The Patient Protection and Affordable Care Act (ACA) attempts to ensure that all eligible individuals have access to affordable health care, regardless of their health status. In the past, some insurers would offer insurance coverage in general, but exclude coverage for care related to a pre-existing health condition, referred to as a pre-existing condition exclusion. But since 2010, individuals under the age of 19 can’t be denied coverage due to pre-existing health conditions, nor can insurers include pre-existing condition exclusions. Starting in 2014, neither group health plans nor individual plans may deny coverage based on pre-existing health conditions. And, plans (with the exception of grandfathered individual plans) are prohibited from imposing pre-existing condition exclusions. This means that you can’t be denied coverage as an applicant; your insurer can’t cancel your coverage for any reason except fraud; and your plan can’t exclude coverage for a pre-existing health condition (unless your plan is a grandfathered plan, meaning it was in place on March 23, 2010).
Do you picture yourself owning a new home, starting a business, or retiring comfortably? These are a few of the financial goals that may be important to you, and each comes with a price tag attached.
That’s where financial planning comes in. Financial planning is a process that can help you reach your goals by evaluating your whole financial picture, then outlining strategies that are tailored to your individual needs and available resources.
Why is financial planning important?
A comprehensive financial plan serves as a framework for organizing the pieces of your financial picture. With a financial plan in place, you’ll be better able to focus on your goals and understand what it will take to reach them.
One of the main benefits of having a financial plan is that it can help you balance competing financial priorities. A financial plan will clearly show you how your financial goals are related–for example, how saving for your children’s college education might impact your ability to save for retirement. Then you can use the information you’ve gleaned to decide how to prioritize your goals, implement specific strategies, and choose suitable products or services. Best of all, you’ll have the peace of mind that comes from knowing that your financial life is on track.
The financial planning process
Creating and implementing a comprehensive financial plan generally involves working with financial professionals to:
•Develop a clear picture of your current financial situation by reviewing your income, assets, and liabilities, and evaluating your insurance coverage, your investment portfolio, your tax exposure, and your estate plan
•Establish and prioritize financial goals and time frames for achieving these goals
•Implement strategies that address your current financial weaknesses and build on your financial strengths
•Choose specific products and services that are tailored to meet your financial objectives
•Monitor your plan, making adjustments as your goals, time frames, or circumstances change
Some members of the team
The financial planning process can involve a number of professionals.
Financial planners typically play a central role in the process, focusing on your overall financial plan, and often coordinating the activities of other professionals who have expertise in specific areas.
Accountants or tax attorneys provide advice on federal and state tax issues.
Estate planning attorneys help you plan your estate and give advice on transferring and managing your assets before and after your death.
Insurance professionals evaluate insurance needs and recommend appropriate products and strategies.
Investment advisors provide advice about investment options and asset allocation, and can help you plan a strategy to manage your investment portfolio.
The most important member of the team, however, is you. Your needs and objectives drive the team, and once you’ve carefully considered any recommendations, all decisions lie in your hands.
Why can’t I do it myself?
You can, if you have enough time and knowledge, but developing a comprehensive financial plan may require expertise in several areas. A financial professional can give you objective information and help you weigh your alternatives, saving you time and ensuring that all angles of your financial picture are covered.
Staying on track
The financial planning process doesn’t end once your initial plan has been created. Your plan should generally be reviewed at least once a year to make sure that it’s up-to-date. It’s also possible that you’ll need to modify your plan due to changes in your personal circumstances or the economy. Here are some of the events that might trigger a review of your financial plan:
•Your goals or time horizons change
•You experience a life-changing event such as marriage, the birth of a child, health problems, or a job loss
•You have a specific or immediate financial planning need (e.g., drafting a will, managing a distribution from a retirement account, paying long-term care expenses)
•Your income or expenses substantially increase or decrease
•Your portfolio hasn’t performed as expected
•You’re affected by changes to the economy or tax laws
Common questions about financial planning
What if I’m too busy?
Don’t wait until you’re in the midst of a financial crisis before beginning the planning process. The sooner you start, the more options you may have.
Is the financial planning process complicated?
Each financial plan is tailored to the needs of the individual, so how complicated the process will be depends on your individual circumstances. But no matter what type of help you need, a financial professional will work hard to make the process as easy as possible, and will gladly answer all of your questions.
What if my spouse and I disagree?
A financial professional is trained to listen to your concerns, identify any underlying issues, and help you find common ground.
Can I still control my own finances?
Financial planning professionals make recommendations, not decisions. You retain control over your finances. Recommendations will be based on your needs, values, goals, and time frames. You decide which recommendations to follow, then work with a financial professional to implement them.
April is Financial Literacy Month–the perfect time to get assistance and get on track with your savings and investing goals. During the month of April we will be publishing several educational articles that you may find useful. Here is is the first of many… Helping you see the Big Picture.
A successful investor maximizes gain and minimizes loss. Though there can be no guarantee that any investment strategy will be successful and all investing involves risk, including the possible loss of principal, here are six basic principles that may help you invest more successfully.
Long-term compounding can help your nest egg growIt’s the “rolling snowball” effect. Put simply, compounding pays you earnings on your reinvested earnings. The longer you leave your money at work for you, the more exciting the numbers get. For example, imagine an investment of $10,000 at an annual rate of return of 8 percent. In 20 years, assuming no withdrawals, your $10,000 investment would grow to $46,610. In 25 years, it would grow to $68,485, a 47 percent gain over the 20-year figure. After 30 years, your account would total $100,627. (Of course, this is a hypothetical example that does not reflect the performance of any specific investment.)
This simple example also assumes that no taxes are paid along the way, so all money stays invested. That would be the case in a tax-deferred individual retirement account or qualified retirement plan. The compounded earnings of deferred tax dollars are the main reason experts recommend fully funding all tax-advantaged retirement accounts and plans available to you.
While you should review your portfolio on a regular basis, the point is that money left alone in an investment offers the potential of a significant return over time. With time on your side, you don’t have to go for investment “home runs” in order to be successful.
Endure short-term pain for long-term gainRiding out market volatility sounds simple, doesn’t it? But what if you’ve invested $10,000 in the stock market and the price of the stock drops like a stone one day? On paper, you’ve lost a bundle, offsetting the value of compounding you’re trying to achieve. It’s tough to stand pat.
There’s no denying it–the financial marketplace can be volatile. Still, it’s important to remember two things. First, the longer you stay with a diversified portfolio of investments, the more likely you are to reduce your risk and improve your opportunities for gain. Though past performance doesn’t guarantee future results, the long-term direction of the stock market has historically been up. Take your time horizon into account when establishing your investment game plan. For assets you’ll use soon, you may not have the time to wait out the market and should consider investments designed to protect your principal. Conversely, think long-term for goals that are many years away.
Second, during any given period of market or economic turmoil, some asset categories and some individual investments historically have been less volatile than others. Bond price swings, for example, have generally been less dramatic than stock prices. Though diversification alone cannot guarantee a profit or ensure against the possibility of loss, you can minimize your risk somewhat by diversifying your holdings among various classes of assets, as well as different types of assets within each class.
Spread your wealth through asset allocationAsset allocation is the process by which you spread your dollars over several categories of investments, usually referred to as asset classes. These classes include stocks, bonds, cash (and cash alternatives), real estate, precious metals, collectibles, and in some cases, insurance products. You’ll also see the term “asset classes” used to refer to subcategories, such as aggressive growth stocks, long-term growth stocks, international stocks, government bonds (U.S., state, and local), high-quality corporate bonds, low-quality corporate bonds, and tax-free municipal bonds. A basic asset allocation would likely include at least stocks, bonds (or mutual funds of stocks and bonds), and cash or cash alternatives.
There are two main reasons why asset allocation is important. First, the mix of asset classes you own is a large factor–some say the biggest factor by far–in determining your overall investment portfolio performance. In other words, the basic decision about how to divide your money between stocks, bonds, and cash is probably more important than your subsequent decisions over exactly which companies to invest in, for example.
Second, by dividing your investment dollars among asset classes that do not respond to the same market forces in the same way at the same time, you can help minimize the effects of market volatility while maximizing your chances of return in the long term. Ideally, if your investments in one class are performing poorly, assets in another class may be doing better. Any gains in the latter can help offset the losses in the former and help minimize their overall impact on your portfolio.
Consider liquidity in your investment choicesLiquidity refers to how quickly you can convert an investment into cash without loss of principal (your initial investment). Generally speaking, the sooner you’ll need your money, the wiser it is to keep it in investments with comparatively less volatile price movements. You want to avoid a situation, for example, where you need to write a tuition check next Tuesday, but the money is tied up in an investment whose price is currently down.
Therefore, your liquidity needs should affect your investment choices. If you’ll need the money within the next one to three years, you may want to consider certificates of deposit or a savings account, which are insured by the FDIC, or short-term bonds or a money market account, which are neither insured or guaranteed by the FDIC or any other governmental agency. Your rate of return will likely be lower than that possible with more volatile investments such as stocks, but you’ll breathe easier knowing that the principal you invested is relatively safe and quickly available, without concern over market conditions on a given day.
Note: If you’re considering a mutual fund, consider its investment objectives, risks, charges, and expenses, all of which are outlined in the prospectus, available from the fund. Consider the information carefully before investing.
Dollar cost averaging: investing consistently and oftenDollar cost averaging is a method of accumulating shares of stock or a mutual fund by purchasing a fixed dollar amount of these securities at regularly scheduled intervals over an extended time. When the price is high, your fixed-dollar investment buys less; when prices are low, the same dollar investment will buy more shares. A regular, fixed-dollar investment should result in a lower average price per share than you would get buying a fixed number of shares at each investment interval.
Remember that, just as with any investment strategy, dollar cost averaging can’t guarantee you a profit or protect you against a loss if the market is declining. To maximize the potential effects of dollar cost averaging, you should also assess your ability to keep investing even when the market is down.
An alternative to dollar cost averaging would be trying to “time the market,” in an effort to predict how the price of the shares will fluctuate in the months ahead so you can make your full investment at the absolute lowest point. However, market timing is generally unprofitable guesswork. The discipline of regular investing is a much more manageable strategy, and it has the added benefit of automating the process.
Buy and hold, don’t buy and forgetUnless you plan to rely on luck, your portfolio’s long-term success will depend on periodically reviewing it. Maybe your uncle’s hot stock tip has frozen over. Maybe economic conditions have changed the prospects for a particular investment, or an entire asset class.
Even if nothing bad at all happens, your various investments will likely appreciate at different rates, which will alter your asset allocation without any action on your part. For example, if you initially decided on an 80 percent to 20 percent mix of stocks to bonds, you might find that after several years the total value of your portfolio has become divided 88 percent to 12 percent (conversely, if stocks haven’t done well, you might have a 70-30 ratio of stocks to bonds in this hypothetical example). You need to review your portfolio periodically to see if you need to return to your original allocation. To rebalance your portfolio, you would buy more of the asset class that’s lower than desired, possibly using some of the proceeds of the asset class that is now larger than you intended.
Another reason for periodic portfolio review: your circumstances change over time, and your asset allocation will need to reflect those changes. For example, as you get closer to retirement, you might decide to increase your allocation to less volatile investments, or those that can provide a steady stream of income.
Q: How are annuity payments taxed?
A: The basic rule for taxing annuity payments (i.e., “amounts received as an annuity”) is designed to return the purchaser’s investment in equal tax-free amounts over the payment period and to tax the balance of each payment received as earnings. Each payment, therefore, is part nontaxable return of cost and part taxable income. Any excess interest (dividends) added to the guaranteed payments is reportable as income for the year received.
Q: Are dividends payable on an annuity contract taxable income?
A: Taxation of dividends under an annuity contract depends on when the contract was purchased. If the contract was purchased after August 13, 1982, dividends received before the annuity starting date are taxable to the extent the cash value of the contract (determined without regard to any surrender charge) immediately before the dividend is received exceeds the investment in the contract at the same time. If there is no excess of cash value over the investment in the contract (i.e., no gain), further dividends are treated as a tax-free recovery of investment. If the annuity contract was purchased before August 14, 1982, and no additional investment was made in the contract after August 13, 1982, the dividends will be taxed like dividends received under life insurance contracts (generally tax-free until basis has been recovered).
Q: What penalties apply to “premature” distributions under annuity contracts?
A: To discourage the use of annuity contracts as short term tax sheltered investments, a 10 percent tax is imposed on certain “premature” payments under annuity contracts. The penalty tax applies to any payment received to the extent the payment is includable in income. There are nine exceptions to the penalty tax.
Q: What is the tax treatment of dividends where annuity values are paid in installments or as a life income?
A: Dividends received before the annuity start date or the first date that an amount is received as an annuity, whichever is later, are included in the recipient’s gross income to the extent that those dividends, taken with other amounts received under the contract that were excludable from gross income, are greater than the total premiums (or other consideration) paid by the recipient to that date. Also, dividends thus received must be subtracted from the consideration paid for purposes of the exclusion ratio that will be applied to payments received from the annuity after the date of the dividend.
Q: What tax rules govern dividends, cash withdrawals, and other amounts received under annuity contracts before the annuity starting date?
A: Policy dividends (unless retained by the insurer as premiums or other consideration), cash withdrawals, amounts received as loans and the value of any part of an annuity contract pledged or assigned, and amounts received on partial surrender under annuity contracts entered into after August 13, 1982, are taxable as income to the extent that the cash value of the contract immediately before the payment exceeds the investment in the contract (i.e., to the extent there is gain in the contract). To the extent the amount received is greater than the gain, the excess is treated as a tax-free return of investment. In effect, this ordering treatment results in distributions being treated as interest or gains first and only second as recovery of cost. (In addition, taxable amounts may be subject to a 10 percent penalty tax unless paid after age 59½ or disability.)
Q: What are the income tax results when an annuitant makes a partial lump sum withdrawal and takes a reduced annuity for the same term or the same payments for a different term?
A: The income tax results are different depending on the annuitant’s circumstances. When taking a reduced annuity for the same term, the nontaxable portion of the lump sum withdrawn is an amount that bears the same ratio to the unrecovered investment in the contract as the reduction in the annuity payment bears to the original payment. The original exclusion ratio will apply to the reduced payments; that is, the same percentage of each payment will be excludable from gross income.
Q: How is the excludable portion of an annuity payment under a fixed period or fixed amount option computed?
A: For non-variable contracts, the basic annuity rule applies: Divide the investment in the contract by the expected return under the contract to determine the exclusion ratio for the payments. Apply this ratio to each payment to find the portion that is excludable from gross income. The balance of the payment is includable in gross income.
Q: If an annuitant dies before his or her deferred annuity matures or is annuitized, is the amount payable at the annuitant’s death subject to income tax?
A: Yes. An annuity contract generally provides that if the annuitant dies before the annuity starting date, the beneficiary will be paid, as a death benefit, the greater of the amount of premium paid or the accumulated value of the contract. The gain, if any, is taxable as ordinary income to the beneficiary. The death benefit under an annuity contract does not qualify for tax exemption under IRC Section 101(a) as life insurance proceeds payable by reason of the insured’s death.
Your goals and priorities will probably change as you plan to retire. Along with them, your insurance needs may change as well. Retirement is typically a good time to review the different parts of your insurance program and make any changes that might be needed.
Stay well with good health insurance
After you retire, you’ll probably focus more on your health than ever before. Staying healthy is your goal, and that may require more visits to the doctor for preventive tests and routine checkups. There’s also a chance that your health will decline as you grow older, increasing your need for costly prescription drugs and medical treatments. All of this can add up to substantial medical bills after you’ve left the workforce (and probably lost your employer’s health benefits). You need health insurance that meets both your needs and your budget.
Fortunately, you’ll get some help from Uncle Sam. You typically become eligible for Medicare coverage at the same time you become eligible for Social Security retirement benefits. Premium-free Medicare Part A covers inpatient hospital care, while Medicare Part B (for which you’ll pay a premium) covers physician care, laboratory tests, physical therapy, and other medical expenses. But don’t expect Medicare to cover everything after you retire. For instance, you’ll have to pay a large deductible and make co-payments for certain types of care. Medicare prescription drug coverage is only available through a managed care plan (a Medicare Advantage plan), or through a Medicare prescription drug plan offered by a private company or insurer (premiums apply).
To supplement Medicare, you may want to purchase a Medigap policy. These policies are specifically designed to fill the holes in Medicare’s coverage. Though Medigap policies are sold by private insurance companies, they’re regulated by the federal government. There are 12 standard Medigap plans, but not all of them are offered in every state. All of these plans provide certain core benefits, and all but one offer combinations of additional benefits. Be sure to look at both cost and benefits when choosing a plan.
What if you’re retiring early and won’t be eligible for Medicare for a number of years? If you’re lucky, your employer may give you a retirement package that includes health benefits at least until Medicare kicks in. If not, you may be able to continue your employer’s coverage at your own expense through COBRA. But this is only a short-term solution, because COBRA coverage typically lasts only 18 months. Another option is to buy an individual policy, though you may not be insurable if you’re in poor health. Even if you are insurable, the coverage may be very expensive.
Don’t overlook long-term care insurance
If you’re able to stay healthy and active throughout your life, you may never need to enter a nursing home or receive at-home care. But the fact is, many people aged 65 and older will require some type of long-term care during their lives. And that number is likely to go up in future years because people are increasingly living longer. On top of that, long-term care is expensive. You should be prepared in case you do need long-term care at some point.
Unfortunately, Medicare provides very limited coverage for long-term care. You may be covered for a short-term nursing home stay immediately following hospitalization, but that’s about it. Other government and military-sponsored programs may help foot the bill, but generally only if you meet strict eligibility requirements. For example, Medicaid requires that you exhaust most of your assets before you can qualify for long-term care benefits. Even a good private health insurance policy will not offer much coverage for long-term care. But most long-term care insurance (LTCI) policies will.
LTCI is sold by private insurance companies and typically covers skilled, intermediate, and custodial care in a nursing home. Most policies also cover home care services and care in a community-based setting (e.g., an assisted-living facility). This type of insurance can be a cost-effective way to protect yourself against long-term care costs–the key is to buy a policy when you’re still relatively young (most companies won’t sell you a policy if you’re under age 40). If you wait until you’re older or ill, LTCI may be unavailable or much more expensive.
Weigh your need for life insurance
If you’re married, you want to make sure that your spouse will have enough money when you die. You may also have children and other heirs you want to take care of. Life insurance can be one way to accomplish these goals, but several questions arise as you near retirement. Should you keep that existing policy in place? If so, should you change the coverage amount? What if you don’t have any life insurance because you lost your group coverage at work (though some employers let you keep the coverage at your own expense)? Should you go out and buy some? The answers depend largely on your particular circumstances.
Your life insurance needs may not be as great during retirement because your financial picture may have improved. When you’re working and raising a family, the loss of your job income could be devastating. You often need life insurance to replace that income, meet your outstanding debts (e.g., your mortgage, car loans, credit cards), and fund your kids’ college education in case something happens to you. But after you retire, there’s usually no significant job income to protect. Plus, your kids may be grown and most of your debts paid off. You may even be financially secure enough to provide for your loved ones without insurance.
It may make sense to go without life insurance in these cases, especially if you have term life insurance and your premium has increased dramatically. But what if you still have financial obligations and few assets of your own? Or what if you’re looking for a way to pay your estate tax bill? Then you may want to keep your coverage in force (or buy coverage, if you have none). If you need life insurance but not as much as you have now, you can always lower your coverage amount. It’s best to talk to a professional before making any decisions. He or she can help you weigh your needs against the cost of coverage.
Take a look at your auto and homeowners policies
If you stay in your home after you retire, your homeowners insurance needs may not change much. But you should still review your liability coverage to make sure it’s sufficient to protect your assets. If you’re liable for an accident on or off your premises, claims against you for medical bills and other expenses can be substantial. For additional protection, you might consider buying an umbrella liability policy. It’s also a good idea to review the coverage you have on your home itself and the property inside it. Finally, if you plan to buy a second home, find out if your insurer will cover both homes and give you a discount on your premium.
Auto insurance raises some similar issues. Review your policy to make sure your coverage limits are high enough in each area. Again, having the right amount of liability coverage is especially important–you don’t want your assets to be put at risk if you cause an auto accident that injures other people or damages property. Weigh your need for any coverages that are optional in your state. Finally, look into ways to save on your premium now that you’re retired (e.g., discounts for low annual mileage or senior driving courses).
When you think of Social Security, you probably think of retirement. However, Social Security can also provide much-needed income to your family members when you die, making their financial lives easier.
Your family may be entitled to receive survivor’s benefits based on your work record
When you die, certain members of your family may be eligible to receive survivor’s benefits (based on your earnings record) if you worked, paid Social Security taxes, and earned enough work credits. The number of credits you need depends on your age when you die. The younger you are when you die, the fewer credits you’ll need for survivor’s benefits. However, no one needs more than 40 credits (10 years of work) to be “fully insured” for benefits. And under a special rule, if you’re only “currently insured” at the time of your death (i.e., you have 6 credits in the 13 quarters prior to your death), your children and your spouse who is caring for them can still receive benefits.
Survivor’s benefits may be paid to:
- Your spouse age 60 or older (50 or older if disabled)
- Your spouse at any age, if caring for your child who is under age 16 or disabled
- Your ex-spouse age 60 or over (50 or older if disabled) who was married to you for at least 10 years
- Your ex-spouse at any age, if caring for your child who is under age 16 or disabled
- Your unmarried children under 18
- Your unmarried children under 19, if attending school full time (up to grade 12)
- Your dependent parents age 62 or older
This is a general overview–the rules are more complex. For more information on eligibility requirements, contact the Social Security Administration (SSA) at (800) 772-1213.
How much will your survivors receive?
An eligible family member will receive a monthly survivor’s benefit based on your average lifetime earnings. The higher your earnings, the higher the benefit. This monthly benefit is equal to a percentage of your basic Social Security benefit. The percentage depends on your survivor’s age and relationship to you.
For example, at full retirement age or older, your spouse may receive a survivor’s benefit equal to 100 percent of your basic Social Security benefit. However, if your spouse has not yet reached full retirement age at the time of your death, he or she will receive a reduced benefit, generally 71 to 94 percent of your basic benefit (75 percent if your spouse is caring for a child under age 16). Your dependent child may also receive 75 percent of your basic benefit.
A maximum family benefit rate caps the total amount of money your survivors can get each month. The total benefit your family can receive based on your earnings record is about 150 to 180 percent of your basic benefit amount. If the total family benefit exceeds this limit, each family member’s benefit will be reduced proportionately.
You can get an estimate of how much your survivors might be eligible to receive using one of the benefit calculators available on the Social Security website, www.ssa.gov.
Don’t forget the lump-sum benefit
If you’ve accumulated enough work credits, your spouse may receive a lump-sum benefit of $255. Your spouse must have been living with you at the time of your death or have been receiving benefits based on your earnings record if living apart from you. If you’re not married at the time of your death, the death benefit may be split among any children you have who are eligible for benefits based on your earnings record.
If a loved one has died, contact the Social Security Administration immediately
If a loved one has died and you are eligible for survivor’s benefits, you should contact the SSA right away. If you’re already receiving benefits based on your spouse’s earnings record, the SSA will change your payments to survivor’s benefits (if your children are receiving benefits, their benefits will be changed, too). But if you’re not yet receiving any Social Security benefits or if you’re receiving benefits based on your own earnings record, you’ll have to fill out an application for survivor’s benefits.
It’s helpful to have the following documents when you apply, but if you don’t have all the information required, the SSA can help you get it:
- Proof of death (a death certificate or funeral home notice)
- Your Social Security number, as well as the deceased worker’s number
- Your birth certificate
- Your marriage certificate, if you’re a widow or widower
- Your divorce papers, if applicable
- Dependent children’s Social Security numbers, if available
- Deceased worker’s W-2 forms, or federal self-employment tax return, for the most recent year
- The name of your bank, as well as your account numbers, for direct deposit
Visit your local SSA office or call (800) 772-1213 for more information on survivor’s benefits and how to apply for them.
As you enter your 60s and 70s, health may become more of an issue than it once was, and your thoughts may turn to the future. Who will take care of you when you can no longer care for yourself? If you must enter a nursing home, how will you pay for it? By learning as much as you can about Medicaid right now and planning appropriately, you may be able to resolve these issues and create a more secure future.
Nursing homes provide different levels of long-term care
You may need to enter a nursing home if you become physically or mentally incapacitated and can no longer care for yourself properly. If the services of an in-home caregiver are inadequate or unavailable, or if you require around-the-clock care, entry into a nursing home on a long-term basis may be your only option.
A nursing home is a state-licensed facility that may provide skilled nursing care, intermediate care, and/or custodial care.
- Skilled care: This around-the-clock care, ordered by a physician and performed by skilled medical personnel, is designed to treat a medical condition.
- Intermediate care: This involves occasional nursing and rehabilitative care provided by registered nurses and certain other medical personnel under the supervision of a physician.
- Custodial care: This type of care is designed to help you perform the activities of daily living (e.g., bathing, eating, dressing). It can be provided by someone without professional medical skills but is supervised by a physician.
Medicaid can help you pay for nursing home care
Medicare (Part A), Medigap insurance, and Medicaid can each provide some assistance in paying for long-term care. However, Medicare and Medigap provide only short-term coverage for skilled care at nursing homes–only a certain number of days per year are covered. Also, they do not provide coverage for intermediate and custodial care in nursing homes.
In contrast, Medicaid (in most states) will pay for skilled care and intermediate care in nursing homes, and for custodial care at home. The bottom line is that most nursing home residents are left with only three alternatives for paying their nursing home bills: Medicaid, their own assets (e.g., cash, investments), and long-term care insurance (LTCI).
Although an LTCI policy may be an ideal solution, you may not be able to purchase such a policy later in life if you’re uninsurable for health reasons, or if you find the premiums too high. If you don’t want to spend your life savings on nursing home bills and can’t afford LTCI premiums, qualifying for Medicaid may be your best bet. With proper planning, you may be able to qualify for Medicaid, protect your healthy spouse (if you have one), and even leave some assets to your loved ones after you’re gone.
You must satisfy several requirements to qualify for Medicaid
Medicaid is a joint federal-state program that provides medical assistance to various low-income people, including those who are aged (i.e., 65 or older), disabled, or blind. It can pay for a number of costs, including hospital bills, physician services, and long-term care. Medicaid is the single largest payer of nursing home bills in America and is the last resort for people who have no other way to finance their long-term care. Although the eligibility rules vary from state to state, federal minimum standards and guidelines must be observed.
In addition to you meeting your state’s medical and functional criteria for nursing home care, your assets and monthly income must each fall below certain limits if you are to qualify for Medicaid. However, several assets (which may include your family home) and a certain amount of income may be exempt or not counted.
Although many people are ineligible for Medicaid when they first enter a nursing home, several states allow elders to enter and then spend down their income and assets on nursing home bills to become eligible. This can be a great advantage. On the downside, though, you may have to kiss your life savings good-bye.
That’s where Medicaid planning comes in. In determining your eligibility for Medicaid, a state may count only the income and assets that are legally available to you for paying bills. You can make assets unavailable by giving them away or by holding them in certain trusts. However, in some cases, such transfers may create a period of ineligibility before you can collect Medicaid. So, to engage in proper Medicaid planning, you should consult an experienced elder law attorney.
Choosing the right nursing home takes research
Because nursing homes have long waiting lists, you should research the nursing homes in your area before an emergency arises. If you plan on using Medicaid to pay for your nursing home care, make sure that the facility you select accepts Medicaid–not all nursing homes do. Many others restrict the number of Medicaid “beds” in the nursing home (some states, however, prohibit this). Also, be aware that if Medicaid will be paying for your nursing home care, you will not be entitled to a private room.
You should consider several factors when choosing a nursing home. These include:
- Level of medical care: Some homes provide mainly custodial care. If you think that you may need skilled nursing care in the future, don’t choose a home that offers only custodial care.
- Cost of care: You will pay less at some facilities than at others. Compare the cost of each facility with the quality of care and the services provided.
- Recreational opportunities: Consider whether the nursing home organizes outside or in-house recreational activities for its residents.
- Appearance of grounds and facilities: The nursing home should be clean and well maintained. A bad smell is one sign of a poor-quality nursing home.
- Resident/staff ratio and interaction: Determine if the resident/staff ratio meets or exceeds state and federal requirements. Also, notice how staff members treat residents.
When you find a nursing home that you like, you should find out if a bed will be available for you, or if you can add your name to a waiting list. And remember, Medicaid planning should be done well before the need for a nursing home arises.
For more information on how to evaluate a nursing home, contact your state department of elder services.
Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child’s college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?
Evaluating the opportunity cost
Deciding between prepaying your mortgage and investing your extra cash isn’t easy, because each option has advantages and disadvantages. But you can start by weighing what you’ll gain financially by choosing one option against what you’ll give up. In economic terms, this is known as evaluating the opportunity cost.
Here’s an example. Let’s assume that you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you’re paying 6.25% interest. If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest, and pay off your loan almost 6 years early.
By making extra payments and saving all of that interest, you’ll clearly be gaining a lot of financial ground. But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so–the opportunity to potentially profit even more from investing.
To determine if you would come out ahead if you invested your extra cash, start by looking at the after-tax rate of return you can expect from prepaying your mortgage. This is generally less than the interest rate you’re paying on your mortgage, once you take into account any tax deduction you receive for mortgage interest. Once you’ve calculated that figure, compare it to the after-tax return you could receive by investing your extra cash.
For example, the after-tax cost of a 6.25% mortgage would be approximately 4.5% if you were in the 28% tax bracket and were able to deduct mortgage interest on your federal income tax return (the after-tax cost might be even lower if you were also able to deduct mortgage interest on your state income tax return). Could you receive a higher after-tax rate of return if you invested your money instead of prepaying your mortgage?
Keep in mind that the rate of return you’ll receive is directly related to the investments you choose. Investments with the potential for higher returns may expose you to more risk, so take this into account when making your decision.
Other points to consider
While evaluating the opportunity cost is important, you’ll also need to weigh many other factors. The following list of questions may help you decide which option is best for you.
- What’s your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.
- Does your mortgage have a prepayment penalty? Most mortgages don’t, but check before making extra payments.
- How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there’s less value in putting more money toward your mortgage.
- Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.
- Do you have an emergency account to cover unexpected expenses? It doesn’t make sense to make extra mortgage payments now if you’ll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change–if you lose your job or suffer a disability, for example–you may have more trouble borrowing against your home equity.
- How comfortable are you with debt? If you worry endlessly about it, give the emotional benefits of paying off your mortgage extra consideration.
- Are you saddled with high balances on credit cards or personal loans? If so, it’s often better to pay off those debts first. The interest rate on consumer debt isn’t tax deductible, and is often far higher than either your mortgage interest rate or the rate of return you’re likely to receive on your investments.
- Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you’ve gained at least 20% equity in your home may make sense.
- How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage, when you’re likely to be paying more in interest).
- Have you saved enough for retirement? If you haven’t, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.
- How much time do you have before you reach retirement or until your children go off to college? The longer your timeframe, the more time you have to potentially grow your money by investing. Alternatively, if paying off your mortgage before reaching a financial goal will make you feel much more secure, factor that into your decision.
The middle ground
If you need to invest for an important goal, but you also want the satisfaction of paying down your mortgage, there’s no reason you can’t do both. It’s as simple as allocating part of your available cash toward one goal, and putting the rest toward the other. Even small adjustments can make a difference. For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments, or by putting any year-end bonuses or tax refunds toward your mortgage principal.
And remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes to your circumstances, market conditions, and interest rates.
There’s still time to make a regular IRA contribution for 2012! You have until your tax return due date (not including extensions) to contribute up to $5,000 for 2012 ($6,000 if you were age 50 by December 31, 2012). For most taxpayers, the contribution deadline for 2012 is April 15, 2013.
You can contribute to a traditional IRA, a Roth IRA, or both, as long as your total contributions don’t exceed the annual limit. You may also be able to contribute to an IRA for your spouse for 2012, even if your spouse didn’t have any 2012 income.
You can contribute to a traditional IRA for 2012 if you had taxable compensation and you were not age 70½ by December 31, 2012. However, if you or your spouse was covered by an employer-sponsored retirement plan in 2012, then your ability to deduct your contributions may be limited or eliminated depending on your filing status and your modified adjusted gross income (MAGI) (see table below). Even if you can’t deduct your traditional IRA contribution, you can always make nondeductible (after-tax) contributions to a traditional IRA, regardless of your income level. However, in most cases, if you’re eligible, you’ll be better off contributing to a Roth IRA instead of making nondeductible contributions to a traditional IRA.
|2012 income phaseout ranges for determining deductibility of traditional IRA contributions:|
|1. Covered by an employer-sponsored plan and filing as:||Your IRA deduction is reduced if your MAGI is:||Your IRA deduction is eliminated if your MAGI is:|
|Single/Head of household||$58,000 to $68,000||$68,000 or more|
|Married filing jointly||$92,000 to $112,000||$112,000 or more|
|Married filing separately||$0 to $10,000||$10,000 or more|
|2. Not covered by an employer-sponsored retirement plan, but filing joint return with a spouse who is covered by a plan||$173,000 to $183,000||$183,000 or more|
You can contribute to a Roth IRA if your MAGI is within certain dollar limits (even if you’re 70½ or older). For 2012, if you file your federal tax return as single or head of household, you can make a full Roth contribution if your income is $110,000 or less. Your maximum contribution is phased out if your income is between $110,000 and $125,000, and you can’t contribute at all if your income is $125,000 or more. Similarly, if you’re married and file a joint federal tax return, you can make a full Roth contribution if your income is $173,000 or less. Your contribution is phased out if your income is between $173,000 and $183,000, and you can’t contribute at all if your income is $183,000 or more. And if you’re married filing separately, your contribution phases out with any income over $0, and you can’t contribute at all if your income is $10,000 or more.
Even if you can’t make an annual contribution to a Roth IRA because of the income limits, there’s an easy workaround. If you haven’t yet reached age 70½, you can simply make a nondeductible contribution to a traditional IRA, and then immediately convert that traditional IRA to a Roth IRA. Keep in mind, however, that you’ll need to aggregate all traditional IRAs and SEP/SIMPLE IRAs you own–other than IRAs you’ve inherited–when you calculate the taxable portion of your conversion.
Finally, keep in mind that if you make a contribution to a Roth IRA for 2012–no matter how small–by your tax return due date, and this is your first Roth IRA contribution, your five-year holding period for identifying qualified distributions from all your Roth IRAs (other than inherited accounts) will start on January 1, 2012.