Social Security Workshop at Keller Public Library
August 11, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
I am conducting a free workshop on social security planning strategies at the Keller Public Library on Tuesday, August 17 at 6:30 pm. The session will cover what baby boomers need to know to maximize their retirement income. Attendees will learn:
- 5 factors to consider when deciding when to apply for benefits
- Why you should always check your earnings record for accuracy
- How to coordinate benefits with your spouse
- How to minimize taxes on Social Security benefits
- How to coordinate Social Security with your other sources of retirement income
Seating is limited, so please RSVP to library@cityofkeller.com to ensure your space.
Should you pay off the mortgage?
May 18, 2010 by Jean Keener, CRPC, CFDP · 1 Comment
One of the best financially freeing moments in life is the day you compare your savings and mortgage principal balances and realize that you could pay off your mortgage if you wanted to. If you’re at that point, congratulations! If you’re not there yet, keep saving; it can come sooner than you think.
Of course, immediately following the discovery of being able to pay off the mortgage comes a question: should I? Here’s how you decide:
First, consider what you would do with the money if you didn’t pay off the mortgage.
Would it sit in savings, be invested for long-term retirement goals, or something else? Based on your plans if you didn’t pay off the mortgage, you can estimate a rate of return you expect to receive. From this rate of return, you’ll need to subtract taxes paid on the earnings (15% if capital gains, your income tax rate if regular interest).
Second, figure out what your mortgage is costing you.
Look at your interest rate, calculate the annual interest expense, and subtract any income tax savings you’re receiving. Be sure to avoid over-estimating the benefits of tax savings. For example, if your mortgage interest is $5,000 and you have another $8,000 of itemized deductions, your total itemized deductions are $13,000. If you’re married filing jointly, the standard deduction is $11,400 this year. So the mortgage interest is only increasing your deductions by $1,600. If you’re in the 28% tax bracket, this equates to a $448 tax savings.
Third, compare your answer in step 1 with your answer in step 2.
If it’s costing you more to keep your mortgage than you would earn with the money invested or in the bank, then you should generally pay off the mortgage. If you can get a greater return on your investments than what your mortgage is costing you, then you should generally keep the money invested and wait to pay off the mortgage.
Of course there are exceptions and other considerations including:
If you would be taking the pay-off money out of a pre-tax IRA or deferred compensation in a lump sum, take a really close look at the tax consequences of that lump sum withdrawal! They can often totally cancel out any savings on the mortgage interest.
If you would be using “retirement” savings funds to pay off the mortgage, you really need to look at your retirement projections and ensure that they still work with the funds withdrawn. If your projections rely on you beginning to save what you’re currently paying on the mortgage, know yourself. Will you stick with this savings program? If not, probably best to just keep your retirement funds intact and continue paying the mortgage.
If paying off the mortgage would take your emergency funds dangerously low or short-change funds for other important goals, it’s likely not a good idea.
Making your decision
While it seems like a fairly straight-forward question, when you think about the whole picture, you realize there are lots of what-ifs and options to consider. The important thing is to take time to do your homework, complete the analysis, and seek professional assistance if needed.
Even if the process reveals you’re better off with the mortgage, you might still want to go ahead and pay it off because of the peace-of-mind benefit that comes from not having any debt. If that’s the case, by going through the process thoughtfully and thoroughly, you will know what you’re giving up financially for that peace of mind so you can make an informed decision about whether it’s worth it to you.
And if the process does show that you would be better off getting rid of that mortgage, you can move forward with confidence.
Of course, everyone’s situation is different. While the process described above addresses many considerations, you may have some issues not addressed here or that are unique to you. Make sure you fully consider your own situation before making any decision.
May 2010 Newsletter
May 10, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The May 2010 newsletter is now available. It includes investing information with perspective on last week’s market plunge and an update on the new reduced fees for trading Vanguard ETFs. For taxes, there’s information on the new 3.8% medicare tax for high income individuals. For cash flow, we cover using a Roth IRA as a back-up emergency fund. For insurance, it includes information on incorporating TX state guarantee association coverage limits and exclusions into your financial planning. Click here to read the newsletter.
New Health Care Law Highlights
April 2, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
If you’re like me, you found it challenging to keep up with the provisions of the health care bills as they worked through the legislative process. But now that the bill is law, it’s helpful to understand how it may affect your individual situation and any changes that need to be made to your financial plan as a result. An overview of some of the most significant provisions:
For individuals
- U.S. citizens and legal residents will be required to have health insurance by 2014, with some exceptions. Those without insurance will face a tax penalty of as much as 2.5% of taxable income.
- Existing employer-sponsored health insurance plans will be allowed to remain essentially the same except the plans will be required to extend dependent coverage to qualifying children through age 26, lifetime limits (and eventually, annual dollar limits) on coverage must be eliminated, waiting periods for coverage cannot extend beyond 90 days, and insurers will not be able to deny coverage or charge higher premiums to people based on their health status and gender.
- Medicaid eligibility will be expanded to include individuals under age 65 whose income is less than 133% of the Federal Poverty Level.
- For families with incomes up to 400% of the Federal Poverty Level, tax credits and subsidies will be available to purchase health insurance through state-run exchanges, and to offset out-of-pocket costs.
- Contributions to a health flexible spending account will be limited to $2,500 per year. Reimbursements from health FSAs and HRAs for over-the-counter drugs will be restricted, and tax-free reimbursements from HSAs and Archer MSAs for over-the-counter drugs will not be allowed, while the tax on HSAs and Archer MSAs increases for distributions not used for qualified medical expenses.
- A rebate of $250 will be available to Medicare Part D (drug coverage) beneficiaries who reach the coverage gap (donut hole) and the coinsurance rate for costs within this gap are gradually reduced to 25%.
- Adults with pre-existing conditions will be able to purchase coverage from temporary high-risk pools until 2014, when coverage cannot otherwise be denied for pre-existing conditions.
- A national program will be established to provide limited reimbursement for long-term care expenses for individuals who participate by contributing to the program’s cost through voluntary payroll deductions.
For employers
- Employers with 50 or more employees that do not offer health insurance coverage will generally have to pay a premium tax of up to $2,000 per full-time employee.
- Employers with more than 200 employees must automatically enroll employees in health insurance plans from which employees may opt out.
- Employers providing health insurance must offer a voucher to qualifying employees to purchase insurance through an exchange.
- Qualifying small employers may receive a tax credit for providing health insurance to employees.
Tax changes
- The threshold for itemized deductions for qualified medical expenses will be increased from 7.5% of adjusted gross income (AGI) to 10% of AGI, though a temporary exception will be maintained for those 65 and older.
- The tax for Medicare Part A (hospitalization coverage) is increased 0.9% for individuals with earnings exceeding $200,000, and for couples with joint earnings greater than $250,000. Also, high-income taxpayers will be subject to a surtax of 3.8% on unearned income, such as capital gains, dividends, annuities, and rental income.
- The law imposes a 10% tax on the amount paid for indoor tanning services.
As provisions go into effect and more details become known, it will be important to update your investments and insurance plans to minimize your tax burden, get the most insurance for your money, and stay in compliance with the law.
March 2010 Newsletter
March 9, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The March 2010 Newsletter is now available. It includes an investment market update, Part II in my series on how to tap into your home equity in retirement, considerations in evaluating an early retirement offer, information on 2009 tax deduction for 2010 Haitian relief contributions, 2011 tax rate proposals found in the federal budget, credit card act provisions, and a reminder on the deadline to take advantage of the home buyers credit. Click here to read it.
Pension Max: Is it right for you?
December 15, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
If you’re near retirement and have a pension, you may be considering a pension max strategy. With all the variables involved, it can be challenging to determine if it’s really in your best interest.
First – what is pension max?
Pension max is used by married couples to increase their net retirement income while still protecting the surviving spouse’s income in the event the pension recipient dies first. Basically, the pension recipient elects a single life pension instead of one with a survivor benefit for their spouse. This results in a higher monthly pension benefit. Then the pension recipient purchases life insurance to allow the surviving spouse to replace the pension income in the event that the pension recipient dies first. In some situations, this approach can result in a higher net retirement income if the cost of the needed life insurance is less than the increased pension benefits.
Pension max always results in more premiums for the insurance company, but doesn’t always result in more income for you. How do you decide if it’s in your best interest?
First — at the risk of stating the obvious — if you’re not married, there’s no reason to consider it. Depending on your estate goals and health, there may be other strategies that make sense.
Second – the health and age of the pension recipient matters a great deal. If the pension recipient is in excellent health and can likely qualify for preferred life insurance rates, pension max has a lot better chance of being a good idea.
Third – you need to determine how much and what kind of life insurance is needed to replace the income. As the pension recipient gets older, less life insurance death benefit will be required to replace the pension income. Usually some combination of tiered term-life policies and a small amount of permanent insurance fit the bill.
Fourth – the surviving spouse should have an idea of how they will use the life insurance death benefit to replace the pension income. For many, a single-premium immediate annuity makes the most sense, however other draw-down investment scenarios can also be considered.
Fifth – you need to consider taxes in your calculations on both the life insurance benefit and the increased pension benefit.
- Life insurance death benefits are generally not subject to income taxes. With an unlimited marital exemption, the estate tax will not be an issue when the first spouse dies. However, depending on the overall size of the estate and the death benefit, it could be an issue when the second spouse dies.
- The increased pension benefit will be subject to income taxes. So when you’re comparing the net effect on your income, you need to calculate how much your pension will be worth after taxes because you will be paying the life insurance premiums with after-tax dollars. This is an easy area to ignore, but depending on your tax bracket the effect of taxes can make or break the plan.
Sixth – consider the convenience factor. If there’s just a very small financial benefit to using a pension max strategy in your situation, it may still make sense to forego it. You need to weigh the simplicity of just taking the pension against the extra effort of going through life insurance underwriting and paying the premiums ongoing.
If you’re seriously considering using a pension max strategy, it’s a good idea to have an uninterested third party talk through the analysis with you. A fee-only financial advisor who doesn’t have a big insurance commission at stake based on your decision will be able to offer objective advice. And even though you spend some money on the advice, it may help you save much more over the long term and at very least feel confident that you made the right decision based on your unique situation.
December 2009 Newsletter
December 3, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The December 2009 newsletter is now available. It includes a market update, tips on tracking your expenses, year-end investing moves designed to save on taxes, and more. Click here to read the newsletter.
2010 Key Numbers
December 2, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The key numbers guide from Forefield has been updated for 2010. Not a lot of changes from last year, but still a convenient reference. It includes limits on retirement plan contributions, tax brackets, tax credit and deduction phase-outs, social security benefits, medicare, and much more. 2010 Key Numbers
Buying a home to cash in on home buyers tax credit?
November 12, 2009 by Jean Keener, CRPC, CFDP · 2 Comments
You may have heard that the first-time home buying tax credit was extended through April 30 next year, and that it now includes a credit for some non-first-time home buyers also. For details on the extension and who is eligible, visit the IRS website.
This is great news if you fall into the eligible groups and were already planning to purchase a home. A tax credit is an actual dollar-for-dollar credit against your tax liability, as compared to a tax deduction which just reduces your taxable income. A deduction, depending on which tax bracket you’re in, saves you between 10% and 35% of the deduction. The credit saves you 100% of the credit amount. The home buying credit is also fully refundable, which means you can receive it even if it exceeds your tax liability.
Should you adjust the timing of your home purchase to take advantage of the credit?
Yes, this is a good idea. If it’s just a question of changing your timing by a few months to take advantage of the tax credit and there aren’t other substantial costs with the change, that makes all the sense in the world.
If you weren’t planning to purchase a home already, should this credit motivate you to take action?
Definitely not. If you weren’t planning to buy a home and aren’t financially ready for the purchase, this tax credit doesn’t significantly change that math.
For existing home owners, the costs of a move are too high to even come close to being offset by this credit. Consider real estate commissions, preparing your home to sell, closing costs on the new home, moving expenses, and ongoing increases in your utilities, maintenance and property taxes if you move to a larger home.
For potential first-time home buyers, the credit doesn’t significantly change whether home ownership is right for you. Yes, the $8,000 is a nice bonus. But it’s a small dent in the costs of owning a home over even the 3-year minimum required to not pay back any of the credit. The mortgage is just the beginning of the cost of home ownership – consider maintenance, repairs, yard work, and utilities that are typically higher in a home than an apartment. There’s also the property tax and insurance which for most first-time home buyers will be escrowed into their total mortgage payment, however it’s up to the home owner to catch up any shortfall in the amounts escrowed.
Bottom line, you should definitely take advantage of the home buyers credit if it fits in with your overall financial plan. The credit could even provide a good opportunity for you to jump-start your 2009 or 2010 IRA contributions, beef up your emergency fund, or start a 529 plan for your children’s college. But the credit shouldn’t tempt you to make a decision that will end up hurting you financially long-term. Make sure your math includes the long-term total cost of your move!
November 2009 Newsletter
November 5, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The November newsletter is now available. It includes a market update, 2010 retirement plan contribution limits, and more. Click here to view it.