ANNOUNCES THE LAUNCH DATE FOR NEW ROTH TSP OPTION

Posted by Katie Lightfoot

Washington, D.C. — The Federal Retirement Thrift Investment Board announced today at its quarterly interagency meeting of Thrift Savings Plan (TSP) coordinators that May 7, 2012 will be the day that the TSP will begin to accept Roth TSP contributions.  The Roth TSP was authorized by the Thrift Savings Plan Enhancement Act of 2009, which was enacted on June 22, 2009, and will allow Federal civilian employees and members of the uniformed services to contribute after-tax dollars into the TSP for the first time.  Both the contributions and their earnings will be tax-free when withdrawn, as long as IRS requirements are met.

According to Greg Long, Executive Director of the Agency, “the Roth TSP option offers an important new tool for Federal civilian employees and uniformed service members in managing their retirement income by providing greater flexibility in the tax treatment of contributions now and in the future.”  Long noted that the Agency will continue to provide participants and agencies with educational materials to help them understand this new option but, as with all tax matters, participants should seek the advice of their qualified tax or financial advisers for answers to questions pertaining to their specific tax situation.

The Agency has been sharing Roth TSP planning bulletins with agency and service payroll and personnel representatives since December 2010 to provide them with the information they require to be able to program their payroll systems to accept and transmit pre-tax and aftertax money.  The Agency is aware that not all agencies or  services have completed the technical and programmatic modifications of their payroll systems required to implement Roth TSP.  These agencies or services will require additional time to modify their payroll systems and will be able to begin participation in Roth as soon after May 5, 2012 as they are able.

With the addition of the Roth TSP option, participants can choose to invest pre-tax or after-tax dollars in any of the TSP funds, up to the Internal Revenue Code limits.  TSP participants can currently invest in ten different funds:

the five Lifecycle (L) Funds, the Government Securities (G) Fund, and the four broadly diversified stock and bond funds – the Fixed Income Index Investment (F) Fund, the Common Stock Index Investment (C) Fund, the Small Capitalization Index Investment (S) Fund, the International Stock Index Investment (I) Fund.

The TSP is a retirement savings plan for Federal employees; it is similar to the 401(k) plans offered by many private employers.  As of March 2012, TSP assets totaled approximately $308 billion, and retirement savings accounts were being maintained for roughly 4.5 million TSP participants. Participants include Federal civilian employees in all branches of Government, employees of the U.S. Postal Service, and members of the uniformed services.

Additional information can be found at www.tsp.gov.

Roth earnings qualify to be paid out tax-free if:

  1. 5 years have passed since January 1 of the calendar year in which you made your first Roth contribution, AND
  2. you are at least age 59 ½, permanently disabled, or deceased.

Introducing Roth

The Thrift Savings Plan will soon introduce a new way to save for your retirement: Roth TSP. Watch the video to learn more.

https://www.tsp.gov/whatsnew/roth/index.shtml

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Choosing between FEHB and TFL

Posted by Katie Lightfoot

By John Grobe for FedSmith

Editor’s note: This is the second article in a two part series.

In Part I, What is TRICARE for Life, we talked about the very basics of that program.

Where it begins to get a little complicated is when a person who is eligible for TRICARE (and most likely eligible for TRICARE for Life), is also eligible (based upon their employment) for health coverage under the Federal Employees Health Benefits (FEHB) program.

These folks are not only dually eligible, they’re dually blessed.  They actually have some choices.  Providing they are otherwise eligible to continue their FEHB coverage into retirement, and providing they enroll in Medicare Parts A and B so that they can retain the option to move from TRICARE to TRICARE for Life, they can actually choose between the two.

Retirees and survivor annuitants who are covered by the FEHB and who are also eligible for TFL can suspend their FEHB enrollment when they sign up for Medicare Part B as a result of their enrollment in TFL.  By officially suspending their FEHB enrollment through OPM, they can retain their right to re-enroll in FEHB should they become dissatisfied with TFL.

Officially suspending FEHB enrollment to enroll in TFL can save at least one monthly premium.  The TFL beneficiary will only be required, in most cases, to pay the monthly Medicare Part B premium, thereby saving the monthly FEHB premium.

The key word for retirees is “suspend”.  Retirees who cancel their FEHB coverage will likely never be able to re-enroll in the program again.  Annuitants can call the OPM retirement information office at 1-888-767-6738 to obtain a copy of the official suspension form.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

 

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The Best Day to Retire From Now Until 2020

Posted by Katie Lightfoot

By John Grobe for FedSmith

Last December, we determined that the best day to retire in 2011, regardless of whether you are in the CSRS or FERS retirement systems. The concept of “best” is related to financial considerations, specifically maximizing your lump-sum annual leave payment. If you do not carry over a lot of A/L from year to year, or if you just want to retire absolutely as soon as you can, your “best” day may very well be different from the ones we mention in this article.

Using 2011 as an example, let’s look at the lump-sum leave payment. One of the biggest reasons that employees choose to retire around the end of the year is to cash in a large amount of use or lose leave.    Assume we have an employee who earns 8 hours of A/L per pay period and carried over 240 hours of annual leave into the 2011 leave year. If that employee manages not to use a single hour of the 208 hours of annual leave they will have earned by 12/31/2011, they will have a balance of 448 hours of annual leave for which they will be paid in a lump sum shortly after they retire. (Shortly generally means two to six weeks).

The lump sum payment will be received in 2012 when, presumably, the retiree will be in a lower tax bracket. Retirement contributions (currently 7% for CSRS and .8% for CSRS Offset and FERS) will not be deducted from the lump sum payment, neither will insurance premiums nor TSP contributions. This will result in a larger payment, though your payroll office might withhold taxes at a higher rate than normal.

The leave year ends on a different date each year, often resulting in a different “best” day to retire from year to year. Usually the “best” day is different for employees in CSRS and FERS due to different rules that affect the starting date of annuities.

Under the FERS system, an employee must be off the rolls for an entire month in order to receive an annuity for that month.

  • A FERS employee retiring October 31, 2011 will receive their first annuity payment on or about December 1, 2011, and the payment will represent the November annuity.
  • A FERS employee who waits until November 3, 2011 to retire will receive their first annuity payment on or about January 1, 2012, and the payment will represent the December annuity. The employee is not entitled to any payment for November, as they were not off the rolls for the whole month.

Under the CSRS system, an employee must be off the rolls no later than the 3rd of the month in order to receive any annuity for that month.

  • A CSRS employee retiring October 31, 2011 will receive their first annuity payment on or about December 1, 2011, and the payment will represent the November annuity.
  • A CSRS employee who waits until November 3, 2011 to retire will receive their first annuity payment on or about December 1, 2011 and the payment will represent the annuity payment for November 4th through November 30th. CSRS employees who retire up to, and including, the 3rd of any month are entitled to a pro-rated annuity for that month.
  • A CSRS employee who waits until November 4, 2011 to retire will receive their first annuity payment on or about January 1, 2012, and the payment will represent the December annuity. The employee is not entitled to any payment for November, as they were not off the rolls by the end of the day on the 3rd of the month.

The above rules have resulted in a general rule that FERS employees should retire on December 31st and CSRS employees should retire on January 3rd if they wish to maximize their lump-sum leave payments. Of course, general rules have exceptions and, for the last two years, January 3rd has not been the “best” date to retire for CSRS employees.

The following chart shows the “best” days to retire from 2011 through 2020. Exceptions are noted and they are explained below the chart.

Leave Year               Ending Date               Best for CSRS                 Best for FERS

2011                       12/31/2011                 12/31/2011                      12/31/2011

2012                      1/12/2013                     1/3/2013                         12/31/2012*

2013                      1/11/2014                     1/3/2014                         12/31/2013* or 1/11/2014**

2014                      1/10/2015                     1/3/2015                         12/31/2014*

2015                      1/9/2016                       1/3/2016                         12/31/2015*

2016                      1/7/2017                       1/3/2017                         12/31/2016

2017                      1/6/2018                       1/3/2018                        12/31/2017

2018                      1/5/2019                       1/3/2019                        12/31/2018

2019                      1/4/2020                        1/3/2020                       12/31/2019

2020                      1/2/2021                        1/2/2021                       12/31/2020

* refers to 2012, 2013, 2014 and 2015. In these years, FERS employees who have a lot of federal service and carry-over a lot of annual leave may want to crunch some numbers to see if working to the end of the leave year and forgoing a January annuity is to their advantage. They should calculate the amount of salary and the lump-sum payment they will receive by working until the end of the leave year, then compare it with the January pension and the lump-sum payment they would receive if they retired on December 31st. Here is an example for 2012 (keep in mind that leave year 2012 has 27 pay periods): Bill is a FERS employee who is    eligible to retire with 30 years of service and a “high-three” of $75,000.

  • If Bill retires on 12/31/12, his monthly unreduced annuity will be $1,875 (using the 1% multiplication   factor). He will receive payment for 448 hours of annual leave (assuming a carry-over of 240 hours and no leave used during the year, a leave accrual rate of 8 hours a pay period gives him an additional 208 hours at the end of the 26th pay period). At $35.94 an hour, the 448 hours will be worth $16,101.12.
  • Using the same assumptions, if Bill waits until 1/12/2013 to retire, he will earn $2,587.68 for working 9 days into January (OK, working 8 and getting paid for the New Year holiday). He will receive a lump-sum annual leave payment for 456 hours of annual leave (as he has completed the 27th pay period), giving him $16,338.64.
  • In this circumstance it is better (financially at least) for Bill to work until the end of the leave year and forgo his January annuity. If the additional 12 days of service result in his receiving an extra month of service time in his pension calculation (roughly a 1 in 3 chance), his FERS annuity will be marginally  higher for the rest of his life.

** refers to the fact that, beginning on 01/01/2014 FERS retirees will receive full credit for their sick leave in the computation of their annuity. Any FERS employee who retires up to and including 12/31/2013 only    receives half credit. Here’s an example: Jill is a FERS employee who is eligible to retire on 12/31/2013 with exactly 25 years of service and a “high-three” of $85,000. She has 1,500 hours of sick leave.

  • If Jill retires on 12/31/2013, she will have 750 hours of sick leave added to her length of service; this gives her credit for another 4 full months (and a few days) of service. Her annuity (1% factor) will be $21,533.05 per year.
  • If Jill waits until 01/01/2014 to retire, she will have the full 1,500 hours of sick leave added to her length of service; this gives her credit for 8 full months (and 19 days) of service. Her annuity (1% factor) will be $21,816.69 per year.
  • If Jill, like Bill above, waits until the end of the leave year, she will have another 11 days of service credit. Added to the 19 days of sick leave she had (over and above the 8 months), the 11 days she works give her another month worth of service credit towards her retirement, resulting in a slight increase to her annuity. Also, like Bill, Jill will likely earn more money working an additional 8 days than she would in the January annuity payment and will have 8 more hours of annual leave in her lump-sum payment.

Confusing? Absolutely!

No one ever said that understanding the federal retirement systems was easy. If you’re approaching retirement, attend a pre-retirement seminar. If your agency is not offering such seminars, ask them to. Federal Career Experts delivers pre-retirement seminars for federal agencies.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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Buyouts and Early Outs: Are You Ready if One is Offered?

Posted by Katie Lightfoot

By John Grobe for FedSmith

There is a lot of uncertainty for federal employees these days. Probably not as much uncertainty as the average private sector employee faces, but uncertainty none-the-less.

We have the annual budget bickering (which was still going on as this article was prepared). In addition, we have the recommendations of the Commission on Fiscal Responsibility and Reform which, among other things, calls for a 10% reduction in federal employment and increased latitude to agencies for conducting re-organizations. One might assume that this latitude would include offering early outs and/or buyouts.

This does not mean that buyouts are “coming soon to an agency near you.” However, if they do, are you prepared to make a good decision?

An early out is officially called a Voluntary Early Retirement Authorization (VERA) and is usually offered to employees who are affected by a re-organization. If a re-organization affects the entire agency, the early out may cover all agency employees. If, on the other hand it affects only part of an agency, it might cover only those who are employed in the particular segment where the re-organization is taking place.

In order to be eligible for an early out, an employee must have 20 years of service and have attained the age of 50, or have 25 years of service regardless of age. This is true for both the CSRS and FERS retirement systems.

A CSRS employee will face a 2% per year penalty (1/6 of 1% per month) for being under the age of 55, but will begin earning cost-of-living-adjustments immediately upon retirement. A FERS employee will face no reduction in pension, but will not begin earning cost-of-living-adjustments until age 62 in most instances.

Some questions that anyone who is thinking of taking an early out should ask themselves are:

  1. Can I afford to live on the amount I will get as an early out pension?
  2. How much in future pension benefits will I be giving up if I take an early out?
  3. If I cannot afford to live on my pension, what can I do to supplement my pension income?
  4. Do I have the skills needed to do whatever it is I need to do to bring in the extra income?
  5. Are there actual opportunities in my area where I can make enough money using the skills I now have?

A buy-out is officially called a Voluntary Separation Incentive Payment (VSIP) and may or may not be offered with an early out.

The amount of a buy-out is the lesser of $25,000 or the amount of severance pay to which an employee would be entitled based on their length of service. Normally the $25,000 is the smaller amount. An employee who accepts a buy-out will have to re-pay it if they return to the government either as an employee or on a personal services contract within five years of receiving the buy-out.

Too many people who accept an early out or buyout offer are focused on the fact that they don’t like where they are now. This is especially true if they don’t begin thinking about their choice until the window period is nearly over. They focus on the from part of the transition they will be making. Adequate time must be given to considering the to part of the equation.

You should begin to think of whether you want to take an early out or buyout long before it is offered. This will allow you to consider all of the pros and cons without feeling the pressure of having to make a decision before the offer of buyout or early out is withdrawn. With buyouts and early outs, as with other decisions we make in life, the more prepared we are and the more information we have—the better decision we will make.

© 2013 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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YEAR-END FINANCIAL PLANNING: A CHECKLIST

Posted by Katie Lightfoot

The best financial decisions are made with the benefit of time, thoughtful consideration, and trusted professional advice.  As tax time approaches, take the time to prepare for sound long-term financial decisions and minimize expenses, taxes, and the headache of organizing your finances at the last minute.

Organize Your Tax Records Early

In preparing for this year’s tax filing, begin to organize tax records, including year-end investment statements, capital gains and losses from asset sales, transaction records from real estate transactions, interest and dividend records for the year (1099s), payroll and withholding statements (W-2s), records corresponding with deductible expenses such as property taxes and insurance, business income and expense records, etc.  Some of these will not come until January or February of the following years.

Review Your Insurance Coverages

At least once each year, gather your insurance records together and review the adequacy of your insurance policies.  Be sure to evaluate all coverages, including life insurance, disability income insurance, homeowners insurance, auto insurance, liability insurance, renters insurance, long-term-care insurance, etc.

Store Your Documents Safely

All your hard-to-replace legal and financial documents should be stored in a safe and fireproof location.  Consider renting a safe-deposit box at your local bank or credit union, or purchase a fireproof lockbox from your local office supplies outlet.  Documents you should store include wills, trusts, powers of attorney, titles of ownership (your home, cars, etc.)  Social Security cards, birth certificates, photographic negatives, list of personal possessions, and so forth.

Review Your Estate Plan

Does your will still fairly reflect your personal wishes for the distribution of your assets?  Have your personal or financial circumstances changed or your beneficiaries significantly changed over the past year?  Have you considered a gifting program to move assets from your estate to those you wish to enrich?  Have you reviewed your estate plan in light of changing estate tax laws or changes in your personal financial position?

Prepare to Minimize Your Income Tax Liability

Consider estimating your federal and state income tax liabilities periodically to ensure proper withholding levels and quarterly estimate tax payments.  This will prove especially important if you sell significant assets during the year or experience large swings in your income level.  Consider maximizing your deductible expenses and savings such as qualified retirement plans, charitable giving, deductible expenses, etc.  Be careful to meet all IRS dates and deadlines for withholdings and filings.

Review and Improve Your Balance Sheet

The one true path to financial independence over the long term is increasing your long-term savings and decreasing your debt.  If you are not maximizing your tax-deductible employer-sponsored retirement plans and your individual tax-advantaged savings plans, evaluate your monthly cash flows with an eye toward increasing your monthly savings.  The other side of your balance sheet, the liabilities side, is equally important in maintaining a healthy personal financial position.  Every effort should be made to eliminate completely the need for short-term debt (credit cards and debit balances) and to efficiently manage your long-term debt (mortgages).

Simplify Your Financial Holdings

Simplifying your financial holdings can eliminate much of the drudgery of financial recordkeeping.  If you have credit cards you don’t use, cancel them and eliminate the extra statements.  Consider consolidating your credit lines to the greatest extent possible.  Review your investment holdings for non-performing assets or redundant accounts and consolidate your investments.

To Sum Up….

Although you may be able to think of more exciting ways to spend your time, organizing your financial records and planning your financial future will pay huge dividends in the long run.  Do what you can on your own and seek professional advice from a trusted advisor where additional planning needs to be done.

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The Top Ten Reasons Why People Need Long Term Care Insurance

Posted by Katie Lightfoot

10.  The government isn’t going to pay for long-term care at home, in a nursing home, or in an assisted living center. Medicare pays 100% of long-term care for 20 days and all but $95.00 per day for the next 80 days–after that nothing. However Medicare only pays for skilled care and most long term care is not skilled care.

9.  The national average cost for nursing homes is approximately $105.00 per day. Assisted    living ranges anywhere from $50 – $90 per day. If you live on the Eastern Seaboard you can  easily spend $50,000 to $80,000 for a year’s stay in a nursing home. These costs are perfectly capable of wiping out a lifetime of savings-not to mention the emotional effect long-term care has on a family.

8.  A Harvard University study showed that 69% of single people and 34% of married couples would exhaust their assets after 13 weeks in a nursing home. 13 Weeks = 91 days!.

7.  At age 65, a woman has a one out of two chance of spending some time in a nursing home.  A man has a one out of three chance. In the case of men, mortality catches up with morbidity.

6.  Medicaid kicks in only after a person’s assets and dignity are gone. In many states the         eligibility threshold for single people is $1,500 in assets. After all Medicaid is WELFARE.

5.  Children would like to help, but children often have children of their own. They certainly can’t quit their jobs to care for their parents.

4.  Health rarely improves with age.

3.  People can’t buy long-term care coverage at crisis time or when they are ready to use it.

2.  American’s have access to the best health care in the world, if they can pay for it.

1.  Most People want to choose where they go instead of having to go where they are taken, and if independence is important to them, they will need to have either a big estate or adequate insurance

 

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Social Security Spousal Benefits: What Social Security Does Not Tell You

Posted by Katie Lightfoot

Social Security spousal benefits can be confusing, but it is well worth your time to do your homework and learn how to take full advantage of them. You may receive thousands of dollars of additional income when you had no idea that it was available. The American Association of Retired People states that $10.1 billion in Social Security (SS) benefits are left unclaimed each year and a major part of that amount is left by senior couples who do not understand how to take full advantage of their Social Security spousal benefits.

Too many seniors only think about their own SS accounts when they are planning their retirement. They do not realize that they can take draw Social Security spousal benefits on their spouse’s account as well as their own accounts. Let’s take a typical couple, John and Linda. John is three years older than Linda. Both John’s and Linda’s full retirement age is 66.

Linda’s benefit at 66 will be $705 per month. John’s benefit at 66 will be $2150 per month.

 

Original Plan

Linda is planning to wait until age 66 to start drawing her benefit and John is planning to wait until age 70 to draw his benefit. Then John reads a retirement planning book that explains how to maximize Social     Security benefits and they formulate a new plan.

New Plan – Part 1

Linda will start drawing on her own SS account at 62 at the reduced rate of $518 per month. When she reaches 66, she will stop drawing on her account and start drawing spousal benefits on John’s account. Drawing on her account from age 62 to 66 (48 months) will give her $28,864 additional benefit income   during the 48 months ($518 x 48 = $28,864).

New Plan – Part 2

At age 66, when she starts drawing spousal benefits on John’s account, the amount will be one half of his benefits at his full retirement age ($2,150 / 2 = $1,075). This will be $370 more per month than the full    retirement benefit from her account.

Remember that John is not going to start drawing his benefit until age 70. However, for Linda to start receiving her spouse benefit from his account, John must apply for his benefit. SS has a provision that allows a person to apply to receive her/his benefit and then suspend receiving it.  John will apply for his own benefit at age 66 and immediately suspends its collection. This will allow Linda to start drawing her Social Security spousal benefits on John’s account when she hits 66.

New Plan – Part 3

Since Linda will start drawing her benefits at 62, John can start drawing his spouse benefits on Linda’s account when he reaches age 66. This amounts to $352 per month which is one half of her benefit. John will draw this benefit until age 70 when he discontinues the spousal benefit and starts to draw his own benefit which will be 32% higher than if started drawing his benefit at age 66.

 

A recap of the increased Social Security benefits received:

  • Linda will receive 48 months of her reduced benefit she was not planning to receive ($28,864).
  • Linda will receive SS spousal benefits on John’s account at age 66 which will be $370 more than her own benefit at age 66. This increased benefit will continue until she dies.
  • John will receive 48 months of spousal benefits from Linda’s account he was not planning to receive ($16,896).

 

The take home ideas from this article:

  • Determine what the benefits are for both individual’s SS accounts
  • Determine what the Social Security spousal benefits will be for each spouse’s account for the other spouse.
  • Consider all combinations of individual and spousal benefits.
  • Develop a plan to utilize the individual and spousal benefits to maximize your Social Security income.

You must take action on your own.  Social Security will not notify you that you are not taking full advantage of all your benefits.

 

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Retirees Can Use Fixed Term SPIAs to Keep in Control of Their Money

Posted by Katie Lightfoot

By: Shane Flait

Today’s retirees often don’t have a company pension. Their only steady source of income is their Social Security benefits (SSB). But often that’s not enough and they want to count on an income that’ll cover their living expenses. If they’ve acquired a decent amount of savings they can use an annuity to assure them an adequate income without losing control of their money. Here’s how.

For a lump sum, you can buy a Single Premium Immediate Annuity (SPIA) that can supply a monthly income for life or for a fixed term. That lump sum amount is now out of your control since you’re taking it as income. If you take it at 65 with a payout to you for life, it’ll take a large lump sum and may deplete all your savings leaving little or no legacy for your kids.

To assure yourself a reliable income yet maintain control of your money and legacy, consider a fixed term payout from an SPIA. How much of your savings you’ll use for the SPIA depends on how much assured income (i.e. SSB and pension) you have already, and what stage of retirement you’re in. If you’re ‘loaded’ or have a great company pension you don’t need to annuitize for the assurance of not outliving your money.

Let’s consider some options for purchasing an SPIA

*The fixed term SPIA option:

Here, we’re looking at a fixed term SPIA where you purchase the SPIA for an immediate payout, but only for a fixed term – perhaps 5, 10 or 15 years depending on your age.

The idea is to buy the fixed term SPIA with only 50% of your savings. The term you choose depends on how much extra assured income you need – beyond your SSB and pension – and what you plan to do with your other 50% of savings. Let’s see some examples for this approach.

*A New retiree’s approach:

If you’re a 66 year old man beginning retirement with about $400,000 or more in savings but no company pension, you may complement your SSB with an annuity income while you pursue some endeavor for the first 10 years of your retirement. But, you don’t want to lose control over your assets for later alternative choices.

As an option, you could purchase a 10 year term SPIA that would pay you about $2,000 per month to supplement your SSB for about $202,000 (you must do some research on this). This would leave you with at least $200,000 in savings that you can invest to grow over the next 10 years. With the assurance of the income that your SPIA gives you, you can invest the remainder of your savings more aggressively for a higher return.

If you can invest at a 7 or 8% growth rate you may recover your $202,000 lump sum with your investment money over those 10 years. The growth rate you can reasonably expect will depend on your choice of investment and the tax-deferred status of your savings. A tax-sheltered account (like an IRA) would allow you to seek tax-deferred high income investments. Or, you could buy a deferred annuity at a guaranteed rate. The key is that you’re in control of your remaining savings for later use and choices.

With assets under $100,000, don’t tie up your money in an annuity. It’s not going to provide enough income to make the purchase worthwhile. Consider part-time work and delaying retirement to increase your assets. Later when you’ve increased your savings, stopped working, and receive Social Security, consider the annuitizing options.

*Older retiree approach – worrying about a legacy and living expenses:

If you’re an 80 year old with $200,000 in savings and a house with no mortgage, you may be drawing down your savings at about $2,000 per month and are worried about depleting your savings and losing your legacy to your children.

You could purchase an SPIA for a fixed term – perhaps 10 years – with a fraction of your savings to cover the monthly drain on her savings that your SSB can’t handle. Your age may make opting for a life annuity, rather than a fixed term, a good option since your low remaining life expectancy would give you more income per lump sum dollar invested.

But use your remaining savings to invest in a deferred annuity to grow for later use or as a legacy

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My Health Insurance Is Through My Employer? What Do I Do When I Retire? Health Insurance In Retirement

Posted by Katie Lightfoot

By:  Dana Anspach, www.moneyover55.about.com

If you’ve held a stable job for most of your career, it’s likely you haven’t had to give much thought to your health insurance plan. Instead, it’s been a benefit consistently offered through your employer. With retirement approaching, now what? You’ll want to follow the steps below to evaluate your health insurance retirement options.

1. Learn About Your Group Health Insurance Benefits In Retirement

The first thing to do is learn all about your existing health insurance benefits and how they change in retirement. Do you have the option to continue in your group plan? Have you worked there for enough years, or reached an age where you become vested in certain health insurance benefits? Attend workshops and read all the literature your employer provides on health insurance in retirement.

2. Explore Your Choices For Health Insurance In Retirement

Next, explore your options. When you’re age 65, most of you will become eligible for Medicare, but you’ll still have choices to make. The most accurate information you can find is on Medicare.gov, but if you’re like the rest of us, you’ll still want professional help in making such an important decision, which means you’ll want to move on to Step 3.

3. Talk To An Agent Contracted With Most Major Carriers To Compare Health Insurance Retirement Choices

Your best choice will be to talk to a health insurance agent who is contracted with most major health plans in your area. Particularly, look for a health insurance agency that specializes in health insurance in retirement; they can conduct a complete analysis of your options by asking you about your existing doctors and medications and then tell you which plans will provide the most cost-effective benefits based on your personal medical situation.

I found such a health insurance agency with Strategic Growth Insurance Associates. Licensed in over twenty states, they provide a spreadsheet of your options, helping you objectively evaluate your health insurance choices.

4. Once You Have Health Insurance In Retirement, Then What?

Whether over or under age 65, once you have secured health insurance in retirement you should be proactive about evaluating it by conducting an annual review of your coverage options. Benefits and costs change, and it is possible a new plan may offer you better coverage at a lower price; you won’t know unless you look. Once again, you’ll want to talk with an agent who is contracted with all major carries to get an objective analysis.

 

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Making an Informed Decision on When to Retire

Posted by Katie Lightfoot

By: Richard Gaudiosi, Social Security Administration Public Affairs Specialist

It’s never too early to start thinking about your retirement.  When you do, one of your first questions may be, “When’s the best time to start receiving retirement benefits?”

There is no “best age” for everyone and, ultimately, it is your choice.  You should make an informed decision about when to apply for benefits based on your individual and family circumstances.

With that in mind, Social Security has published a new fact sheet to help you make the decisions that is best for you. When to Start Receiving Retirement Benefits is available on line at www.socialsecurity.gov/pubs .

Things to consider are your current cash need, health, family longevity, whether you plan to work after you retire, future financial needs and obligations, and the amount of your benefits and other income, such as pensions and deductions from retirement funds.  Do you have investments to draw from when you need extra money?  Will it last as long as you expect to live?

Keep in mind that people are living longer than they used to.  About one out of every four 65 year olds today will live past age 90, and one out of 10 will live past age 95.  If you decide to retire early, at age 62 or any time before your full retirement age, you can get your benefits sooner, but you will get a reduced benefit for the rest of your life.  Your monthly benefit will last as long as you do.  Therefore, the reduction in monthly payment for taking early retirement can add up to a big difference over the life of your benefits.

Your decision can affect your spouse and family, too.  If you die before your spouse and dependent children, they may be eligible for survivor’s benefits.  But, if you took early retirement, payments to your widow would be based on your reduced benefit amount.

When you reach your full retirement age, you can work and earn as much as you want and still receive your full Social Security benefit payment.  If you are not at full retirement age and your earnings exceed certain dollar amounts, some of your benefit payment during the year will be withheld.

On the other hand, if you put off retirement benefits until after your full retirement age, your benefit amount will increase.  In fact, your benefit amount will continue to go up until you reach age 70 or start receiving benefits, whichever comes first.

And when thinking about Social Security, don’t forget Medicare.  You should sign up for Medicare three months before reaching age 65, no matter when your full retirement age is—even if you decide to delay retirement benefits.  Otherwise, your Medicare, as well as prescription drug coverage, could be delayed and you could be charged higher premiums.

Learn more and make an educated decision about when to retire.  Visit the online fact sheet, When to Start Receiving Retirement Benefits, at www.socialsecurity.gov/pubs.

 

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Life Insurance Buyer’s Guide Prepared

Posted by Katie Lightfoot

By: The National Association of Insurance Commissioners

  • Buying Life Insurance
  • How much do you need?
  • What is the Right Kind?
  • Finding a Low Cost Policy
  • Things to Remember

Buying Life Insurance

When you buy life insurance you want coverage that fits your needs and doesn’t cost too much. First, decide how much you need – and for how long – and what you can afford to pay. Next, find out what kinds of policies are available to meet your needs and pick the one that best suits you. Then, find out what different companies charge for that kind of policy for the amount of insurance you want. You can find important cost differences between life insurance policies by using cost comparison indexes as described in this guide.

It makes good sense to ask a life insurance agent or company to help you. An agent can be particularly useful in reviewing your insurance needs and in giving you information about the kinds of policies that are available. If one kind doesn’t seem to fit your needs, ask about others. This guide provides only basic information. You can get more facts from a life insurance agent or company or at your public library.

How much do you need?

To decide how much life insurance you need, figure out what your dependents would have if you were to die now, and what they would actually need. Your new policy should come as close to  making up the difference as you can afford.

In figuring what you have, count your present insurance – including any group insurance where you work, social security or veteran’s insurance. Add other assets you have – saving, investments, real estate, and personal property.

In figuring what you need, think of income for you dependents – for family living expenses, educational costs and any other future needs. Think also of cash needs – for the expenses of a final illness and for paying taxes, mortgage or other debts.

What is the Right Kind?

All life insurance policies agree to pay an amount of money when you die. But all policies are not the same. Some provide permanent coverage and others temporary coverage. Some build up cash   values and others do not. Some policies combine different kinds of insurance, and others let you change from one kind of insurance to another. Your choice should be based on your needs and what you can afford. A wide variety of plans is being offered today. Here is a brief description of two basic kinds – term and whole life – and some combinations and variations. You can get detailed information from a life insurance agent or company.

Term insurance covers you for a term of one or more years. It pays a death benefit only if you die in that term. Term insurance generally provides the largest immediate death protection for your premium dollar.

Most term insurance policies are renewable for one or more additional terms even if your health has changed. Each time you renew the policy for a new term, premiums will be higher. Check the premiums at older ages and how long the policy can be continued.

Many term insurance policies can be traded before the end of a conversion period of a whole life policy-even if you are not in good health. Premiums for the new policy will be higher than you have been paying for the term insurance.

Whole Life Insurance covers you for as long as you live. The common type is called straight life or ordinary life insurance – you pay the same premiums for as long as you live. These premiums can be several times higher than you would pay at first for the same amount of term insurance. But they are smaller than the premiums you would eventually pay if you were to keep renewing a term policy until your later years.

Some whole life policies let you pay premiums for a shorter period such as 20 years, or until age 65. Premiums for these policies are higher than for ordinary life insurance since the premium payments are squeezed into a shorter period.

Whole life policies develop cash values. If you stop paying premiums, you can take the cash – or you can use the cash value to buy continuing insurance protection for a limited time or a reduced amount. (Some term policies that provide coverage for a long period also have cash values).

You may borrow against the cash values by taking a policy loan. Any loan and interest on the loan that you do not pay back will be deducted from the benefits if you die, or from the cash value if you stop paying premiums.

Combinations and Variations. You can combine different kinds of insurance. For example, you can buy whole life insurance for lifetime coverage and add term insurance for the period of your greatest insurance need. Usually the term insurance is on your life – but it can also be bought for your spouse or children.

Endowment insurance policies pay a sum or income to you if you live to a certain age. If you die  before then, the death benefit is paid to the person you named as beneficiary.

Other policies may have special features which allow flexibility as to premiums and coverage. Some let you choose the death benefit you want and the premium amount you can pay. The kind of insurance and coverage period are determined by these choices.

One kind of flexible premium policy, often called universal life, lets you vary your premium payments every year, and even skip a payment if you wish. The premiums you pay (less expense charges) go into a policy account that earns interest and charges for the insurance are deducted from the account. Here, insurance continues as long as there is enough money in the account to pay the insurance charges.

Variable life is a special kind of insurance where the death benefits and cash values depend upon investment performance of one or more separate accounts. Be sure to get the prospectus provided by the company when buying this kind of policy. The method of cost comparison outlined in this Guide does not apply to policies of this kind.

A simple comparison of the premiums is often not enough. There are other things to consider.  For example:

  • Do premiums or benefits vary from year to year?
  • How much cash value builds up under the policy?
  • What part of the premiums or benefits is not guaranteed?
  • What is the effect of interest on money paid and received at different times on the policy?

Finding a Low Cost Policy

After you have decided which kind of life insurance is best for you, compare similar policies from different companies to find which one is likely to give you the best value for your money.

Comparison Index numbers, which you get from your life insurance agents or companies, take   these sorts of items into account and can point the way to better buys.

Comparison Indexes. There are two types of comparison index numbers. Both assume you will live and pay premiums for the period of index.

Yield Comparison Index . The Life Insurance Yield Comparison Index is a measure of cash value growth over the Index period which takes into account the interest credited, the estimated value of the death protection provided, and the expenses charged. A higher yield index number generally indicates a better buy. Since this index reflects items other than interest earnings, it may differ from the credited interest rate advertised or guaranteed in your policy. For the same reasons, the Yield Index may differ from the return on a pure investment like a savings account. Keep this in mind if you attempt to compare Yield Indexes with investment returns.

The Net Payment Cost Comparison Index helps you compare costs over the Index period assuming you will continue to pay premiums on your policy and do not take its cash value. It is  useful if your main concern is the benefits that are to be paid at your death.

Guaranteed an Illustrated Figures. Many policies provide benefits on a more favorable basis than the minimum guaranteed basis in the policy. They may do this by paying dividends, or by charging less than the maximum premium specified. Or they may do this in other ways, such as by providing higher cash values or death benefits than the minimums guaranteed in the policy. The “currently   illustrated basis” reflects the company’s current scale of dividends, premiums or benefits. These scales can be changed after the policy is issued, so that the actual dividends, premiums or benefits over the years can be higher of lower than those assumed in the Indexes on the currently illustrated basis.

Some policies are sold only on a guaranteed or fixed cost basis. These policies do not pay dividends; the premiums and benefits are fixed at the time you buy the policy and will not change.

Using Comparison Indexes. The most important thing to remember is that, when using the Net Payment Cost Comparison Index, a policy with smaller index numbers is generally a better buy than a similar policy with larger index numbers. When using the Life Insurance Yield Comparison Index, the opposite is true: a policy with larger Yield Comparison Index numbers is generally a better buy than one with smaller Yield Comparison Index numbers.

Compare index numbers only for similar policies – those which provide essentially the same benefits, with premiums payable for the same length of time. Where possible the same amount of planned premium should be used. Make sure they are for your age, and for the kind of policy and amount you intend to buy. Remember than no one company offers the lowest cost at all ages for all kinds and amounts of insurance.

Small differences in index number should be disregarded, particularly where there are dividends or non guaranteed premiums or benefits. Also, small differences could easily be offset by other policy features, or differences in the quality of service from the agent or company or differences in the strength of companies. When you find small differences in the indexes, your choice should be based on something other than cost.

Finally keep in mind that index numbers cannot tell you the whole story. You should consider:

The level and quality of service from the agent or company, the strength and reputation of the company, the history (track record) of how the company treats carious classes of policyholders e. g. longtime policyholders versus current purchasers.

The pattern of policy benefits. Some policies have low cash values in the early years that build rapidly later on. Other policies have a more level cash value buildup. A year-by-year display of values and benefits can be very helpful. (The agent or company will give you a Policy Summary that will show benefits and premiums for selected years).

Any special policy features that may be particularly suited to your needs.

The methods by which non guaranteed values are calculated. For example, interest rates are an   important factor in determining policy dividends. In some companies dividends reflect the average interest earnings on all policies whenever issued. In others, the dividends for policies issued in a   recent year, or a group of years, reflect the interest earnings on those policies; in this case, dividends are likely to change more rapidly when interest rates change.

Things to Remember

  • Review your particular insurance needs and circumstances. Choose the kind of policy with   benefits that most closely fit your needs. Ask an agent or company to help you.
  • Be sure that the premiums are within your ability to pay. Don’t look only at the initial premiums, but take account of any later premium increase.
  • Don’t buy life insurance unless you intend to stick with it. It can be very costly if you quit during the early years of the policy.
  • Read your policy carefully. Ask your agent or company about anything that is not clear to you.
  • Review your life insurance program with your agent or company every few years to keep up with changes in your income and your needs.
  • Contact Benchmark Financial Group, LLC for all your insurance needs:  913-227-4224  www.benchmarkfinancialgroup.com

 

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How Living Expenses Change During Retirement

Posted by Katie Lightfoot

By:  Ian Filippini

There are some upsides to being a retiree—senior discounts, lower taxes, subsidized healthcare and regular Social Security checks among them. On the other hand, mature Americans must contend with worrisome issues such as rising costs of medical care, long-term care, prescription drugs, and even basic necessities such as food and energy.

To determine your monthly expenses during retirement, you might start by dividing costs into two categories; those you believe will change and those you believe will remain largely the same

Costs You Believe Might Change

Housing expenses—particularly if you plan to live in your paid-off home or plan to downsize to a smaller dwelling

Medical insurance—which may shift from a premium for HMO coverage to a Medigap policy

Costs of dependents—if you have children you believe will be self-sufficient by the time you retire.

Entertainment and travel expenses—for some people, these might decline precipitously; for others, they might be far higher.

Taxes—most retirees find their combined tax burden is less than during their working years.

Automobile-related costs—retirees generally drive less than workers who commute to their jobs every day, thus spending less on maintenance, gasoline, etc.

Monthly contributions toward retirement savings accounts—not only can you stop making this contribution, you might even consider spending it.

Costs You Think Will Remain the Same

Food

Clothing—unless you previously spent large amounts of money on uniforms or other job-specific wardrobe items.

Household expenses—such as telephone, utilities, cable, etc

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Estimate Your Retirement Benefits

Posted by Katie Lightfoot

How can I calculate my own retirement benefit estimates?

We suggest you use the Retirement Estimator at http://www.socialsecurity.gov/estimator. The Retirement Estimator produces estimates based on your actual Social Security earnings record, so it’s very accurate. Also, you can use it to test different retirement possibilities based on what age you decide to start benefits or get an estimate with changes to your future benefits.

You also can go to the Benefits Calculators at http://www.socialsecurity.gov/planners/benefitcalculators.htm and use the earnings shown on your Social Security Statement to calculate estimates. The calculators will show your retirement benefits as well as disability and survivor benefit amounts. These benefit calculators are not linked to your Social Security record, so you do not need to establish a password to use them.

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ESTATE PLANNING BASICS: PART V – WHY YOU DON’T NEED A TRUST

Posted by Katie Lightfoot

By:  Timothy Denker

An old friend of mine called me up and wanted to discuss what he needed for an estate plan. He was single, and had a few things, but nothing significant. My friend had spoken with a couple other attorneys who were suggesting he create a pretty complex estate plan. He was single with no kids, and wanted everything to go to just two people. We walked through the pros and cons of his estate planning options, and the one big question popped up: does he need a trust?

Every person needs to have an estate plan, no matter how simple their situation may be. It only takes one small mistake to significantly reduce the value of the property being inherited and the time it takes to actually inherit it. An instrument commonly used to help avoid that mistake is called a Trust, and a common question clients ask is whether they need one. To be able to assess whether you need a Trust consider a few of the basics.

Trusts come in many different forms and have many different purposes. They are extremely efficient instruments used to plan a person’s estate. Trusts can be living or testamentary; revocable or irrevocable. Trusts help avoid probate and paying estate taxes. They also help protect the assets and the beneficiaries of the estate. When used properly they will save your family all of the money, headache, time and hassle that could be incurred in an improperly planned estate. Everyone could definitely benefit by having a trust.

The main reason I wouldn’t recommend a trust to someone would be if it were not cost effective. One of the first things I ask my clients to do when beginning the estate planning process is to figure out their net worth (assets minus liabilities). This includes real property, bank accounts, life insurance, retirement accounts, debt, etc.; and it usually adds up to more than what most people realize. However, if I look at the estate and see little to no net worth, then consideration needs to be given to a more cost effective estate plan.

Another reason would be if you have a very simple distribution plan. Only having one or two heirs who don’t have their own children can leave things pretty simple, and we can use alternative vehicles to accomplish the plan you want laid out. Any changes to that plan in the future may be a bit time consuming, but could still be worth the savings.

A third possible reason would be if your only asset is a retirement investment account. These accounts have some very stringent rules regarding on-death transfers and the tax benefits of listing a person versus a trust should be explored with a professional.

Essentially, whether you are set up in a Trust is your decision. Your lawyer should provide you with other alternatives as well as the pros and cons of each plan. These alternative plans should all include a Will, but should definitely NOT be limited to just a Will. If an alternative plan to a Trust is used it is very important to remember the following: (1) it will take careful planning to make sure they are following the overall estate plan. Even the most well-crafted Will won’t undo a careless overall plan; (2) the initial efforts of proper titling of the assets are absolutely crucial to the execution of your plan; (3) it will require constant awareness, and maintenance/updating any time there is a change to your family, property or location; and (4) if the only thing in your estate plan is a Will you need to find out what is missing.

Timothy Denker
The Legal Center for New Families LLC
229 SE Douglas, Ste 210
Lee’s Summit, MO 64063
(816) 434-6610
[email protected]

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ESTATE PLANNING BASICS: PART IV – THE POWER OF ATTORNEY FOR FINANCIAL MATTERS

Posted by Katie Lightfoot

By:  Timothy Denker

A young woman in her 40s called me one day completely distraught. She was married with two adorable little girls, but her husband was hit by a drunk driver and had been in a coma for quite some time. Her income alone was unable to support her family, and the bills were starting to pile up. She wanted to sell her house so she could use and salvage the equity in their home that they’d worked so hard to build. The problem was that the house was owned by her AND her husband. While this may not seem to be too problematic, in actuality, it was. Without having a durable power of attorney for finance, she was unable to sign on her husband’s behalf even though he couldn’t do so himself.

Estate Planning is not just about planning what happens when you die. It’s also about planning for the possibility of you becoming incapacitated (unable to make your own decisions). No one thinks this could ever happen to them, but I’ve yet to meet anyone who was able to predict their own future. Tragedies occur. It’s cruel, but inevitable. Did you know that according to the Highway Patrol, in 2010, there were 54,875 people injured in car crashes just in the state of Missouri? And I see more and more people looking at and talking on their phones while they drive every day.

Last month, I talked about the Health Care Power of Attorney, which is needed to plan for your incapacity. Well, the Power of Attorney for Financial Matters is a separate document that also comes in very handy. Basically, this gives the person you designate the ability to handle your financial affairs in the event you can’t. It includes everything from paying your bills, to selling your property, to handling some overlooked last minute estate planning.

This Power of Attorney for Finance can either be durable or springing. If it’s durable, that provides quite a bit more flexibility, and allows the person’s agent to sign on his behalf in the event he is unavailable. A Springing Power of Attorney, on the other hand, only becomes enacted upon the actual incapacity of the person. My client’s husband did not have any type of power of attorney in place, and because of it, he exposed his wife and two little girls to the possibility of losing everything they’d worked so hard to attain.

So at what point should someone do this type of planning? Planning for one’s incapacity needs to start the second someone becomes a legal adult. Once you’re an adult no one has the authority to make those decisions for you anymore, and signing the marriage certificate does not provide your spouse with this authority either.

Fortunately for my client, she had some close relatives that ended up being able to help her through the difficult times, and she was able to save the house. But how many people really have that kind of luxury?

Timothy Denker
The Legal Center for New Families LLC
229 SE Douglas, Ste 210
Lee’s Summit, MO 64063
(816) 434-6610
[email protected]

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ESTATE PLANNING BASICS: PART III – YOUR HEALTHCARE DECISIONS

Posted by Katie Lightfoot

By:  Timothy Denker

Not everything about estate planning is done for your heirs. Much of it, in fact, is put in place to protect you. One of those documents is called a “Power of Attorney for Health Care and Health Care Directive.” I’ll simply call it “Directive” from here on out.

Most of us remember the Terri Schiavo story. To remind you, Terri suffered an accident that resulted in serious brain damage and was in a persistent vegetative state. Terri did not have a Directive and so a seven year legal battle ensued between her husband and friend, who wanted the life-prolonging procedures to be removed, and her parents, who wanted her to continue on life support hoping for a recovery. In the end, the decision was made by the courts. This situation cost the family constant and prolonged heartache, thousands of dollars, and at a certain point Terri went on government aid/taxpayer money. If Terri had just had a Directive, it would have been clear to all her family members what her wishes would be, and the fighting could have been avoided altogether.

Did you know that just because you’re married, your spouse does not have the automatic right to make those healthcare decisions for you? In fact, any person who is an adult and does not have a legal guardian should have a Directive in place.

So ask yourself: Who do you trust to be able to make (and handle) those incredibly important decisions for you? Your spouse? Your parents? Your kids? Is that person comfortable making that call? Then take it a step further. How should that person make those decisions?

A Directive not only provides the person you give the power to make health care decisions you are unable to make, but it also tells them what you want. Make sure you are the person who chooses what situations will determine the extent of your medical treatment. Don’t force your family to make that decision for you. And don’t force your family to fight in court over who has that say and what that say should be.

These are very emotional and sensitive decisions to make, and only you can really know what you want. Have your Power of Attorney for Health Care and Health Care Directive drawn up as a part of your overall estate plan, and remove the burden of that decision from your loved ones.

Timothy Denker
The Legal Center for New Families LLC
229 SE Douglas, Ste 210
Lee’s Summit, MO 64063
(816) 434-6610
[email protected]

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ESTATE PLANNING BASICS: PART II – WHAT DO YOU MEAN “PROBATE”?

Posted by Katie Lightfoot

By: Timothy Denker

A couple of years ago, a client came into my office trying to figure out how to transfer the title of their deceased father’s house into that client’s name. The father didn’t have a Will or any resemblance of an estate plan, so I kept asking questions. It turned out the father had another son who they didn’t talk to anymore and quite a bit of furniture and other household goods. While it was a pretty modest estate the house had to be sold to help pay for the probate expenses, it was going to take at least 9 months before everything was going to be resolved, and this was all based on the hope that his brother was going to actually cooperate, which rarely happens.

On my last blog I made a reference to “non-probate planning,” without really defining probate. Simply put, probate is the department in the courts that deals with passing property to heirs at a person’s death. However, the process itself is not as simple as the definition. There are a multitude of steps and rules that need to be followed. Is there a Will? What property is passing through the will? Who gets what? What if two of the heirs want the same piece of property? Is there enough money in the estate to pay the expenses, or will the heirs have to pony up their own money? The list of questions goes on and on and rarely is the answer simple. Here are a few of the more common questions I get. If any of this relates to you, make sure you talk to an attorney before acting. This is only generic advice, and may not directly apply to your situation.

When my parent dies am I responsible to pay off their debts? Basically, the answer is no. The only way you should pay any debts off or agree to pay debts off of the parent is if you were already obligated to do so. Otherwise, those should be dealt with accordingly when settling the probate estate.

Should I open up a probate estate if there’s more debt than assets? Probably. This answer depends on the situation (type of debt, type of property, etc.). The ultimate goal in these estates is to maximize the value of the assets to pass to the heirs while still paying off the necessary creditors pursuant to what the law provides.

If there is a Will, does that mean the property does not have to go through probate? No. This is a very common misconception. First off, everyone does need a Will. The Will provides a safety net in the event part of the person’s estate plan is not executed accordingly, is not modified when a triggering event occurs, or some extraneous event causes a probate case to be opened by a 3rd party (i.e. creditor, disinherited heir, etc.). However, the Will does not avoid probate.

The good news is that probate is completely avoidable, and planning to do so is one of the essential elements of every estate plan I put together for my clients. There are quite a few methods that can be used, and some are better than others. The key elements to having an effective non-probate plan are to (1) implement your plan immediately after you execute the rest of your estate planning documents; (2) review and update it when necessary; and (3) make sure it accurately reflects your chosen estate plan.

Timothy Denker
The Legal Center for New Families LLC
229 SE Douglas, Ste 210
Lee’s Summit, MO 64063
(816) 434-6610
[email protected]

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ESTATE PLANNING BASICS: PART I – MORE THAN JUST A WILL

Posted by Katie Lightfoot

By Timothy Denker

Recently, I met with a couple who was beginning to contemplate retirement. A family member told them they need to get Wills drawn up so they decided to find out how they should do that. “Well, we don’t really have anything, so we’re not sure why we would need a Will?” I can’t even begin to tell you how many times people say those exact words to me when I tell them that I help people plan their estates. It’s a common misconception that estate planning is only for the wealthy when in fact everyone should have it, and having a Will is just one of the things needed for a properly planned estate.

[On a side note, I would like to point out that a person's estate includes every piece of property they own. This includes their house, car, bank account(s), stock, retirement account, life insurance, jewelry, furniture, etc. So even if you don't think you have anything, there's a very good chance you have at least something that needs to be addressed.]

Due to the variety of issues that are addressed in an estate plan, I’ve decided to break it up into several parts: Wills and non-probate planning, probate, the healthcare power of attorney and healthcare directive, the financial power of attorney, and trusts. For this article, I’d like to discuss not only the Will itself, but also what should be addressed outside of the Will to make it as easy on your loved ones as possible.

Everyone should have a Will. If a person dies without a Will, they died intestate. This means that any property passing through the probate court will go to whoever the state legislature has decided should get it. Do you really want someone else making that decision for you? Did you know that if you die with a surviving spouse and children, your spouse does not necessarily get everything?

If a person dies and has a Will, they died testate. So what exactly is a Will? Simply put it provides the opportunity to legally choose who will get what, and which person is trusted to handle divvying out that property according to the Will. There are many different provisions in a properly drawn up Will that will not only handle the basics of a Will, but will also address methods used if probate is necessary, the powers of the personal representative (a.k.a. the executor), whether the property should be placed in a trust, guardianship for minor children, and most importantly (in my opinion) helping keep your loved ones from fighting.

So in addition to having a Will drawn up and properly executed for you, a properly planned estate will include non-probate planning. Basically, getting the property to legally pass without having to use the probate courts. When an estate is planned properly, it will save your heirs significant amounts of time, money and hassle that would normally be incurred during the probate process.

Timothy Denker
The Legal Center for New Families LLC
229 SE Douglas, Ste 210
Lee’s Summit, MO 64063
(816) 434-6610
[email protected]

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ESTATE PLANNING AND THE FAMILY MEMBER WITH A DISABILITY

Posted by Katie Lightfoot

If you have a family member with special needs, such as a lifelong developmental, physical, or mental disability, your personal financial and legal advisors should be made
aware of this. This information is crucial in developing an appropriate estate plan.

Needs-based governmental programs, such as Medicaid and Supplemental Security Income (“SSI”), are essential to persons with a disability. Persons with developmental
disabilities may live in a variety of settings in their communities. They may live in a group home, an extended family situation, or relatively independently. However, in all these
settings there is a services provider who is performing any combination of a number of tasks, which may include (to name a few) assisting with balancing a checkbook, grocery shopping, housekeeping, ensuring hygienic practices, and monitoring medication compliance. These services are provided as home and community-based programs, which are made available and funded through Medicaid. Even in cases where an individual may be living at home with parents, that individual is likely to be receiving services away from home during the day, such as job coaching services in employment or supervision at a workshop. Again, these services are provided and funded through a home and community-based Medicaid waiver program.

To qualify for Medicaid or SSI, an individual may not have assets exceeding a certain minimal threshold – $4,000 for Medicaid; $2,000 for SSI. In the event the individual
directly received an inheritance exceeding these levels, the individual would be required to pay out-of-pocket for their home and community-based services until once again below the applicable limit. Fortunately, however, the individual can be the beneficiary of a certain type of trust, known as a special needs trust or a supplemental needs trust, without the trust’s assets counting against the individual’s eligibility. The idea is to name the trust in your will to receive the share that otherwise would have gone to the disabled individual.

The trustee of the trust will have authority to make expenditures from the trust that would be in the individual’s best interests and that would enhance the individual’s quality
of life. The trust can be used to purchase desired goods or services which could not be paid for in any other way. For example, such trusts have been used to purchase electric powered wheelchairs controlled by a joy stick (neither Medicare nor Medicaid will pay for advanced wheelchairs), a handicap van conversion, or assistive devices. They have also been used to buy video games, entertainment, and trips. Most other expenditures you might think would be desirable to make could be made.

The trust device is a sound, reliable way of providing for a family member with a disability. By contrast, leaving all your property to your other children with a request that
the other children “take care of” the one with disabilities carries the risk that the property will be diverted to other uses. One of the other child’s creditors may execute a judgment against the property, or the property might get caught up in a divorce proceeding. Or, the sibling may just decide his house renovation is more important or pressing than some future expenditure for the sibling with the disability.

It is important to get this planning right while you are alive. It is possible for experts to divert an outright inheritance into a particular type of special needs trust after you have
passed away. However, the cost for that particular type of special needs trust is that particular trust must include a provision that the State will be reimbursed for Medicaid
received by the disabled individual after the individual’s death. The reimbursement would take priority over distribution to other family members. By contract, a reimbursement
provision is not required in a trust which you establish during your life as part of your estate plan.

The preparation of special needs trust is a specialized area of estate planning.  Such trusts require certain provisions to work correctly, and many estate planning attorneys
have little knowledge about them. So, make sure you find an advisor who has the requisite expertise.

The author of this article may be contacted at:

David W. Rowe
Kinsey Rowe Becker & Kistler, LLP
P.O. Box 85778
Lincoln, NE 68501-5778
(402) 438-1313 x21
(402) 438-1654 (fax)
[email protected]

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