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Will Debt Spoil Too Many Retirements?

/// Posted by Carol McShera

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What pre-retirees owe could compromise their future quality of life.

The key points of retirement planning are easily stated. Start saving and investing early in life. Save and invest consistently. Avoid drawing down your savings along the way. Another possible point for that list: pay off as much debt as you can before your “second act” begins.

Some baby boomers risk paying themselves last. Thanks to lingering mortgage, credit card, and student loan debt, they are challenged to make financial progress in the years before and after retiring.

More than 40% of households headed by people 65-74 shoulder home loan debt. That figure comes from the Federal Reserve’s Survey of Consumer Finances; the 2013 edition is the latest available. In 1992, less than 20% of Americans in this age group owed money on a mortgage. Some seniors see no real disadvantage in assuming and retiring with a mortgage; tax breaks are available, interest rates are low, and rather than pay cash for a home, they can arrange a loan and use their savings on other things. Money owed is still money owed, though, and owning a home free and clear in retirement is a great feeling.1 

Paying with plastic too often can also exert a drag on retirement. Personal finance website ValuePenguin notes that the average U.S. household headed by 55- to 64-year-olds now carries $8,158 in credit card debt. As for households headed by those aged 65-69, they owe an average of $6,876 on credit cards.2

According to the latest Weekly Rate Report at CreditCards.com, the average APR on a credit card right now is 16.15%. How many investments regularly return 16% a year? What bank account earns that kind of interest? If a retiree’s consumer debt is increasing at a rate that his or her investments and deposit accounts cannot match, financial pain could be in the cards.3   

 

Education debt is increasing. Older Americans are dealing with student loans – their own and those of their adult children – to alarming degree. In all 50 states, the population of people 60 and older with student debt has grown by at least 20% since 2012. That finding from the Consumer Financial Protection Bureau may be understating the depth of the crisis, which may have its roots in the Great Recession. Fair Isaac Corporation (FICO) says that between 2006-16, the number of Americans aged 65 and older with outstanding education loans has tripled.4,5

Just what kind of financial burden are these loans imposing? According to FICO, the average 65-or-older student loan borrower is dealing with a balance of $28,268. That is up 40% from the average balance in 2006.5

What can you do?

The key to managing through various types of debt prior to retirement starts with budgeting. A good exercise at any age is to calculate out your monthly budget to determine what disposable income is available to you to balance various debt management and savings goals. You can determine your monthly disposable income by subtracting your essential spending needs (housing, food, health care, transportation, childcare & other monthly obligations) from your monthly take-home pay.

Once you’ve determined your monthly disposable income, then work to build and maintain an emergency fund of 3-6 months of those essential spending needs. Then save for retirement in your workplace savings plan at least to the amount to receive your full employer match. Many people enter their workplace savings plan at a 6% contribution rate and increase their contribution rate by 1% per year around the time of their annual salary raise.

After addressing these initial savings goals, shift your attention to managing your outstanding debt. Attack your high-interest credit cards first, then your lower-interest ones. Or, look into consolidating your balances. Regarding student loan debt, pay off private student loans, which tend to have higher rates than government loans.

After paying off debt with an interest rate over 8%, considering saving more into your workplace retirement savings plan. A good target is 15% of your pre-tax pay.

Once high interest rate credit debt & private student loans are paid off and you are saving enough into your retirement plan to replace 70-85% of your income in retirement, begin paying off lower interest rate government debt and mortgages more aggressively to pay them off prior to entering retirement.

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This material was prepared by Sapers & Wallack and MarketingPro, Inc.,. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – nytimes.com/2017/06/02/business/retirement/mortgages-for-older-people-retirement.html [6/2/17]
2 – valuepenguin.com/average-credit-card-debt [9/28/17]
3 – creditcards.com/credit-card-news/interest-rate-report-92717-unchanged-2121.php [9/27/17]
4 – consumerfinance.gov/about-us/blog/nationwide-look-how-student-debt-impacts-older-adults/ [8/18/17]
5 – newsday.com/business/65-plus-crowd-facing-growing-burden-from-student-loan-debt-1.14124052 [9/10/17]

 

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One of the bread-and-butter staples of a well-conceived employee benefit program is the classic group term life insurance.  You join a company, fill out a beneficiary form, and voila, you are provided with group term life insurance equivalent to a multiple of salary, such as two times annual earnings.  You don’t think much of this benefit until you receive your W-2 form at the end of the year.  Imagine your surprise when you look at Box 12, Code C, and find a taxable cost in the thousands!

Group term life insurance is taxed under IRC Section 79.  An employee is allowed to exclude any cost for the first $50,000 of coverage provided.  Amounts of insurance over $50,000 are considered income to the employee, and taxed using the Uniform Premium Table (Table I) in IRC Section 79.  The dollar amount added to the employee’s taxable income is calculated based on the employee’s age and amount of coverage.  Since Table I uses outdated and artificially inflated rates, the cost to the employee can be significant.

Many of our clients are surprised and exasperated by the high tax cost they are forced to report, and come to us seeking solutions.

For those individuals who do not need the insurance, naming a charitable organization as a beneficiary of the group term policy is a terrific solution to avoid the Table I tax.  And if the employee actually needs the life insurance coverage and is healthy, the employee can go out and purchase an individually owned and controlled term life insurance policy that will actually cost the employee less than the aforementioned group term.  We call this concept the two-fer: benefitting two beneficiaries (charity and personal) for one cost.  Think about this again.  For less than the cost you were previously paying for your group term life, you have benefitted a charity and improved your personal life insurance portfolio via a portable policy with level premiums and no automatic age reductions.

As an example, let’s review the economics of a male, age 58 who has $800,000 of group term life.  The initial $50,000 of coverage is a freebie to the employee.  From ages 58 to 67, the employee will report taxable income on $750,000 of coverage totaling $71,730!  At a 40% tax bracket, this “free” benefit has actually cost the employee close to $29,000!  Alternatively, if the employee designates a charity as beneficiary of the group term amount, the employee avoids this astronomical tax cost. Simultaneously, the employee can go out and replace the $750,000 of coverage at a cost of only $1,567 per year, or $15,670 over 10 years.

You owe it to yourself and your beneficiaries to investigate the better solutions to this costly, “free” benefit. Most people don’t like paying taxes. Paying taxes needlessly is worse.

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Protecting your Identity and Credit Following the Equifax Breach

/// Posted by Mark Alaimo, CPA/PFS, CFP®

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By now, most of us have learned of the unprecedented data breach reported by the credit bureau Equifax on September 7th.  According to Equifax, personal private information for more than 143 million customers may have been compromised, affecting one in three Americans.  

The Federal Trade Commission has posted a valuable blog post entitled The Equifax Data Breach: What to Do, which we recommend you review.  

Regardless, this event also presents an opportunity to review a handful of best practices to prevent becoming a victim of identity theft and/or credit card fraud:

  • Passwords: Be sure to create and frequently update strong passwords for use online.  Birth dates, children’s names, pet’s names, maiden names etc… are all easily identifiable.  Consider including one or more capital letters, one or more numbers, and one or more special characters in your password. You should ensure the password your personal email (when did you last update this password?) and other sites that do not require updates contain a strong password.
  • Inventory: Maintain an inventory of all open loans, credit cards and bank accounts with each institutions’ contact number offline (ideally in a safe, safe deposit box or other secure location). 
  • Annual credit report: Annually, you are entitled to a free credit report from each of the three major credit bureaus: Experian, Equifax and TransUnion. Be sure to review all three reports and compare them against your loan and credit card inventory to ensure both are current, and to identify and resolve any errors. You may request the reports online
  • Mail:  To the extent you are comfortable with technology, it is best to elect to receive most financial statements electronically rather than via postal service.  If you notice irregularities with your mail delivery, contact the US Postal Inspection Service online or by dialing 877-876-2455.
  • Read your statements:  Last and certainly not least, open and review your statements upon receipt. Surprisingly, most individuals do not consistently review all of their statements on a monthly basis. This is often the easiest, most effective, and most timely manner to identify and resolve issues with as little financial loss as possible. 

These best practices are not fail safe, but should help you prevent the most common challenges. If you are unfortunate to suspect your identity has been stolen, after contacting your local police department you should review the Federal Trade Commission’s Identity Theft website to take the necessary steps to contain the damage and repair it as soon as possible. Additionally, contact the IRS’s Identity Protection Unit by dialing 800-908-4490.

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Are You In Danger of Outliving Your Life Insurance Policy?

/// Posted by Ed Wallack

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When individuals purchase permanent insurance (whole life, universal life, variable life), as opposed to term insurance, the expectation is that the policy will remain in force as life insurance until death of the insured. However, due to a marked increase in longevity, many are likely to survive to the end of the mortality tables on which their life insurance policies are based. The bottom line is that there is a grave and imminent danger that many life insurance policies will terminate at age 100 and expose the policy owner to adverse income tax consequences.

Many policies issued prior to December 31, 2008, are based on mortality tables having a terminal age of 100. The terminal age is the age at which the table shows no survivors among insureds. In other words, the table is based on the assumption that no one among the insured population survives to age 100. So what happens if an insured lives to age 100? Some insurance companies offer the option of an extended maturity rider for universal life (but not whole life) policies based on older mortality tables that have a terminal age of 100. While the typical traditional whole life policy does not specifically say the face amount is paid to the policyholder at the terminal age, many companies indicate that they will pay the face amount if the insured survives to the terminal age, along with a 1099 showing any taxable income. Even if a policy provides for a life extension rider, which continues the life insurance benefit beyond age 100, there is a risk that the policy may not qualify as life insurance under the Federal tax law after the insured reaches age 100. The fact that the contract has fully matured may affect the treatment of the policy owner under the income tax doctrine of constructive receipt, or may affect the treatment of a beneficiary under the contract if amounts are received not by reason of death but by reason of the insured’s attainment of age 100. It is an understatement to say that the age 100 problem is serious, and will only become more so as life expectancy increases. Sapers & Wallack has expertise in conducting policy reviews that address the age 100 problem and is available to properly analyze and advise on life insurance portfolios. If you would like to engage us to conduct a complimentary review, please email Ed Wallack at ewallack@sapers-wallack.com.

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Everyone Needs an Estate Plan!

/// Posted by Mark Alaimo, CPA/PFS, CFP®

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Make sure your plan matches your stage in life

Most people do not like thinking about their own death or the death of family and friends.  Benjamin Franklin famously wrote: “… in this world nothing can be said to be certain, except death and taxes.”  Simply stated, the reason to have your own estate plan drafted is to provide for the orderly administration of your affairs (financial and otherwise) in the event of your incapacity or death.  For many, the words ‘estate plan’ conjures images of luxury and affluence, though everyone, regardless of financial resources should have an estate plan.  To help prove our point, here are some of the top reasons each of the following personas should make creating/updating their estate plan a priority.

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Summer: An Unlikely Time for Changing CPAs

/// Posted by Karen Van Voorhis

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Last year my husband and I knew there was something wrong with our boiler, in the basement of our house. We knew this because we lost heat in the house during the winter – twice. We learned that repairing it would involve dismantling part of it and having no heat for a day. Our plumber, whom we see around town, admonished us several times to make arrangements with him to take care of it during that summer, when our need for heat would be close to zero. And we finally did, one week last June – it was the last thing I wanted to be bothered to do, but when winter and snow came, boy were we happy, and relieved.

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How 529 Plans Can Help Take the Bite Out of the College Price Tag

/// Posted by Mark Alaimo, CPA/PFS, CFP®

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Every May, years of all-night study sessions and grueling examinations endured by thousands of young men and women culminate with graduation and the receipt of a four-year college degree.  While more and more young men and women are attending college, the cost to attend continues to skyrocket.  The Institute for College Access and Success reports that as of 2012, over 70% of students graduated four-year colleges with student debt[1].  66% of graduates from public colleges had debt (with an average balance of $26,000), 75% of graduates from private not-for-profit colleges had debt (with an average balance of $32,000) and 88% of graduates from private for-profit colleges had loans (with an average balance of $40,000)[2]

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It’s International Women’s Day, and I have been thinking about how financial advisors interact with women, especially when those women are one half of a couple, and how I wished both advisors and women would behave differently.

I’ve been to several conferences in recent years, where I find myself in hotel ballroom, listening to a speaker (usually female) patiently explaining to hundreds of (mostly male) financial advisors that they ­should pay attention to their “clients’ wives.” (Let that sink in for a minute . . . . as though the female half of a couple isn’t a client. But I digress.)

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Leadership Lessons learned from Bill Belichick

/// Posted by Aviva Sapers

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The Superbowl excitement is behind us and we all celebrated the success of the New England Patriots during the famous Duckboat Parade.

The continuous success of this team is possible with a great leader at its helm: Bill Belichick. The way he leads and assembles a first class team year after year provides valuable lessons for me as a business leader and for many other executives who are faced with difficult decisions and the demand to lead effective and efficient.

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Gifts in Perpetuity

/// Posted by Bill Sapers

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Wooing, educating, maintaining annual gifts for Charitable Institutions is “tough business” for the thousands of fund raisers working desperately to meet ever increasing costs. Most annual gifts are the product of endless meetings, dinners, phone calls, tours and creative discussions.

Once a donor has bought into the needs of the institution, there is an annual romancing necessary to maintain or increase the gift. If successful the donor tends to increase the annual gift over years as his ability to give increases and as his support for the charity deepens.

But what happens when the donor dies? Years of building collapses unless “Gifts in Perpetuity” becomes an integral part the Fund Raising Plan.

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