Underappreciated Options for Building Retirement Savings

October 10, 2018
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More people ought to know about them.

There are a number of well-known retirement savings vehicles, used by millions. Are there other, relatively obscure retirement savings accounts worthy of attention? Are there prospective benefits for retirement savers that remain under the radar?

The answer to both questions is yes. Consider these potential routes toward greater retirement savings.

Health Savings Accounts (HSA’s). People enrolled in high-deductible health plans (HDHP’s) commonly open HSA’s for their stated purpose: to create a pool of money that can be applied to health care expenses. One big perk: HSA contributions are tax deductible. Another, underappreciated perk deserves more publicity: the federal government permits the funds within HSA’s to grow tax free. Just ahead, you will see why that is important to remember.

While 96% of HSA owners hold their HSA funds in cash, others are investing a percentage of their HSA money. Tax-free growth is nothing to sneeze at: an HSA owner who directs 100% of the maximum $3,450 yearly account contribution into investments returning just 4% annually could have an HSA holding more than $200,000 in 30 years. Prior to age 65, withdrawals from HSA’s are tax free if they are used for qualified medical expenses. After that, withdrawals from HSA’s may be used for any purpose (i.e., for retirement income), although they do become fully taxable.  In 2018, an individual can direct $3,450 into an HSA; a family, $6,900. Additional catch-up contributions are allowed for HSA owners aged 55 and older.

“Backdoor” Roth IRA’s. Some people make too much money to open a Roth IRA. That does not mean they are barred from having one. Anyone can convert all or part of a traditional IRA to a Roth, and pre-retirees with high incomes and low retirement savings occasionally do. Why? A Roth IRA offers the potential for future tax-free withdrawals. Roth IRA owners also never have to take Required Minimum Distributions (RMD’s). A Roth conversion is typically a taxable event, and it cannot be undone. The IRA owner may enter a higher tax bracket in the year of the conversion, so anyone considering this should speak with a tax professional beforehand.

Cash value life insurance. Permanent life insurance policies often have the capability to build cash value over time, and high-income households sometimes purchase them with the goal of achieving more tax efficiency and using that cash value to supplement their retirement incomes. Cash value accounts within these policies are designed to earn interest and grow, tax deferred. Withdrawals lower the cash value of the policy, but are untaxed up to the total amount of premiums you have paid. Tax-free, low-interest loans may also be taken from these policies; unrepaid loans, though, lower a policy’s death benefit. The big risk here? If you have an outstanding policy loan, you could potentially face huge income taxes if you run into a situation where you must surrender the policy or are unable to pay the premiums.

Cash balance pension plans. Many small business owners need to accelerate the pace of their retirement saving. A cash balance plan, when wedded to a standard workplace retirement plan that features profit sharing, may enable a business owner to save much more for retirement annually than the low contribution limits of an IRA would ever allow. If contributions are very large, the yearly tax savings linked to the plan could even reach six figures. 

The Saver’s Credit. Lastly, the federal government provides a significant tax credit to encourage low-income and middle-income households to save for retirement. The Saver’s Credit can be as large as $2,000 each year. Joint filers with adjusted gross income (AGI) of $63,000 or less, heads of household with AGI of $47,250 or less, and other filers with AGI of $31,500 or less may be eligible for the credit, which equals either 50%, 20%, or 10% of their annual workplace retirement plan or IRA contribution, depending on their respective AGI level. Taxpayers contributing to ABLE accounts are also eligible to take the Saver’s Credit, so long as they are the designated beneficiary for that account.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

 

Retirement Questions That Have Nothing to Do With Money


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Think about these matters before you leave work for the last time.  

Retirement planning is not entirely financial. Your degree of happiness in your “second act” may depend on some factors you cannot quantify. Here are a few of those factors as well as the questions they may end up provoking in your mind.

Where will you live? This is a major factor in retirement happiness. If you can surround yourself with family members and friends whose company you enjoy, in a community where you can maintain old friendships and meet new people with similar interests or life experience that is a definite plus. If all this can occur in a walkable community with good mass transit and senior services, all the better. Moving away from the life you know to a spread-out, car-dependent suburb where anonymity seems more prevalent than community may be a bad idea. 

How will you get around in your eighties and nineties? The actuaries at Social Security project that a quarter of today’s 65-year-olds will live to age 90. Some will live longer. Say you find yourself in that group. What kind of car would you want to drive at 85 or 90? At what age would you cease driving? Lastly, if you do stop driving, who would you count on to help you go where you want to go and get out in the world?

What will you do with your time? Retirement is not about leaving your old life behind, it is about enhancing the life you have created. It is about writing a new chapter in your life, informed by wisdom and experience. What will that chapter look like? What narrative will unfold for you? Too many people retire without any idea of what their retirement will look like. They leave work, and they cannot figure out what to do with themselves, so they grow restless. Certainly, you do not want this to happen to you.

If your life, identity, and social circle revolves around your work, then maybe you should ignore any received wisdom that tells you to retire at a certain age and keep working. On the other hand, if you have goals and passions in mind that you need to pursue – dreams you need to fulfill away from your career or business – then you definitely have the “raw material” to write that next chapter in your life story and retire with purpose.

How will you keep up your home? At 45, you can tackle that bathroom remodel or backyard upgrade yourself. At 75, you will probably outsource projects of that sort, whether or not you stay in your current home. You may want to move out of a single-family home and into a townhome or condo for retirement. Regardless of the size of your retirement residence, you will probably need to fund minor or major repairs, and you may need to find reliable and affordable sources for gardening or landscaping.                     

Will your relationships with family and friends change? Should you move nearer to your children or other relatives? If you have grandchildren, what kind of role do you anticipate playing in their lives? Your significant other may spend more of each day with you than he or she has in years; that may be welcome, or it may take some adjustment.

These are the non-financial retirement questions that no pre-retiree should dismiss. Think about them as you plan and invest for the future.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

The Art of Managing Retirement Assumptions


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A retirement plan is built on a set of assumptions that can’t be validated until it’s too late. One key to successful retirement planning is carefully setting assumptions and revising them often.

Retirement calculators make it so easy. Pick a retirement date. Estimate your living expenses in retirement and choose an inflation rate. Figure out a rate of return for your investments. Guess how long you think you’ll live. Put these assumptions into the calculator, and it will tell you just how much you need to have at retirement in order to receive the income stream you desire.

The problem is your assumptions could be off. And if they’re off by just a little, they could skew the result by a significant amount over your remaining life. Consider this:

  • If a portfolio withdrawal rate is set to last to age 90 and you make it to your 91st birthday, the plan failed. You can’t do retirement projections without making some assumptions. But most of the self help tools out there make assumption-setting seem too easy. Some even have default settings, which imply that the metric in question — a 3% inflation rate, for example — is what any reasonable person would choose. To change it would be to go against the conventional wisdom, a scary proposition for anyone who isn’t even sure what the inflation rate is based on.

For example, people often:

  • Underestimate retirement spending. Most people have not tried to estimate how much money they will need for retirement. Those who have calculated this amount often underestimate what they will need to maintain their pre-retirement lifestyle in retirement.
  • Don’t plan for contingencies. Many workers will retire before they expect to because of disability, job loss, or the need to care for a spouse, parents, or other family members.
  • Underestimate health care. Many people underestimate their chances of needing long term care.
  • Take the cash. Although people find guaranteed lifetime income attractive, they usually choose to receive retirement plan benefits in a lump sum, failing to recognize the difficulty of self-insuring longevity.
  • Fail to explore investment options. Many workers misunderstand investment returns and how investment vehicles work.
  • Underestimate income. Workers misunderstand what their primary sources of income will be in retirement, and may be disappointed when trying to live on the income available to them.
  • Don’t seek help. A significant number of retirees and pre-retirees do not seek the help of an advisor, yet they indicate a strong desire to work with a qualified professional.

Here are some things you can do to get ready for retirement:

  • Establish initial assumptions that are as accurate as possible. This requires considerable knowledge and judgment — the opposite of “pick a number.” Get some help.
  • Revise the assumptions going forward to keep the plan on track. As new information comes in and the plan plays out, the original assumptions may need to be changed and the plan revised accordingly.
  • Get help. Advisors are experienced in setting assumptions and can help you set reasonable assumptions for your particular plan. Consider the following issues when discussing assumptions with your advisor.

Reasonableness of the assumption. This is one of the main challenges for people doing retirement planning on their own: they simply don’t know what is reasonable, especially when it comes to financial matters. Is it reasonable to expect a consistent annual 6% rate of return over the next 30 years? Is a 3% inflation rate realistic if the mortgage is paid off and the bulk of your spending in retirement is on food, energy, travel, and health care? Are tax rates likely to go up, down, or stay the same?

Potential consequences if you’re wrong. Some assumptions carry such drastic consequences if they are wrong that it influences how the assumption is set to begin with. Outliving one’s life expectancy is just about the worst, because by the time you find it out, it’s too late to do anything about it. This is why most advisors recommend a life expectancy of 90 to 100 years rather than the average life expectancy past which half of all people will live. Underestimating health care needs can be another disastrous assumption.

The interplay of multiple assumptions is that some assumptions impact one another. For example, retirement age and life expectancy determine how many years you have left to save and how long the portfolio must last in retirement. By extending one, you shorten the other, and vice versa. Two other assumptions that impact one another are estimated expenses and life expectancy: the longer the withdrawal period, the less annual income you may receive, and vice versa — unless you adjust something else, such as the expected rate of return. The permutations are endless and may be one reason people get bogged down with retirement planning.

At the same time, you have information that may influence the assumptions that should be used. For example, you may decide to shorten or extend the life expectancy assumption based on what you know about your particular family history, health status, and lifestyle. Another important factor is your willingness to revise your goals if one or more of the major retirement risks should threaten to play out. Ask yourself if you would be willing to work longer (or go back to work if already retired) or lower your standard of living in order to either save more now or reduce expenses in retirement.

When planning your retirement, visualize your life all the way through and establish appropriate assumptions for each phase, including a final phase that may require several years of living assistance or nursing care. Collaborate with your advisor. You and your advisor each have information and insights that can increase the accuracy of assumptions. Your advisor’s understanding of the markets and the economy, his experience with clients who are already retired, and his number crunching ability can give you a professional advantage over web-based retirement calculators designed for individuals to use on their own. The less willing you are to revise your goals, the more conservative the assumptions need to be.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

 

Getting It All Together for Retirement

September 26, 2018
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Where is everything? Time to organize and centralize your documents.

Before retirement begins, gather what you need. Put as much documentation as you can in one place, for you and those you love. It could be a password-protected online vault; it could be a file cabinet; it could be a file folder. Regardless of what it is, by centralizing the location of important papers you are saving yourself from disorganization and headaches in the future.

  • What should go in the vault, cabinet or folder(s)? Crucial financial information and more. You will want to include…
  • Those quarterly/annual statements. Recent performance paperwork for IRAs, 401(k)s, funds, brokerage accounts and so forth. Include the statements from the latest quarter and the statements from the end of the previous calendar year (that is, the last Q4 statement you received). You no longer get paper statements? Print out the equivalent, or if you really want to minimize clutter, just print out the links to the online statements. (Someone is going to need your passwords, of course.) These documents can also become handy in figuring out a retirement income distribution strategy.
  • Healthcare benefit info. Are you enrolled in Medicare or a Medicare Advantage plan? Are you in a group health plan? Do you pay for your own health coverage? Own a long term care policy? Gather the policies together in your new retirement command center, and include related literature so you can study their benefit summaries, coverage options, and rules and regulations. Contact info for insurers, HMOs, your doctor(s) and the insurance agent who sold you a particular policy should also go in here.
  • Life insurance info. Do you have a straight term insurance policy, no potential for cash value whatsoever? Keep a record of when the level premiums end. If you have a whole life policy, you need paperwork communicating the death benefit, the present cash value in the policy and the required monthly premiums.
  • Beneficiary designation forms. Few pre-retirees realize that beneficiary designations often take priority over requests made in a will when it comes to 401(k)s, 403(b)s and IRAs. Hopefully, you have retained copies of these forms. If not, you can request them from the account custodians and review the choices you have made. Are they choices you would still make today? By reviewing them in the company of a retirement planner or an attorney, you can gauge the tax efficiency of the eventual transfer of assets.
  • Social Security basics. If you have not claimed benefits yet, put your Social Security card, your W-2 form from last year, certified copies of your birth certificate, marriage license or divorce papers in one place, and military discharge paperwork and a copy of your W-2 form for last year (or Schedule SE and Schedule C plus 1040 form, if you work for yourself), and military discharge papers or proof of citizenship, if applicable. Take a look at your Social Security statement that tracks your accrued benefits (online or hard copy) and make a screengrab of it or print it out.
  • Pension matters. Will you receive a bona fide pension in retirement? If so, you want to collect any special letters or bulletins from your employer. You want your Individual Benefit Statement telling you about the benefits you have earned and for which you may become eligible; you also want the Summary Plan Description and contact info for someone at the employee benefits department where you worked.
  • Real estate documents. Gather up your deed, mortgage docs, property tax statements and homeowner insurance policy. Also, make a list of the contents of your home and their estimated value – you may be away from your home more in retirement, so those items may be more vulnerable as a consequence.
  • Estate planning paperwork. Put copies of your estate plan and any trust paperwork within the collection, and of course a will. In case of a crisis of mind or body, your loved ones may need to find a durable power of attorney or health care directive, so include those documents if you have them and let them know where to find them.
  • Tax returns. Should you only keep your 1040 and state return from the previous year? How about those for the past 7 years? Have you kept every one since 1982 or 1974? At the very least, you should have a copy of returns from the prior year in this collection.
  • A list of your digital assets. We all have them now, and they are far from trivial – the contents of a cloud, a photo library, or a Facebook page may be vital to your image or your business. Passwords must be compiled too, of course.

This will take a little work, but you will be glad you did it someday. Consider this a Saturday morning or weekend project. It may lead to some discoveries and possibly prompt some alterations to your financial picture as you prepare for retirement.

At HFG Wealth Management, we embrace a holistic method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

Do Women Face Greater Retirement Challenges?


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If so, how can they plan to meet those challenges?

Why are women so challenged to retire comfortably? You can cite a number of factors that can potentially impact a woman’s retirement prospects and retirement experience. A woman may spend less time in the workforce during her life than a man due to childrearing and caregiving needs, with a corresponding interruption in both wages and workplace retirement plan participation. A divorce can hugely alter a woman’s finances and financial outlook. As women live longer on average than men, they face slightly greater longevity risk – the risk of eventually outliving retirement savings. There is also the gender wage gap that is narrowing, but still evident.

What can women do to respond to these financial challenges? Several steps are worth taking.

  • Invest early & consistently. Women should realize that, on average, they may need more years of retirement income than men. Social Security will not provide all the money they need, and, in the future, it may not even pay out as much as it does today. Accumulated retirement savings will need to be tapped as an income stream. Saving and investing regularly through IRA and workplace retirement accounts is vital and the earlier the better and so is getting the employer match, if one is offered. Catch-up contributions after 50 should also be a goal.
  • Consider Roth IRA & HSA. Imagine having a source of tax-free retirement income. Imagine having a healthcare fund that allows tax-free withdrawals. A Roth IRA can potentially provide the former; a Health Savings Account, the latter. An HSA is even funded with pre-tax dollars, as opposed to a Roth IRA, which is funded with after-tax dollars – so an HSA owner can potentially get tax-deductible contributions as well as tax-free growth and tax-free withdrawals.  IRS rules must be followed to get these tax perks, but they are not hard to abide by. A Roth IRA needs to be owned for only five tax years before tax-free withdrawals may be taken (the owner does need to be older than age 59½ at that time). Those who make too much money to contribute to a Roth IRA can still convert a traditional IRA to a Roth. HSA’s have to be used in conjunction with high-deductible health plans, and HSA savings must be withdrawn to pay for qualified health expenses in order to be tax-exempt. One intriguing HSA detail worth remembering: after attaining age 65 or Medicare eligibility, an HSA owner can withdraw HSA funds for non-medical expenses (these types of withdrawals are characterized as taxable income).
  • Work longer in pursuit of greater monthly Social Security benefits. Staying in the workforce even one or two years longer means one or two years less of retirement to fund, and for each year a woman refrains from filing for Social Security after age 62, her monthly Social Security benefit rises by about 8%. Social Security also pays the same monthly benefit to men and women at the same age – unlike the typical privately funded income contract, which may pay a woman of a certain age less than her male counterpart as the payments are calculated using gender-based actuarial tables.
  • Find a method to fund eldercare. Many women are going to outlive their spouses, perhaps by a decade or longer. Their deaths (and the deaths of their spouses) may not be sudden. While many women may not eventually need months of rehabilitation, in-home care, or hospice care, many other women will.

Today, financially aware women are planning to meet retirement challenges. They are conferring with financial advisors in recognition of those tests – and they are strategizing to take greater control over their financial futures.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

The Details You Can Miss About Medicare

September 25, 2018
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Before you enroll, take note of what the insurance does not cover and the changes ahead.

Misconceptions about Medicare coverage abound. Our national health insurance program provides seniors with some great benefits. Even so, traditional Medicare does not pay for dental care, vision care, or any real degree of long-term care. How about medicines?

Original Medicare (Parts A & B) offers no prescription drug coverage. You may not currently take prescription medicines, but you may later, and can you imagine paying out of pocket for them? Since 2013, the prices of the 20 most-prescribed drugs for seniors have been reported to have risen an average of 12% annually.   

To address this issue, many seniors sign up for Part D (prescription drug) plans, which may reduce the co-pays for certain generic medicines down to $1 or $0. As private insurers provide Part D plans, the list of medicines each plan covers varies – so, carefully check the list, also called the formulary, before you enroll in one. Keep checking it, as insurers are permitted to change it from one year to the next.

You may want a Medigap policy, considering your Part B co-payments. If you stick with original Medicare, you will routinely pay 20% of the cost of medical services and procedures covered by Part B. If you need a hip replacement or a triple bypass, you could face a five-figure co-pay. Medigap insurance (also called Medicare Supplement insurance) addresses this problem with supplemental Part B coverage. Premiums and services can vary greatly on these plans, which are sold by insurers.

If you want dental and vision coverage (and much more), you may want a Part C plan. Around a third of Medicare beneficiaries enroll in these plans, also called Medicare Advantage programs. The typical Part C plan includes all the coverage of Medicare Parts A, B, and D, plus the dental and vision insurance that original Medicare cannot provide. Medicare Advantage plans also limit beneficiary out-of-pocket costs for the services they cover.

Part C plans may soon offer even more benefits. They will be allowed to include services beyond normal medical insurance beginning in 2019. Starting in October, they can reveal what new perks, if any, they have chosen to offer. Some of the new benefits you might see: coverage for the cost of home health aides, adult day care, palliative care, the installation of grab bars and mobility ramps in the home, and trips to and from medical appointments. The list of potential benefits could expand further in 2020.

Few seniors who enroll in Part C plans switch out of them. If you enroll in one, you should realize that these plans are regional rather than national – so, if you move, you may have to find another Part C plan or return to traditional Medicare, with or without Medigap coverage.

The Medicare Advantage Disenrollment Period is disappearing. A recently passed federal law, the 21st Century Cures Act, does away with this annual January 1-February 14 window. Beginning in 2019, there will simply be an annual Medicare Advantage Open Enrollment Period from January 1-March 31. During these three months, Medicare recipients will have the chance to either switch Part C plans or disenroll from a Part C plan and go back to original Medicare.

Some Medicare Cost plans are being phased out. These plans, which offer some features of Medigap policies and some features of Medicare Advantage programs, are ending in certain counties within 15 states and in the District of Columbia. Enrollees are being left to search for new coverage.

If you are financially challenged, you may have options. State subsidies and Medicare savings programs are available to help households handle co-payments and deductibles under original Medicare. Some non-profit groups offer pharmaceutical assistance programs (PAPs) to help Medicare beneficiaries pay less for medicines.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

A Look at HSAs


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A Health Savings Account may provide you with remarkable tax advantages. 

Why do some households inquire about Health Savings Accounts? They have heard about what an HSA can potentially offer them: a pool of tax-exempt dollars for health care, a path to tax savings, even a possible source of retirement income after age 65. You may want to look at this option yourself.

About 26 million Americans now have an HSA. You must enroll in a high-deductible health plan (HDHP) to have one, a health insurance option that is not ideal for everybody. In 2018, this deductible must be $1,350 or higher for individuals or $2,650 or higher for a family. Typically, in exchange for accepting the high deductible, you may pay relatively low premiums for the coverage.

You fund an HSA with tax-free contributions. This year, an individual can direct as much as $3,450 into an HSA, while a family can contribute up to $6,900. (These contribution caps are $1,000 higher if you are 55 or older in 2018.) Some employers will even provide a matching contribution on your behalf.

An HSA can offer you three potential opportunities for tax savings. Your account contributions are tax free (that is, tax deductible), the earnings in your account grow tax free, and you can withdraw funds from your HSA, tax free, so long as they are used to pay for qualified health care expenses, such as deductibles, co-payments, and hospitalization costs. (HSA funds may not be used to pay health insurance premiums.)  

At age 65, you can even turn to your HSA for retirement income. Currently, federal tax law allows an HSA owner 65 or older to withdraw HSA funds for any purpose, tax free. Yes, any purpose. You can use the money to pad your retirement income; you can use it to pay Medicare premiums or long-term care insurance premiums. No Required Minimum Distributions (RMD’s) are ever required of HSA owners. (Prior to age 65, an HSA withdrawal not used for qualified medical expenses is assessed a 20% I.R.S. penalty.)

Why is an HSA less attractive for some people? Well, the first thing to mention is the related high-deductible health plan. When you enroll in one of these plans, you agree to pay all (or nearly all) of the cost of medicines, hospital stays, and doctor and dentist visits out of your pocket until that high insurance deductible is reached. The other hurdle is just saving the money. If you pay for your own health insurance, just meeting the monthly premiums can be a challenge, especially if your household contends with other significant financial pressures. There may not be enough money left over to fund an HSA. Also, if you are a senior (or a younger adult) with a chronic condition or illnesses, you may end up spending all of your annual HSA contribution and reducing your HSA balance to zero year after year. That works against one of the objectives of the HSA – the goal of accumulation, of growing a tax-advantaged health care fund over time.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

 

Financial Planning with Health Insurance in Mind

September 11, 2018
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How much might health care cost you someday?

 “Financially speaking, what would be the worst thing that could happen to you?” If you ask a hundred people in their forties that question, you may get a dozen different answers. Some may say “my business going under” or “losing my house.” Some might say “a divorce,” “a lawsuit,” or “being laid off.” But how many would say “a severe illness?”  A catastrophic illness seems like a remote possibility to many; distant, decades away. As a result, that possibility may be overlooked in our financial planning.

The healthiest of us may need to save the most for health care. This may seem paradoxical, but think about what many people in their eighties or nineties experience: years of declining health and mobility, and accompanying high health care expenses.

The more you earn, the more you may pay for essential health benefits. Take the case of Medicare premiums. Most Medicare beneficiaries who are single filers with modified adjusted gross incomes of $85,000 or less are paying monthly Part B premiums of $104.90-$121.80 this year. In contrast, single filers with MAGIs between $85,001-107,000 are paying Part B premiums of $170.50 a month. That premium jumps to $243.60 for a single filer with MAGI greater than $107,000, and extremely high-earning individuals pay more than that. Pre-retirees should be mindful of this, and the fact that Medicare does not pay for long term care or dental careYour income level may also affect how much you pay for health coverage before you retire.

So looking ahead, is a Health Savings Account a good idea? For the future, it may be. An HSA must be used in conjunction with high-deductible health plans, but even with that requirement, these accounts can give pre-retirees a nice, dedicated savings vehicle to plan for future health care expenses. An HSA may become an important part of a long-run financial strategy.

The annual contribution limit on an HSA is currently $3,350 for individuals, $6,750 for families. Contributions are 100% tax-deductible. (You can even make $1,000 catch-up contributions beginning in the year you turn 55, as long as you are not a Medicare recipient.) You can also optionally invest the money within the account. An HSA is tax-advantaged: assets get tax-free growth, and withdrawals are tax-free if you use the money to pay for qualified health expenses. An HSA can also have another nice feature: once you turn 65, you may use withdrawals from them for non-medical purposes, though such withdrawals will be taxable. If you enroll in Medicare, you can no longer contribute to an HSA – so it is vital to fund these accounts for some years before retiring.

It is only prudent to factor potential health care costs into your financial plan. Some healthy pre-retirees may assume that they will need only a five-figure rather than six-figure sum to address them. That assumption may be flawed and can be wise to consider all options into your final plan.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

The Medical Expense Deduction in 2018


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Tax reform has lowered the threshold.

 If you itemize, you should note the reduced medical deduction threshold for 2018. This year, you can deduct qualified medical expenses exceeding 7.5% of your adjusted gross income. Next year, the threshold for the medical expense deduction returns to 10% of AGI. (The Tax Cuts & Jobs Act of 2018 also allowed the 7.5% threshold to apply retroactively to the 2017 tax year.)

So, if you are considering surgery or dental work in the future that could mean sizable out-of-pocket expenses for you, it might be better from a tax standpoint to schedule these procedures for 2018 instead of 2019.

What kinds of unreimbursed expenses qualify for the deduction? The list is long. For a start, the Internal Revenue Service says these types of expenses may qualify as tax deductible: out-of-pocket fees to medical and dental professionals, psychiatrists and psychologists, and certain nontraditional medical practitioners; money spent to participate in a weight-loss program in response to a doctor-diagnosed condition or disease; payments for prescription drugs and insulin; payments for smoking cessation programs and prescription drugs to facilitate nicotine withdrawal; money spent on inpatient treatment or acupuncture at a rehab facility; and, money spent on inpatient hospital care or residential nursing home care. That last item deserves further explanation regarding nursing homes. If a taxpayer is in a nursing home first and foremost to receive medical care, the I.R.S. says that the cost of that care and any lodging and meal costs borne by the taxpayer are deductible. Should the taxpayer reside in a nursing home primarily for other reasons, the I.R.S. limits the deduction to the medical care provided.

Other potential medical expense deductions are worth noting. You can of course deduct payments made for health care aids such as wheelchairs, false teeth, service animals and guide dogs, hearing aids, contact lenses, and reading or prescription eyeglasses. In addition, you can usually deduct insurance premiums that you have paid for insurance policies covering medical care or long-term care (as opposed to premiums paid on these policies by your employer). Lastly, you can often deduct transportation costs you incur related to qualified medical expenses: bus, train, and plane fares; gasoline expenses; parking and toll fees.

What kinds of expenses do not qualify? The cost of basic toiletries and toothpaste cannot be deducted; the same goes for cosmetics. Expenses for cosmetic surgery are usually not deductible, and neither are expenses for wellness programs or vacations. Non-prescription, over-the-counter drugs or medicines are non-deductible. Nicotine patches and gum may not be deducted, unless they have been prescribed for you. Burial and funeral expenses are also ineligible for the medical expense deduction.

Talk to a tax professional about the possibilities here. You may find it advantageous to itemize in 2018 using Schedule A so that you can claim medical expense deductions and take advantage of what could be the last year for the 7.5% threshold. Or, you might find that taking the newly enlarged standard deduction makes more financial sense. If you think your household will have significant medical expenses this year, it might be wise to compare the options.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”

 

How To Keep Healthcare Costs Under Control In Retirement


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If you’ve been covered by a generous employer group health plan, you may be in for a rude awakening when you retire. Here are some tricks for keeping health care costs under control after you retire. Although the government may subsidize some of your health care costs under the Medicare program, you will still be responsible for certain out-of-pocket costs. You will want to do everything in your power to prepare for these costs, as well as avoid unnecessary costs like late enrollment penalties, overpriced private plans, and superfluous trips to the doctor.

Did you know that there’s even a penalty for not enrolling in Medicare on time? That’s because the only way the system can work is if everyone — the sick and the healthy, the young and the old — participate in the program. If you fail to enroll in Medicare when you are supposed to, you will be charged a penalty equal to 10% of the Part B premium for every 12 months you delayed signing up for Medicare. The penalty is permanent and must be paid for the rest of your life. To avoid it, find out when you need to enroll in Medicare and be sure to sign up during your enrollment period. If you are retired and covered by a retiree plan, or if you are working and covered by a plan that covers fewer than 20 employees, you must enroll in Medicare Part B no later than the third month after your 65th birthday. If you (or your spouse) are still working and covered by a group plan that covers 20 or more employees, you must enroll in Medicare no later than the 7th month after your group coverage ends. Practically speaking, you’ll want to avoid gaps in coverage by enrolling in Medicare before your employer coverage ends. But to avoid penalties, make sure you sign up no later than the end of your enrollment period.

Medicare does not cover everything. In order to avoid coverage gaps for prescription drugs and the portion of medical services that Medicare doesn’t pay for, you will need to have private insurance. Whether you buy a comprehensive Medigap policy plus a standalone prescription drug plan, or enroll in a Medicare Advantage plan, you will need to shop carefully to get the best plan for your needs. Comparing monthly premiums is just a starting point. You will also need to pay attention to deductibles, copayments, and coinsurance amounts considering the specific drugs and types of services you need.

Of the factors underlying the meteoric rise in health care costs over the past two decades, the growing role of health insurance in our country has been held responsible in part because it tends to make consumers unaware of costs when they seek health care services. This is especially true for workers with comprehensive employer health insurance. Once you go onto Medicare you will need to be aware of health care costs. Otherwise you could be surprised by some rather large medical bills. Start by asking if your doctor accepts Medicare—some don’t. Ask if the doctor accepts assignment, which means you will be billed no more than the Medicare-approved amount, with you (or your Medigap insurer) being responsible only for the deductible and coinsurance amounts. Examine your insurer’s drug list and be aware of the copayments and coinsurance amounts for drugs you take. Do this annually, because drug plans change from year to year. Take into consideration all of your health care needs, including dental care and other services not covered by Medicare, and be aware of all of your out-of-pocket costs — preferably before they are incurred.

If your income is over $85,000 (if single) or $170,000 (if married), you will be charged an income-related monthly adjustment amount on top of your regular Part B and Part D premiums. These are cliff thresholds, which means if your income is just $1 over the amount, you will be charged the higher amount. There may not be anything you can do to avoid the IRMAA, but if you’re near one of the cliff thresholds, proper tax planning care save you a lot of money in additional premium expenses over the course of your retirement.

Although staying healthy won’t help you reduce your premium costs, it will certainly help you avoid copayments and coinsurance amounts. Certain conditions, if discovered early, can be treated quickly and easily and at a much lower cost than if hospitalization or expensive drugs are required. You should view staying healthy as a reward in and of itself, and also bear in mind that it will not necessarily save you money overall: The longer you live, the more you’ll pay in premiums. When designing a healthcare budget, it pays to account for the possibility of a very long life.

At HFG Wealth Management, we embrace a method of financial planning known as Financial Life Planning™. We believe this is a financially effective and personally rewarding approach to creating a practical, lasting financial plan. As financial professionals using the life planning approach, our purpose is to assist individuals and families in creating a long-term vision that is consistent with their core values. At HFG we recognize that life events and life transitions can impact your financial responsibilities and your vision of the future. We are here to provide you with tips and strategies to get you started and help you reach your financial and life goals at every stage. For more information, please visit www.hfgwm.com or call 832.585.0110.

“The information contain herein is general in nature and may not be suitable for everyone. We encourage you to give us a call, to discuss your specific situation and to help determine the appropriate course of action.”