Category: Employer

I’m Retiring Soon—What Do I Do with My 401(k)?

I’m Retiring Soon—What Do I Do with My 401(k)?

As you may have realized, when you reach retirement age, you can pack up all your pictures and favorite fountain pens and desk knick-knacks, but you can’t just toss your 401(k) in a cardboard box, kick open the door, and journey off to new, work-free horizons.

 

You have to decide what to do with the hard-earned money you’ve saved at your employer, a decision that should be thought out carefully, so you can avoid mistakes that may hack away at your retirement livelihood.

 

To get you thinking in the right direction, I’d like to outline all of your options for what to do with your 401(k). Some are much better than others for most people, so I think it will be beneficial to run you through the four common choices retirees make and the potential strengths and weaknesses of each.

 

  1. Do Nothing

That’s right, you could take the path of least resistance and just leave it with your employer. And, surprisingly, there are viable reasons for doing so. For a small one, a 401(k) usually has good protection from creditors. But here’s the big one: keeping your money in a 401(k) will allow you to withdraw without penalty at age 55. Other options are not so friendly to early takers, socking you with penalties if you withdraw before 59 and a half. So, if you are retiring before 59 and a half, this is an important point to consider.

 

However, aside from that, there aren’t too many reasons you’d want to keep your 401(k) with your employer. It limits your investment options. Oftentimes, you can’t get good, individualized management help. And, if you’ve had a string of employers and left a pot of money with each, you’ve probably got a trail of 401(k) accounts following behind you, making your money difficult to manage. Scattered money leads to a scattered brain.

 

In other words, sticking with your employer is not your worst option, but it may be not your best.

 

  1. Take a Lump Sum Distribution—Cash It Out!

To fling us all the way over to the dark side, this is the worst option. In fact, this choice can cause you to loose a third of your 401(k) value in one foul swoop. How? I’ll give you a hint. It has something to do one of life’s two certainties.

 

No, not death…but taxes.

 

When you cash it all out at once, that money becomes part of your income for the year. This will often make you soar into higher tax brackets, and—next thing you know—Uncle Sam can snag tens of thousands of dollars from your hard earned money.

 

 

To take an example, let’s say your yearly income (as a couple filing jointly) is in the 15% bracket ($18,651 to 75,900 in 2017). If you take out a 401(k) with, let’s say, $200,000 in it, this will catapult you up 3 tax brackets to 33%! That’s $66,000 gone, in just one transaction.

 

To put it bluntly, this 401(k) strategy should only be used in emergencies. Even if you want to buy a big-ticket item like a car or a boat or a house, only cash out what you need and, if possible, cash it out in chunks to rein in the tax hikes.

 

  1. Transfer It to a Roth IRA

A Roth IRA is a phenomenal option for 20-somethings wanting to save money for their retirement. However, for the soon-to-be retiree, it usually isn’t. Why? Well, you run into the same tax problem that you do with the second option. Remember the 33% hit?

 

You see, unlike with a traditional IRA, with a Roth IRA, you pay taxes on your money up front. Then, you can withdraw the money tax-free later on. Therefore, the only time it makes sense to convert to a Roth IRA is if you know you will be in a higher tax bracket in the future, when you take it out. For retirees, this is rarely the case.

 

Perhaps a Roth IRA would be a good option if you knew you didn’t need the money, planned to let it grow tax-free until you die and pass it on to your kids. But I’m speaking in extreme rarities now. Most retirees are counting on their 401(k) to live.

 

  1. Transfer It to a Traditional IRA.

The last option is the most popular, and for good reason, too. As far as taxes go, you can transfer it electronically, avoiding all taxes up front. Then you can pay the taxes as you withdraw it, in a reasonable bracket for your income.

 

And, it also wins on many other fronts, fronts that the decision to leave it at your employer doesn’t.

 

For one, you are free to choose from the world of investment options. Like a talent scout seeks out the best players for his team, you can seek out the best performing investments to develop a killer portfolio that is both diversified and matched to your unique risk tolerance.

 

For another, you can consolidate any and all retirement accounts in one, so it is easier to manage.

 

And finally, you can get personalized help. The kind of help that isn’t from a representative to a crowd of employees or from a recording on your phone telling you to “press one to hear more options.” When you rollover your 401(k) to a traditional IRA, you have the option to sit down face-to-face with a professional, certified financial planner and develop that aforementioned killer portfolio together.

Now, it’s important to note that there is a fee involved with working with a financial planner, which is usually 1-2% of the assets he or she manages. Whether or not the fees are higher than the fees you currently pay at your employer is a toss up, so that is something to consider.

 

 

The point is, the decision of what to do with your 401(k) is an important and complicated one. Making the wrong choice can lead to major losses or lost opportunities. That is why we offer a 401(k) planning workshop to help you sort through it all and come to decision you can be confident about. Click here to discover more about our 401(k) workshop as well as our other workshop offerings.

The Diversification Misconception: Why All Your Eggs May Still Be in One Basket

The Diversification Misconception: Why All Your Eggs May Still Be in One Basket

The adage is almost older than investing itself: Don’t put all your eggs in one basket. In other words, diversify your portfolio so that—if a particular investment tanks—you haven’t lost all your money.

 

So you set off to work, scattering your wealth in various locations over time. $10,000 in a Vangard mutual fund, $25,000 in U.S. Bank, 15,000 in randomly selected stocks. Here a little; there a little.

 

Sounds simple, right? The only problem is that this isn’t diversification. Sure, it is better than betting your entire life savings on a Kraft Mac and Cheese stock.  And it may protect you against any one company going under. But—in almost every other respect—this investment strategy doesn’t leave you any better off than a one-basketeer. Why?

 

Because asset classes are the ticket!

Diversification is not about the variety of companies, but rather the variety of asset classes you invest in. Maybe you’ve heard some of them thrown around at dinner parties as wealthy investors brag about their business ventures: fixed income, large cap growth, international, global, etc.

 

But what is an asset class? In short, it is just a categorization of investments, but this definition doesn’t tell the whole story. An asset class, rather, is a category of investments with comparable characteristics that tend to behave similarly in the marketplace. If one goes up in value, it is likely that the others have gone up as well (at least to some degree). And when one plummets, check the others; they probably aren’t doing so hot either.

 

This means that if you have all of your money invested in one asset class, your portfolio is not diversified. If that one asset class does poorly (since all investments within the category behave similarly), your entire portfolio will suffer.

 

But you can’t stop there!

Haphazardly choosing various asset classes will put you far above those who are randomly selecting investments, but you must go further to truly diversify your portfolio.

 

It’s not just about a variety of asset classes; it is about the right variety of asset classes. Some asset classes behave very similarly to other asset classes. These pairs are considered positively correlated. The general rule is this: you don’t want pairs of investments that are positively correlated. In fact, negatively correlated asset classes are the best. Following this rule puts you in a strong position as an investor. Your investments won’t all go up and down at the same time.

 

 

Allow me to give you an example to illustrate this concept.

Imagine a friend of yours just caught a big break at work. His salary just doubled. Since he doesn’t know what to do with this expendable income, he decides to invest. The first thing he purchases is 100 shares of umbrella stock (the umbrella industry is rockin’). Then—to diversify his portfolio—he also buys 75 shares of stock in a poncho company. He’s in the clear, he thinks, but just to be sure, he goes online and buys 90 shares of stock in a company that sells rain boots.

 

How do you think he’s doing?

Yeah. It’s a disaster. In fact, his miniature portfolio is so imbalanced and hopelessly one-basket-ed that you internally cringe by his second purchase. You don’t need to know much about investing to know that his stocks are positively correlated. They will behave the same way! When it’s dry weather, they will all crash and burn. When it’s wet, they will likely do well.

 

What your friend should have done is invest in a sunscreen company to offset his investments in the umbrella company. In a basic sense, this is diversification.

 

Now, this is definitely an oversimplified example. Anyone can see it from a mile away. But people are doing this in the real world, with real money. Not because they are dumb, but because—in reality—correlations aren’t nearly as obvious.

 

In my practice, I’ve seen it all too many times. People come in for a financial consultation, thinking they have a diversified portfolio, and I find that 70% of their investments are in a single asset class. And this isn’t even taking into account the correlations!

 

Needless to say, it’s a scary situation. No one knows how well a particular investment is going to do from year to year. And no one knows how a particular asset class will do either. The only thing we can do is develop a well-balanced, well-rounded, well-diversified portfolio to smooth out the ups and downs, and then watch the money grow over time. It’s the time-tested, statistically- verified choice.

 

But as long as investors believe the misconceptions, thinking that their portfolio is diversified, they will never change the reality that their eggs are still—in fact—all in one basket.

 

Concerned that your portfolio isn’t diversified? Call Seniormark at 937-492-8800 for a free consultation with a Certified Financial Planner!

 

Do I Really Need a Medicare Supplement?

Do I Really Need a Medicare Supplement?

 

David Belk, a doctor and anti-supplement activist says, “…If you have Medicare and buy a supplemental policy with your own money, you are effectively giving an insurance company your money so that they can keep it.”

 

Wow. This statement is moving. For those who have had a Medicare Supplement Policy for years, it slaps you in the face with regret.

 

And for those who may not be on Medicare and have yet to purchase Medicare Supplement Insurance, it frees you. It justifies a decision that will save you money on premium month to month.

 

However, it is not entirely true. He has a point, but—ultimately—it represents a fundamental misunderstanding of what insurance is.

 

If you take this statement at face value, it would imply that virtually all insurance is worthless.

 

Here’s why: in the vast majority of cases, people pay into insurance and then rarely use it. This is what keeps insurance companies in the black.

 

How many people spend thousands over years on homeowner’s insurance and never have their house burn down? How many people purchase car insurance and only experience a couple of fender benders over their lifetime? Are they essentially “giving their money away to an insurance company”? Yes, you could say that, and it wouldn’t be inaccurate, just a bit misleading.

 

Because you don’t buy insurance for things you expect! Rather, you buy it for things with a high dollar amount of risk and a low probability of happening!

 

You can’t insure what is high risk and high probability. Take Alex Honnold, for example. He spends his waking hours climbing steep ravines with no safety harness. For hours a day, he is one missed footing away from plummeting to his doom. Do you think he is going to be able to get life insurance? It’s almost laughable. This is a high risk, high probability scenario. Of course no insurance company will take a chance on him!

 

You can insure against a low risk, low probability scenario, but why would you want to? Do you want pet insurance for your grandson’s gerbil? Obviously not. Even a low-premium insurance plan wouldn’t be worth it. What did you pay for it? 30 bucks? Maybe fifty if it’s some hypoallergenic, exotic breed? Either way, it’s not a high enough risk.

 

So this begs the question…what does a supplement cover? Is it something that is low probability and high risk?

 

Well…there are varying coverage levels, but even the lowest premium plans cover Medicare’s scariest coverage gap: the unlimited out-of-pocket spending limit.

 

Sure, a lot of them cover “nickel and dime” copays and coinsurance costs that virtually eliminate hassle and reduce costs, but this is just icing on the cake. The real substance of a Supplement Plan is that it puts a cap on your potential out-of-pocket spending.

With Medicare alone, there is absolutely no limit to what you can spend.

 

One of our clients had triple bypass surgery and ended up with a $7,000 bill. My father-in-law with lung cancer had approximately $30-40,000 in charges for outpatient chemotherapy and radiation. I ran into a man who—after a few years of extended illness—racked up over $140,000 in bills that Medicare alone didn’t cover.

 

Can you imagine the devastation if any of these retirees forfeited Medicare Supplement Insurance? If these individuals had chosen Medicare alone, those outrageous bills would’ve been heaped upon their shoulders.

 

Now, what are the chances of this happening to you?

Not very high.

But that is the point! What are the chances that your house is going to burn down? What are the chances that your car will get totaled? You can cite statistics like Dr. Belk and say, “Look…not very many people need this insurance.” However, this doesn’t make those isolated cases any less scary. And it doesn’t change the fact that, from 2006-2015, Medicare Supplement Insurance companies consistently paid out over 75% in claims what they gathered in premiums. Insurance is not about whether or not you are going to get out what you pay in; it is about peace of mind.

 

So yes…I do recommend buying Medicare Supplement Insurance. You don’t necessarily need an expensive, luxury plan, but having something in place is essential. Even if you can’t afford a Supplement, you can (at the very least), purchase a low or no cost Medicare Advantage Plan that will cap your annual out-of-pocket spending at $4-6,000.

 

This won’t guarantee that you won’t be “giving an insurance company your money” but it will guarantee that you can live your retirement life freely and fearlessly, knowing that—in all those unlikely but possible scenarios—

 

you’re still covered.

 

Wondering how much a Medicare Supplement will cost you? Click here to use our Medicare Supplement quoting tool to find out!

 

 

Know The Drug Plan Lingo! 5 Terms to Get You Started

Know The Drug Plan Lingo! 5 Terms to Get You Started

Every field or discipline has its own language. And to the undiscerning ear, it can all run together into nonsensical jargon. Mumbo jumbo. Gibberish. Flim flam. Drivel. You get the idea. But if you want to walk the walk and get ahead, you must first talk the talk. To get you started, you’ve probably come across these 6 terms in your Part D Drug Plan research.

 

Formulary

I’ll start with an easy one. The formulary is simply the list of drugs a particular plan covers. There are 24 drug plans at your disposal. Not all of them will cover the same medications. This is why it is important to check a plan’s formulary to find out if it’s right for you.

 

Prior Authorization

If a drug plan requires prior authorization, it means that they will not cover certain drugs unless your doctor or prescriber proves that the medication is medically necessary.

 

Step Therapy

Drug companies do not want you on an expensive drug when a less expensive one will be just as effective. For this reason, they will often make their beneficiaries start on a generic or cheaper drug as a trial to see if it works just as well. If it doesn’t, then the beneficiary can “step” up to the more expensive (often name brand) medication. This is called step therapy.

 

Quantity Limit

Quantity limit is exactly what it sounds like: a limit on the quantity of a specific drug that a plan will cover. Drug companies limit quantity to reduce waste, curb drug costs, and prevent unsafe use. For example, if someone is on a pain medication with a standard dosage of 2 per day, the quantity limit for a month will likely be 60 pills. They don’t want people getting addicted or wasting them through misuse or carelessness.

 

Tiers

Drug plan companies often organize the medications they cover into levels or “tiers”. Drugs on a lower tier (often generic brands) have lower associated costs such as copayments or coinsurance. Drugs on a higher tier (such as name brand or specialty drugs) often have higher costs.

 

The Donut Hole

The donut hole is a gap is prescription drug coverage. After you reach $3,310 in total drug costs, you enter the donut hole (resulting in higher out-of-pocket costs). After you reach 4,850 in out-pocket costs, you leave the donut hole and enter into what is known as “catastrophic” coverage where the plan will cover 95% of your drug costs.

 

All done! If you finished reading this, your Medicare literacy just increased. But if you have run into any more difficult terms, leave a comment. We are more than willing to answer your questions. Or visit Medicare Interactive’s glossary for additional Medicare vocabulary.

 

Have other Medicare questions? Turning 65 soon and not sure what to do? Click here to sign up for our free Medicare workshop. No high-pressure sales pitches here, just in-depth discussion about the ins and outs of Medicare!

3 Questions You MUST Ask Yourself Before Enrolling in Medicare Part B

3 Questions You MUST Ask Yourself Before Enrolling in Medicare Part B

When approaching 65, most people sign up for Part B, but not everyone. And for good reason, too—not just because they didn’t plan well and missed the deadline. If you are wondering if you are one of these few, stay tuned! The answer is dependent on these three questions:

 

Question 1: Will I (Or My Spouse) Continue Working?

You might be more than ready and able to clock out of that stuffy office or factory for the last time. If this is you, go ahead and enroll. Lack of active employment forfeits your right to delay Part B (even if you have retiree benefits from either your or your spouse’s employer).

However, you or your spouse might continue active employment past age 65 and have insurance coverage through your employer plan. In this case, move on to question #2.

 

Question #2: Who Pays First?

Medicare or the employer? This is an important question to ask because if Medicare pays first and you don’t get on part B, you could be stuck footing some pretty hefty bills on outpatient services. Your employer won’t pay for it because they expected you to get on Medicare. However, if the employer pays first, the decision to delay Part B and stick with your employer health insurance might save you cash on premiums.

The way it works is actually quite simple: Do you work for a company of 20 employees or more? Then the employer pays first. How about fewer than 20? Then Medicare pays first.

But don’t just assume. To be certain, ask your human resources department or employer. They might surprise you with their answer.

Refer to question 3 if you or your spouse is covered under a health plan that insures 20 or more employees.

For more information on the answer to this question, refer to this Kiplinger article entitled “Should You Enroll in Medicare If You Are Still Working?” The “Who Pays First” chart mid-page is especially helpful.

 

Question #3: Is Medicare Cheaper?

Some people have excellent employer plans that make sense to stay on. But for others, it is a toss up. And for a few, Medicare is clearly the cheaper option. The only way to find out is to perform a cost to benefits analysis to determine which is more cost effective. If the employer plan is more expensive, then sign up for Part B.

If this helped you come to a conclusion on enrolling in Part B coverage, I wish you sincere congratulations. You are one step closer to a smooth retirement transition. But—of course—you are not done yet. There are many more things to consider.

Turning 65 soon and not sure what to do? Click here to sign up for our free Medicare workshop. No high-pressure sales pitches here, just in-depth discussion about the ins and outs of Medicare!

If you would like our assistance to perform a cost/benefit analysis, or need more immediate answers to your questions, give our office a call at 937-492-8800 and we will see how we can help!

 

Tax Penalty Alert: Mixing Medicare and HSAs

Tax Penalty Alert: Mixing Medicare and HSAs

Medicare and Health Savings Accounts just don’t mix.

Like oil and water. Like toothpaste and orange juice. Like shopping with grandkids and fixed budgets.

 

This is very important to know. When you start Medicare, either Part A or Part B, you have to stop contributions to your HSA account. Otherwise, you could be on the hook for some tax penalties. According to IRS publication 969, the penalty is 6% of your contribution and its interest until you remove the funds from your HSA.

 

So if you want to continue contributing to your HSA (legally, at least), you will have to delay getting on Medicare. But here’s the catch: Very few people can delay Medicare without receiving—you guessed it—penalties (there seems to be a lot of these nowadays). In fact, the only people who can forgo Medicare benefits without consequences are those who have adequate coverage with their employer through active employment. I’m not talking retiree insurance. I am talking Monday through Friday, on-the-floor or in-the-office work. It’s the only way.

 

And if you started receiving Social Security early and were signed up for Medicare automatically, I’m sorry to say you are stuck. You cannot contribute to your HSA, and it will be very difficult to get around it. This is because you are not allowed to opt out of Part A. Although you can drop Part B, being enrolled in Medicare Part A will still prevent you from contributing to your HSA.

 

However, it is important to note that you can still use the money in your HSA. There is no penalty for that. As a matter of fact, I would strongly encourage you to use your money. You’ve spent a lot of time building up that robust HSA; you might as well take advantage of it! You can use the funds for

  • Your Part B Premium
  • Your Drug Plan Premium
  • Your Advantage Plan Premium
  • Doctor’s Appointments
  • Copays

And this is just the beginning. There are many other qualified medical expenses you can use it for.

 

So don’t get too upset. You’re Health Savings Account is not obsolete. It’s just not going to grow much anymore. But that is just the way it is with a lot of things in retirement. Think of your nest egg. Your 401k. IRAs. It is just that time in your life when you stop working to save and start putting those hard-earned savings to work for you! When you look at it that way, it doesn’t seem too bad.

 

Have more questions about Medicare and your employer insurance?  Click here to receive your free copy of our handout:  The top 4 questions Medicare-aged employees ask about their employer health insurance.

 

If you still have questions — give our office a call at 937-492-8800.

 

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Turning 65 and Work For a Small Employer? Sign Up For Medicare Part B!

Turning 65 and Work For a Small Employer? Sign Up For Medicare Part B!

The general rule of thumb is if you have employer insurance through active employment, you can delay Part B of Medicare without penalty.

 

But that certainly doesn’t mean you should! There are cases, of course, when your employer plan is the better value, and it works out for you to opt out of part B. However, in other situations, it may be very costly.

 

For example, consider the woman who came into our office earlier this year with an $8000 bill for her outpatient surgery. She opted out of Part B, but she had insurance through active employment. Shouldn’t her employer plan cover it?

 

Well, not always. You see, her insurance was provided through a company that employed less than 20 people. This made Medicare the primary payer of her insurance. And when she didn’t have Medicare? Well…it wasn’t good.

 

The costly mistake had to do with how coordination of benefits works between employer insurance and Medicare. Let’s take an employer health insurance plan that covers 80/20 as an example (insurance pays 80%, you pay 20%)

 

When an employer plan covers 20 or more employees, the employer plan is the primary payer of your claims. Therefore, your employer insurance pays 80% of the bill and Medicare (if you have it) pays the remaining 20%. In this case, it is not necessary to have Part B; you can opt out. You’ll have to pay the remaining 20%, but it saves you the $134.00 a month Part B premium.

 

But if your employer plan covers less than 20 employees, Medicare pays first. The whole thing is flipped. So what if you get the previously mentioned expensive surgery and don’t have Medicare? It will not just carry over to your employer plan. They won’t pay the 80% that was supposed to be covered by Medicare. Instead, you will be lucky to get them to pay the 20%, leaving you on the hook…80% or more on the hook, which might just be $8000 in uncovered surgery procedures.

 

This is why it is so important to ensure that you are signing up for Medicare at the right time. Just because your neighbor can opt out of part B doesn’t mean you can. They might work for a Honda or a Copeland, a company with thousands of employees. You might work for a small business of 15 people.

 

So check with your boss or human resources department. Ask and make sure. It could save you from an unexpected, expensive, and potentially crippling bill.

 

Confused about Medicare and not sure what to do next? Download our free E-book here, and let us walk you through it!  Still have questions?  Call our office at 937-492-8800 to schedule a free, no obligation appointment!