Medicare Prescription Drug Coverage

If you’re covered by Medicare, here’s some welcome news–Medicare drug coverage can help you handle the rising cost of prescriptions. If you’re covered by original Medicare, you can sign up for a drug plan offered in your area by a private company or insurer that has been approved by Medicare. Many Medicare Advantage plans will also offer prescription drug coverage in addition to the comprehensive health coverage they already offer. Although prescription drug plans vary, all provide a standard amount of coverage set by Medicare. Every plan offers a broad choice of brand name and generic drugs at local pharmacies or through the mail. However, some plans cover more drugs or offer a wider selection of pharmacies (for a higher premium) than others, so you’ll want to choose the plan that best meets your needs and budget.

How much will it cost?

What you’ll pay for Medicare drug coverage depends on which plan you choose. But here’s a look at how the cost of Medicare drug coverage is generally structured in 2015:

A monthly premium: Most plans charge a monthly premium. Premiums vary, but average $33.13. (Source: Centers for Medicare and Medicaid Services.) This is in addition to the premium you pay for Medicare Part B. You can have the premium deducted from your Social Security check, or you can pay your Medicare drug plan company directly.

An annual deductible: Plans may require you to satisfy an annual deductible of up to $320. Deductibles vary widely, so make sure you compare deductibles when choosing a plan.

A share of your prescription costs: Once you’ve satisfied the annual deductible, if any, you’ll generally need to pay 25% of the next $2,640 of your prescription costs (i.e., up to $660 out-of-pocket) and Medicare will pay 75% (i.e., up to $1,980). After that, there’s a coverage gap; you’ll need to pay 100% of your prescription costs until you’ve spent an additional $3,720. (Some plans offer coverage for this gap.) However, once your prescription costs total $6,680 (i.e., your out-of-pocket costs equal $4,700–you’ve paid a $320 deductible + $660 + $3,720 in drug costs–and Medicare has paid $1,980), your Medicare drug plan will generally cover 95% of any further prescription costs. For the rest of the year, you’ll pay either a coinsurance amount (e.g., 5% of the prescription cost) or a small co-payment for each prescription.

Again, keep in mind that all figures are for 2015 only–costs and limits may change each year, and vary among plans.

Note: Health-care legislation passed in 2010 gradually closes the prescription drug coverage gap. In 2015, if you have spending in the coverage gap, you’ll receive a 55% discount on covered brand-name drugs, and a 35% discount on generic drugs. Other changes will take effect in future years.

 Total prescription costs in 2015 What you pay What Medicare pays
$0 to $320 You pay deductible of $320 (some plans may offer lower deductibles) Medicare pays nothing until deductible is satisfied
$320 to $2,960 You pay 25% of costs Medicare pays 75% of costs
$2,960 to $6,680 You pay 100% of costs Medicare pays nothing
Over $6,680 You pay 5% of costs Medicare pays 95% of costs

 

What if you can’t afford coverage? Extra help with Medicare drug plan costs is available to people who have limited income and resources. Medicare will pay all or most of the drug plan costs of seniors who qualify for help. If you haven’t already received an application for help, you can get one at your local pharmacy or order one from Medicare.

When can you join?

Seniors new to Medicare have seven months to enroll in a drug plan (three months before, the month of, and three months after becoming eligible for Medicare). Current Medicare beneficiaries can generally enroll in a drug plan or change drug plans during the annual election period that occurs between October 15 and December 7 of each year, and their Medicare prescription drug coverage will become effective on January 1 of the following year. If you qualify for special help, you can enroll in a drug plan at anytime during the year. Certain other events may qualify you for a Special Enrollment Period outside of the annual election period when you can enroll in a plan or switch plans.

If you already have Medicare drug coverage, remember to review your plan each fall to make sure it still meets your needs. Before the start of the annual election period, you should receive a notice from your current plan letting you know of any important plan modifications or additional plan options. Unless you decide to make a change, you’ll automatically be re-enrolled in the same drug plan for the upcoming year.

Do you have to join?

No. The Medicare prescription drug benefit is voluntary. However, when deciding whether or not to enroll, keep in mind that if you don’t join when you’re first eligible, but decide to join in a future year, you’ll pay a premium penalty that will permanently increase the cost of your coverage. There’s an exception to this premium penalty, though, if the reason you didn’t join sooner was because you already had prescription drug coverage that was at least as good as the coverage available through Medicare.

What if you already have prescription drug coverage?

Like many people, you may already have prescription drug coverage through the Medicare Advantage program, private health insurance such as Medigap, or your employer or former employer’s health plan. You can generally opt either to keep that coverage or join a Medicare prescription drug plan instead. If you already have other prescription drug coverage, you’ll receive a notice from your current provider explaining your options.

What happens after you join?

Once you join a plan, you’ll receive a prescription drug card and detailed information about the plan. In order to receive drug coverage, you’ll generally have to fill your prescription at a pharmacy that is in your drug plan’s network or through a mail-order service in that network. When you fill a prescription, show the card to the pharmacist (or provide the card number through the mail) even if you haven’t satisfied your annual deductible, so that your purchase counts toward the deductible and benefit limits.

What if you have questions?

If you have questions about the Medicare prescription drug benefit, you can get help by calling 1-800-MEDICARE (1-800-633-4227) or by visiting the Medicare website at http://www.medicare.gov. Look for information in the mail from Medicare and the Social Security Administration (SSA), including a copy of this year’s “Medicare and You” publication that will give you details about the prescription drug plans available in your area.

Choosing a Medicare Prescription Drug Plan

  • Start by making a list of all the prescription drugs you currently take and the price you pay for them to see how much you’re spending on prescription drugs.
  • Next, compare plans. Does each plan cover all of the drugs you currently take?
  • What deductible and co-payments does each plan require?
  • What monthly premium will you pay?
  • What pharmacies are included in each plan’s network?
  • Finally, ask for help if you need it. A family member or friend can help you find information, or you can call a Medicare customer representative at 1-800-MEDICARE.

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, Qwest, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Merck, Pfizer, Verizon, Glaxosmithkline, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

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Setting and Targeting Investment Goals

Go out into your yard and dig a big hole. Every month, throw $50 into it, but don’t take any money out until you’re ready to buy a house, send your child to college, or retire. It sounds a little crazy, doesn’t it? But that’s what investing without setting clear-cut goals is like. If you’re lucky, you may end up with enough money to meet your needs, but you have no way to know for sure.

How do you set investment goals?

Setting investment goals means defining your dreams for the future. When you’re setting goals, it’s best to be as specific as possible. For instance, you know you want to retire, but when? You know you want to send your child to college, but to an Ivy League school or to the community college down the street? Writing down and prioritizing your investment goals is an important first step toward developing an investment plan.

What is your time horizon?

Your investment time horizon is the number of years you have to invest toward a specific goal. Each investment goal you set will have a different time horizon. For example, some of your investment goals will be long term (e.g., you have more than 15 years to plan), some will be short term (e.g., you have 5 years or less to plan), and some will be intermediate (e.g., you have between 5 and 15 years to plan). Establishing time horizons will help you determine how aggressively you will need to invest to accumulate the amount needed to meet your goals.

How much will you need to invest?

Although you can invest a lump sum of cash, many people find that regular, systematic investing is also a great way to build wealth over time. Start by determining how much you’ll need to set aside monthly or annually to meet each goal. Although you’ll want to invest as much as possible, choose a realistic amount that takes into account your other financial obligations, so that you can easily stick with your plan. But always be on the lookout for opportunities to increase the amount you’re investing, such as participating in an automatic investment program that boosts your contribution by a certain percentage each year, or by dedicating a portion of every raise, bonus, cash gift, or tax refund you receive to your investment objectives.

Which investments should you choose?

Regardless of your financial goals, you’ll need to decide how to best allocate your investment dollars. One important consideration is your tolerance for risk. All investments involve some risk, but some involve more than others. How well can you handle market ups and downs? Are you willing to accept a higher degree of risk in exchange for the opportunity to earn a higher rate of return?

Whether you’re investing for retirement, college, or another financial goal, your overall objective is to maximize returns without taking on more risk than you can bear. But no matter what level of risk you’re comfortable with, make sure to choose investments that are consistent with your goals and time horizon. A financial professional can help you construct a diversified investment portfolio that takes these factors into account.

Investing for retirement

After a hard day at the office, do you ask yourself, “Is it time to retire yet?” Retirement may seem a long way off, but it’s never too early to start planning, especially if you want retirement to be the good life you imagine.

For example, let’s say that your goal is to retire at age 65. At age 20 you begin contributing $3,000 per year to your tax-deferred 401(k) account. If your investment earns 6% per year, compounded annually, you’ll have approximately $679,000 in your investment account when you retire.

But what would happen if you left things to chance instead? Let’s say that you’re not really worried about retirement, so you wait until you’re 35 to begin investing. Assuming you contributed the same amount to your 401(k) and the rate of return on your investment dollars was the same, you would end up with approximately $254,400. And, as this chart illustrates, if you were to wait until age 45 to begin investing for retirement, you would end up with only about $120,000 by the time you retire.

Investing for college

Perhaps you faced the truth the day your child was born. Or maybe it hit you when your child started first grade: You have only so much time to save for college. In fact, for many people, saving for college is an intermediate-term goal–if you start saving when your child is in elementary school, you’ll have 10 to 15 years to build your college fund.

Of course, the earlier you start, the better. The more time you have before you need the money, the greater chance you have to build a substantial college fund due to compounding. With a longer investment time frame and a tolerance for some risk, you might also be willing to put some of your money into investments that offer the potential for growth.

Investing for a major purchase

At some point, you’ll probably want to buy a home, a car, or even that vacation home you’ve always wanted. Although they’re hardly impulse items, large purchases are usually not something for which you plan far in advance; one to five years is a common time frame. Because you don’t have much time to invest, you’ll have to budget your investment dollars wisely. Rather than choosing growth investments, you may want to put your money into less volatile, highly liquid investments that have some potential for growth, but that offer you quick and easy access to your money should you need it.

Review and revise

Over time, you may need to update your investment strategy. Get in the habit of checking your portfolio at least once a year–more frequently if the market is particularly volatile or when there have been significant changes in your life. You may need to rebalance your portfolio to bring it back in line with your investment goals and risk tolerance. If you need help, a financial professional can help.

Investing for Your Goals

Investment goal and time horizon At 4%, you’ll need to invest At 8%, you’ll need to invest At 12%, you’ll need to invest
Have $10,000 for down payment on home: 5 years $151 per month $136 per month $123 per month
Have $50,000 in college fund: 10 years $340 per month $276 per month $223 per month
Have $250,000 in retirement fund: 20 years $685 per month $437 per month $272 per month
Table assumes 3% annual inflation, and that the return is compounded annually; taxes are not considered. Also, rates of return will vary over time, particularly for long-term investments, which could affect the amounts you would need to invest. This hypothetical example is not intended to reflect the actual performance of any investment.

 

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, ExxonMobil, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Nonprofit Boards: New Challenges and Responsibilities

The days are long gone when nonprofit boards were made up of large donors who expected that little more would be asked of them beyond socializing at the occasional fundraiser. Being a board member can be as demanding and rewarding as any full-time work.

 

Nonprofit board members are being required to do strategic planning for both long- and short-term goals. They must produce demonstrable results that are measured against specific benchmarks. And they are finding that they must stretch already tight budgets further than ever. In turn, stakeholders within and outside nonprofit organizations increasingly are holding board members to a higher standard of accountability for making sure the organization not only delivers on its mission but does so in the most effective way.

 

Learning how to do more with less

 

Of all the challenges facing nonprofits, financial issues can be especially complex. In the last decade, many nonprofits have experienced funding cutbacks. Even those whose funding has remained stable are finding that money has to go further to meet increased client loads and demands on programs and services.

 

In some cases, the issues can be so complex that boards are going outside the organization’s ranks to hire consultants with specific expertise in certain areas. People who stay on top of the latest developments in such fields as tax law, charitable giving regulations, and best practices in accounting can be particularly effective in helping an organization fulfill its purpose without having to add staff.

 

Understanding your role and responsibilities as a board member, as well as the challenges facing nonprofits today, can not only improve your board’s decision-making process, but also can help you have maximum impact. A nonprofit board member has a dual role: support of the organization’s purpose, and governance over how it attempts to further that mission. You and your fellow board members doubtless want to use your collective time efficiently. When thinking about how to focus your efforts, consider whether your organization needs help with any of the following issues.

 

Ensuring accountability

 

Limited budgets and greater demand mean that hard choices will need to be made; in many cases, it’s the board’s responsibility to make them. To make wise decisions, it’s important to understand the organization’s financial assets, liabilities, and cash flow situation. If you’ve had corporate experience, you may be able to help your fellow board members review the balance sheet; if not, it’s worth your time to become familiar with it yourself. For example, knowing whether your organization qualifies for state sales and/or use tax exemption could have a meaningful impact on finances. Little may be more disturbing to potential donors than the feeling that their money may not be used effectively.

 

Also, the IRS is beginning to require more detailed information about nonprofit finances and governance practices, such as involvement in a joint venture or other partnership.

 

Program funders also have increased reporting requirements. When deciding which grants to make, foundations are asking for more information, greater documentation, and increased evaluation of results. Gathering and analyzing accurate, timely, comprehensive data and being able to document a program’s effectiveness and impact is increasingly important. Understanding the organization’s finances doesn’t just improve the board’s oversight capabilities; it also can make you a more effective fundraiser.

 

Higher standards of accountability mean that boards also should ensure that liability insurance is in place for both directors and officers. This is especially true if the organization provides services to the public, such as medical care.

 

Adopting enhanced governance standards

 

The Sarbanes-Oxley Act, passed in the wake of corporate governance scandals and nicknamed SOX, also affects nonprofits. Though the law applies almost exclusively to publicly traded companies, some nonprofits are using SOX provisions as a model for developing formal policies on financial reporting, potential conflicts of interest, and internal controls.

 

Two provisions of SOX also apply to nonprofits. First, organizations must have a written policy on retention of important documents, particularly those involved in any litigation. Second, they need a process for handling internal complaints while also protecting whistleblowers. Individual states have expressed interest in extending other SOX requirements to the nonprofit world, particularly larger organizations. Many nonprofit organizations hope that voluntary compliance efforts will eliminate calls for increased official regulation of such issues as board member compensation and conflicts of interest.

 

Ensuring effective fundraising and money management

 

Nonprofits have not been spared the increases in for-profit health care costs and worker’s compensation insurance that have hit corporations and small businesses. Yet fundraising for such mundane areas as day-to-day operations, staff salaries, and building and equipment maintenance has traditionally been one of the biggest challenges for nonprofits.

 

The twin effects of inflation and increased client loads have underscored the importance of having an adequate operating reserve. Also, corporate sponsorships can be vulnerable to the mergers and acquisitions that occur frequently in the corporate world. It makes sense to ensure a diversity of donors rather than relying on a few traditional sources.

 

Bringing in money is only half the battle; the day-to-day issues are equally important. Board members may be unfamiliar with operational challenges that businesses don’t generally face, such as fundraising, or recruiting and managing volunteers. However, in some cases you might be able to suggest ways to adapt businesslike methods for nonprofit use.

 

For example, appropriately investing short-term working capital can help preserve financial flexibility while maximizing resources. If your group has an infusion of cash that won’t be spent immediately, such as a contribution for a capital spending project, consider alternatives for putting at least some of it to work rather than letting it sit idle.

 

Planning strategically

 

Having a strategic plan can lead to better evaluation of funding needs and targeted fundraising efforts; it also can help ensure that board members and staff are on the same page. Make sure your plan provides guidance, yet allows staff members to do their jobs without constant board supervision.

 

A board of directors also must assure that the organization can attract and retain leadership. Many nonprofits today are led by executives who came of age during the 1960s. As those baby boomers march toward retirement, some experts worry that attracting and retaining executive directors and staff will become increasingly challenging, especially when budgets are shrinking. A succession plan for key personnel might be wise.

 

Using your time wisely

 

Nonprofit board membership can be both demanding and rewarding. Understanding your group’s finances can increase your effectiveness in furthering your organization’s goals.

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, Glaxosmithkline, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Chevron, Hughes, Northrop Grumman, Qwest, Raytheon, ExxonMobil, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Exchange-Traded Funds: Do They Belong in Your Portfolio?

Exchange-traded funds (ETFs) have become increasingly popular since they were introduced in the United States in the mid-1990s. Their tax efficiencies and relatively low investing costs have attracted investors who like the idea of combining the diversification of mutual funds with the trading flexibility of stocks. ETFs can fill a unique role in your portfolio, but you need to understand just how they work and the differences among the dizzying variety of ETFs now available.

What is an ETF?

Like a mutual fund, an exchange-traded fund pools the money of many investors and purchases a group of securities. Like index mutual funds, most ETFs are passively managed. Instead of having a portfolio manager who uses his or her judgment to select specific stocks, bonds, or other securities to buy and sell, both index mutual funds and exchange-traded funds attempt to replicate the performance of a specific index.

However, a mutual fund is priced once a day, when the fund’s net asset value is calculated after the market closes. If you buy after that, you will receive the next day’s closing price. By contrast, an ETF is priced throughout the day and can be bought on margin or sold short–in other words, it’s traded just as a stock is.

How ETFs invest

Since their inception, most ETFs have invested in stocks or bonds, buying the shares represented in a particular index. For example, an ETF might track the Nasdaq 100, the S&P 500, or a bond index. Other ETFs invest in hard assets–for example, gold. With the rapid proliferation of ETFs in recent years, if there’s an index, there’s a good chance there’s an ETF that tracks it. More and more new indexes are being introduced, many of which cover narrow niches of the market, or use novel rules to choose securities. Many so-called rules-based ETFs are beginning to take on aspects of actively managed funds–for example, by limiting the percentage of the fund that can be devoted to a single security or industry.

Pros and Cons of Exchange-Traded Funds

Pros

  • ETFs can be traded throughout the day as price fluctuates
  • ETFs can be bought on margin, sold short, or traded using stop orders and limit orders, just as stocks can
  • ETFs do not have to hold cash or buy and sell securities to meet redemption demands by fund investors
  • Annual expenses are often lower, which can be especially important for long-term investors
  • Because ETFs typically trade securities infrequently, they have lower annual taxable distributions than a mutual fund

Cons

  • Dollar-cost averaging will require paying repeated commissions and will increase investing costs
  • If an ETF is organized as a unit investment trust, delays in reinvesting its dividends may hamper returns
  • An ETF doesn’t necessarily trade at its net asset value, and bid-ask spreads may be wide for thinly traded issues or in volatile markets

The new wave of ETFs

New and unique indexes are being developed every day. As a result, ETFs that might seem similar–for example, two funds that invest in large-cap stocks–can actually be quite different. Many indexes define which securities are included based on their market capitalization–the number of shares outstanding times the price per share. However, other indexes and the ETFs that mimic them may select or weight securities within the index based on fundamental factors, such as a stock’s dividend yield. Why is weighting important? Because it can affect the impact that individual securities have on the fund’s result. For example, an index that is weighted by market cap will be more affected by underperformance at a large-cap company than it would be by an underperforming company with a smaller market cap. That’s because the large-cap company would represent a larger share of the index. However, if the index weighted each security equally, each would have an equal impact on the index’s performance.

The cost advantages and tradeoffs of ETFs

As indicated above, one of the reasons ETFs have gained ground with investors is because of their low annual expenses. Passive index investing means an ETF doesn’t require a portfolio manager or a research staff to select securities; that reduces the fund’s overhead. Also, investing in an index means that trades are generally made only when the index itself changes. As a result, the trading costs required by frequent buying and selling of securities in the fund are minimized.

However, don’t forget that you’ll generally pay a commission with each ETF trade (depending on the type of account you have). That means a one-time lump-sum investment in an ETF will be more cost-effective than frequent, regular investments over time.

ETFs and taxes

ETFs can be relatively tax efficient. Because it trades so infrequently, an ETF typically distributes few capital gains during the year. There can be times when some investors find themselves paying taxes on capital gains generated by a mutual fund, even though the value of their fund may actually have dropped. Though it’s not impossible for an ETF to have capital gains, ETFs generally can minimize the ongoing capital gains taxes you’ll pay.

Just how much impact can reducing taxes have over the long term? More than you might think. Even a 1% difference in your return can be significant. For example, if you invest $50,000 and earn an average annual return of 5% (compounded monthly), you would have a pretax amount of $82,350 after 10 years. Even a 1% increase in that return would give you $90,970 at the end of that time. (This hypothetical example is for illustrative purposes only and does not represent the performance of any particular investment. Actual results will vary.)

Make sure you consider how an ETF’s returns will be taxed. Depending on how the fund is organized and what it invests in, returns could be taxed as short-term capital gains, ordinary income, or in the case of gold and silver ETFs, as collectibles; all are taxed at higher rates than long-term capital gains.

What are some other reasons investors use ETFs?

  • To get exposure to a particular industry or sector of the market. Because the minimum investment in an ETF is the cost of a single share, ETFs can be a low-cost way to make a diversified investment in alternative investments, a particular investing style, or geographic region.
  • To limit losses. Being able to set a stop-loss limit on your ETF shares can help you manage potential losses. A stop-loss order instructs your broker to sell your position if the shares fall to a certain price. If the ETF’s price falls, you’ve minimized your losses. If its price rises over time, you could increase the stop-loss figure accordingly. That lets you pursue potential gains while setting a limit on the amount you can lose.

How to evaluate an ETF

  1. Look at the index it tracks. Understand what the index consists of and what rules it follows in selecting and weighting the securities in it. Be aware that the performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest directly in any index.
  2. Look at how long the fund and/or its underlying index have been in existence, and if possible, how both have performed in good times and bad.
  3. Look at the fund’s expense ratios. The more straightforward its investing strategy, the lower expenses are likely to be. An index using futures contracts is likely to have higher expenses than one that simply replicates the S&P 500.

Your financial professional can help you decide how ETFs might fit your investing strategy.

 

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, Qwest, ING Retirement, AT&T, Chevron, Northrop Grumman, Hughes, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Balancing Your Investment Choices with Asset Allocation

A chocolate cake. Pasta. A pancake. They’re all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that’s appropriate for you.

Getting an appropriate mix

The combination of investments you choose can be as important as your specific investments. The mix of various asset classes, such as stocks, bonds, and cash alternatives, accounts for most of the ups and downs of a portfolio’s returns.

There’s another reason to think about the mix of investments in your portfolio. Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may be chosen for their growth potential. Others may provide regular income. Still others may offer safety or simply serve as a temporary place to park your money. And some investments even try to fill more than one role. Because you probably have multiple needs and desires, you need some combination of investment types.

Balancing how much of each you should include is one of your most important tasks as an investor. That balance between growth, income, and safety is called your asset allocation, and it can help you manage the level and type of risks you face.

Balancing risk and return

Ideally, you should strive for an overall combination of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk. For example, let’s say you want to get a 7.5% return on your money. Your financial professional tells you that in the past, stock market returns have averaged about 10% annually, and bonds roughly 5%. One way to try to achieve your 7.5% return would be by choosing a 50-50 mix of stocks and bonds. It might not work out that way, of course. This is only a hypothetical illustration, not a real portfolio, and there’s no guarantee that either stocks or bonds will perform as they have in the past. But asset allocation gives you a place to start.

Someone living on a fixed income, whose priority is having a regular stream of money coming in, will probably need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that’s 30 years away. Many publications feature model investment portfolios that recommend generic asset allocations based on an investor’s age. These can help jump-start your thinking about how to divide up your investments. However, because they’re based on averages and hypothetical situations, they shouldn’t be seen as definitive. Your asset allocation is–or should be—as unique as you are. Even if two people are the same age and have similar incomes, they may have very different needs and goals. You should make sure your asset allocation is tailored to your individual circumstances.

Many ways to diversify

When financial professionals refer to asset allocation, they’re usually talking about overall classes: stocks, bonds, and cash or cash alternatives. However, there are others that also can be used to complement the major asset classes once you’ve got those basics covered. They include real estate and alternative investments such as hedge funds, private equity, metals, or collectibles. Because their returns don’t necessarily correlate closely with returns from major asset classes, they can provide additional diversification and balance in a portfolio.

Even within an asset class, consider how your assets are allocated. For example, if you’re investing in stocks, you could allocate a certain amount to large-cap stocks and a different percentage to stocks of smaller companies. Or you might allocate based on geography, putting some money in U.S. stocks and some in foreign companies. Bond investments might be allocated by various maturities, with some money in bonds that mature quickly and some in longer-term bonds. Or you might favor tax-free bonds over taxable ones, depending on your tax status and the type of account in which the bonds are held.

Asset allocation strategies

There are various approaches to calculating an asset allocation that makes sense for you.

The most popular approach is to look at what you’re investing for and how long you have to reach each goal. Those goals get balanced against your need for money to live on. The more secure your immediate income and the longer you have to pursue your investing goals, the more aggressively you might be able to invest for them. Your asset allocation might have a greater percentage of stocks than either bonds or cash, for example. Or you might be in the opposite situation. If you’re stretched financially and would have to tap your investments in an emergency, you’ll need to balance that fact against your longer-term goals. In addition to establishing an emergency fund, you may need to invest more conservatively than you might otherwise want to.

Some investors believe in shifting their assets among asset classes based on which types of investments they expect will do well or poorly in the near term. However, this approach, called “market timing,” is extremely difficult even for experienced investors. If you’re determined to try this, you should probably get some expert advice–and recognize that no one really knows where markets are headed.

Some people try to match market returns with an overall “core” strategy for most of their portfolio. They then put a smaller portion in very targeted investments that may behave very differently from those in the core and provide greater overall diversification. These often are asset classes that an investor thinks could benefit from more active management.

Just as you allocate your assets in an overall portfolio, you can also allocate assets for a specific goal. For example, you might have one asset allocation for retirement savings and another for college tuition bills. A retired professional with a conservative overall portfolio might still be comfortable investing more aggressively with money intended to be a grandchild’s inheritance. Someone who has taken the risk of starting a business might decide to be more conservative with his or her personal portfolio.

Things to think about

  • Don’t forget about the impact of inflation on your savings. As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate. Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.
  • Your asset allocation should balance your financial goals with your emotional needs. If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you’re pursuing is worth the lost sleep.
  • Your tax status might affect your asset allocation, though your decisions shouldn’t be based solely on tax concerns.

Even if your asset allocation was right for you when you chose it, it may not be appropriate for you now. It should change as your circumstances do and as new ways to invest are introduced. A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, ExxonMobil, access.att.com, Raytheon, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Pfizer, Glaxosmithkline, Merck, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Holding Equities for the Long Term: Time Versus Timing

Legendary investor Warren Buffett is famous for his long-term perspective. He has said that he likes to make investments he would be comfortable holding even if the market shut down for 10 years. Investing with an eye to the long term is particularly important with stocks. Historically, equities have typically outperformed bonds, cash, and inflation, though past performance is no guarantee of future results and those returns also have involved higher volatility. It can be challenging to have Buffett-like patience during periods such as 2000-2002, when the stock market fell for 3 years in a row, or 2008, which was the worst year for the Standard & Poor’s 500* since the Depression era. Times like those can frazzle the nerves of any investor, even the pros. With stocks, having an investing strategy is only half the battle; the other half is being able to stick to it.

Just what is long term?

Your own definition of “long term” is most important, and will depend in part on your individual financial goals and when you want to achieve them. A 70-year-old retiree may have a shorter “long term” than a 30 year old who’s saving for retirement.

Your strategy should take into account that the market will not go in one direction forever–either up or down. However, it’s instructive to look at various holding periods for equities over the years. Historically, the shorter your holding period, the greater the chance of experiencing a loss. It’s true that the S&P 500 showed negative returns for the two 10-year periods ending in 2008 and 2009, which encompassed both the tech crash and the credit crisis. However, the last negative-return 10-year period before then ended in 1939, and each of the trailing 10-year periods since 2010 have also been positive.*

The benefits of patience

Trying to second-guess the market can be challenging at best; even professionals often have trouble. According to “Behavioral Patterns and Pitfalls of U.S. Investors,” a 2010 Library of Congress report prepared for the Securities and Exchange Commission, excessive trading often causes investors to underperform the market.

The Power of Time

Note: Though past performance is no guarantee of future results, the odds of achieving a positive return in the stock market have been much higher over a 5or 10-year period than for a single year. Another study, “Stock Market Extremes and Portfolio Performance 1926-2004,” initially done by the University of Michigan in 1994 and updated in 2005, showed that a handful of months or days account for most market gains and losses. The return dropped dramatically on a portfolio that was out of the stock market entirely on the 90 best trading days in history. Returns also improved just as dramatically by avoiding the market’s 90 worst days; the problem, of course, is being able to forecast which days those will be. Even if you’re able to avoid losses by being out of the market, will you know when to get back in?

Keeping yourself on track

It’s useful to have strategies in place that can help improve your financial and psychological readiness to take a long-term approach to investing in equities. Even if you’re not a buy-and-hold investor, a trading discipline can help you stick to a long-term plan.

Have a game plan against panic

Having predetermined guidelines that anticipate turbulent times can help prevent emotion from dictating your decisions. For example, you might determine in advance that you will take profits when the market rises by a certain percentage, and buy when the market has fallen by a set percentage. Or you might take a core-and-satellite approach, using buy-and-hold principles for most of your portfolio and tactical investing based on a shorter-term outlook for the rest.

Remember that everything’s relative

Most of the variance in the returns of different portfolios is based on their respective asset allocations. If you’ve got a well-diversified portfolio, it might be useful to compare its overall performance to the S&P 500. If you discover you’ve done better than, say, the stock market as a whole, you might feel better about your long-term prospects.

Current performance may not reflect past results

Don’t forget to look at how far you’ve come since you started investing. When you’re focused on day-to-day market movements, it’s easy to forget the progress you’ve already made. Keeping track of where you stand relative to not only last year but to 3, 5, and 10 years ago may help you remember that the current situation is unlikely to last forever.

Consider playing defense

Some investors try to prepare for volatile periods by reexamining their allocation to such defensive sectors as consumer staples or utilities (though like all stocks, those sectors involve their own risks). Dividends also can help cushion the impact of price swings. If you’re retired and worried about a market downturn’s impact on your income, think before reacting. If you sell stock during a period of falling prices simply because that was your original game plan, you might not get the best price. Moreover, that sale might also reduce your ability to generate income in later years. What might it cost you in future returns by selling stocks at a low point if you don’t need to? Perhaps you could adjust your lifestyle temporarily.

Use cash to help manage your mindset

Having some cash holdings can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to act thoughtfully instead of impulsively. An appropriate asset allocation can help you have enough resources on hand to prevent having to sell stocks at an inopportune time to meet ordinary expenses or, if you’ve used leverage, a margin call.

A cash cushion coupled with a disciplined investing strategy can change your perspective on market downturns. Knowing that you’re positioned to take advantage of a market swoon by picking up bargains may increase your ability to be patient.

Know what you own and why you own it

When the market goes off the tracks, knowing why you made a specific investment can help you evaluate whether those reasons still hold. If you don’t understand why a security is in your portfolio, find out. A stock may still be a good long-term opportunity even when its price has dropped.

Tell yourself that tomorrow is another day

The market is nothing if not cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may get another chance. If you’re considering changes, a volatile market is probably the worst time to turn your portfolio inside out. Solid asset allocation is still the basis of good investment planning.

Be willing to learn from your mistakes

Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. Even the best aren’t right all the time. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions.

*Data source: Calculations by Broadridge based on total returns on the S&P 500 Index over rolling 1-, 5-, and 10-year periods between 1926 and 2014.

 

 

 

 

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, netbenefits.fidelity.com, Pfizer, Verizon, AT&T, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Changing Jobs? Take Your 401(k) and Roll It

If you’ve lost your job, or are changing jobs, you may be wondering what to do with your 401(k) plan account. It’s important to understand your options.

What will I be entitled to?

If you leave your job (voluntarily or involuntarily), you’ll be entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (pretax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan’s vesting schedule.

In general, you must be 100% vested in your employer’s contributions after 3 years of service (“cliff vesting”), or you must vest gradually, 20% per year until you’re fully vested after 6 years (“graded vesting”). Plans can have faster vesting schedules, and some even have 100% immediate vesting. You’ll also be 100% vested once you’ve reached your plan’s normal retirement age.

It’s important for you to understand how your particular plan’s vesting schedule works, because you’ll forfeit any employer contributions that haven’t vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for your particular plan works. If you don’t have one, ask your plan administrator for it. If you’re on the cusp of vesting, it may make sense to wait a bit before leaving, if you have that luxury.

Don’t spend it, roll it!

While this pool of dollars may look attractive, don’t spend it unless you absolutely need to. If you take a distribution you’ll be taxed, at ordinary income tax rates, on the entire value of your account except for any after-tax or Roth 401(k) contributions you’ve made. And, if you’re not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout. (Special rules may apply if you receive a lump-sum distribution and you were born before 1936, or if the lump-sum includes employer stock.)

If your vested balance is more than $5,000, you can leave your money in your employer’s plan until you reach normal retirement age. But your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan. As the name suggests, in a direct rollover the money passes directly from your 401(k) plan account to the IRA or other plan. This is preferable to a “60-day rollover,” where you get the check and then roll the money over yourself, because your employer has to withhold 20% of the taxable portion of a 60-day rollover. You can still roll over the entire amount of your distribution, but you’ll need to come up with the 20% that’s been withheld until you recapture that amount when you file your income tax return.

Should I roll over to my new employer’s 401(k) plan or to an IRA?

Assuming both options are available to you, there’s no right or wrong answer to this question. There are strong arguments to be made on both sides. You need to weigh all of the factors, and make a decision based on your own needs and priorities. It’s best to have a professional assist you with this, since the decision you make may have significant consequences–both now and in the future.

Reasons to roll over to an IRA:

  • You generally have more investment choices with an IRA than with an employer’s 401(k) plan. You typically may freely move your money around to the various investments offered by your IRA trustee, and you may divide up your balance among as many of those investments as you want. By contrast, employer-sponsored plans typically give you a limited menu of investments (usually mutual funds) from which to choose.
  • You can freely allocate your IRA dollars among different IRA trustees/custodians. There’s no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year. This gives you flexibility to change trustees often if you are dissatisfied with investment performance or customer service. It can also allow you to have IRA accounts with more than one institution for added diversification. With an employer’s plan, you can’t move the funds to a different trustee unless you leave your job and roll over the funds.
  • An IRA may give you more flexibility with distributions. Your distribution options in a 401(k) plan depend on the terms of that particular plan, and your options may be limited. However, with an IRA, the timing and amount of distributions is generally at your discretion (until you reach age 70½ and must start taking required minimum distributions in the case of a traditional IRA).
  • You can roll over (essentially “convert”) your 401(k) plan distribution to a Roth IRA. You’ll generally have to pay taxes on the amount you roll over (minus any after-tax contributions you’ve made), but any qualified distributions from the Roth IRA in the future will be tax free.

Reasons to roll over to your new employer’s 401(k) plan:

  • Many employer-sponsored plans have loan provisions. If you roll over your retirement funds to a new employer’s plan that permits loans, you may be able to borrow up to 50% of the amount you roll over if you need the money. You can’t borrow from an IRA–you can only access the money in an IRA by taking a distribution, which may be subject to income tax and penalties. (You can, however, give yourself a short-term loan from an IRA by taking a distribution, and then rolling the dollars back to an IRA within 60 days.)
  • A rollover to your new employer’s 401(k) plan may provide greater creditor protection than a rollover to an IRA. Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) cannot attach your plan funds to satisfy any of your debts and obligations, regardless of whether you’ve declared bankruptcy. In contrast, any amounts you roll over to a traditional or Roth IRA are generally protected under federal law only if you declare bankruptcy. Any creditor protection your IRA may receive in cases outside of bankruptcy will generally depend on the laws of your particular state. If you are concerned about asset protection, be sure to seek the assistance of a qualified professional.
  • You may be able to postpone required minimum distributions. For traditional IRAs, these distributions must begin by April 1 following the year you reach age 70½. However, if you work past that age and are still participating in your employer’s 401(k) plan, you can delay your first distribution from that plan until April 1 following the year of your retirement. (You also must own no more than 5% of the company.)
  • If your distribution includes Roth 401(k) contributions and earnings, you can roll those amounts over to either a Roth IRA or your new employer’s Roth 401(k) plan (if it accepts rollovers). If you roll the funds over to a Roth IRA, the Roth IRA holding period will determine when you can begin receiving tax-free qualified distributions from the IRA. So if you’re establishing a Roth IRA for the first time, your Roth 401(k) dollars will be subject to a brand new 5-year holding period. On the other hand, if you roll the dollars over to your new employer’s Roth 401 (k) plan, your existing 5-year holding period will carry over to the new plan. This may enable you to receive tax-free qualified distributions sooner.

When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.

What about outstanding plan loans?

In general, if you have an outstanding plan loan, you’ll need to pay it back, or the outstanding balance will be taxed as if it had been distributed to you in cash. If you can’t pay the loan back before you leave, you’ll still have 60 days to roll over the amount that’s been treated as a distribution to your IRA. Of course, you’ll need to come up with the dollars from other sources.

 

 

 

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by netbenefits.fidelity.com, hewitt.com, fidelity.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, Merck, ExxonMobil, Glaxosmithkline, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Guaranteed Lifetime Withdrawal Benefit Annuity Rider

Indexed annuities (also referred to as fixed-index or equity-indexed annuities) and variable annuities can be useful options for retirement savings because interest earnings are tax-deferred until withdrawn. These annuities can also be converted to a stream of income payments that can last for the rest of your life (annuitization). However, annuitization generally requires that you exchange your annuity account balance for income payments. Due to growing demand for additional income options, many issuers are offering a rider, called a guaranteed lifetime withdrawal benefit (GLWB), to variable annuities and fixed-index annuities that allows you to get lifetime income payments while continuing to have access to the annuity’s remaining cash value.

Here’s how it works

There are different variations of the GLWB rider, depending on the issuer offering it. Typically, a GLWB rider subjects the annuity owner to a fee for the rider, and specific age restrictions or income limitations. However, most issuers incorporate some common features. Your annuity premium is invested in subaccounts (with a variable annuity) or earns interest (with a fixed-index annuity). Thereafter, you can elect to receive annual withdrawals from the annuity that last for the rest of your life (minimum guaranteed withdrawal). The amount of the withdrawal is determined by applying a percentage (withdrawal percentage) to the premium or the cash value, whichever is greater at the time of your election. Withdrawals are subtracted from the cash value. The amount of the withdrawal will not decrease, even if the cash value decreases or is exhausted.

For example, you invest $100,000 in a variable annuity with a withdrawal percentage of 5%. In five years, you elect to begin receiving minimum guaranteed withdrawals, but the cash value is worth only $80,000 (due to poor subaccount performance). The withdrawal percentage (5%) is applied to your premium ($100,000) since it is greater than the cash value at the time of your election. Your minimum guaranteed withdrawal is $5,000 per year ($100,000 x 5%).*

Some issuers apply a minimum rate of return to your premium (minimum income value) apart from your cash value. In this case, the withdrawal percentage is applied to the greater of your minimum income value or your cash value to determine your guaranteed minimum withdrawal. This option ensures that the amount of your minimum guaranteed withdrawal increases each year you defer receiving withdrawals.

To illustrate, use the same facts as the previous example, but include a minimum income value of 6% per year applied to your premium ($100,000). When you elect to receive withdrawals, the minimum income value is $133,823 ($100,000 x 6% per year x 5 years). Since this value is greater than your cash value ($80,000), the withdrawal percentage (5%) is applied to the minimum income value yielding a minimum guaranteed withdrawal of $6,691 per year ($133,823 x 5%).*

*Examples are for illustration purposes only and do not reflect the actual performance of a specific product or investment.

Issuers may also increase your guaranteed minimum withdrawal by increasing the withdrawal percentage as the age at which you elect to begin receiving withdrawals increases. For example, the withdrawal percentage could be 5% if you start withdrawals at age 55, 7% at age 70, and 8% at age 80.

However, if you exceed the allowable withdrawal amount, you may adversely affect your ability to continue receiving guaranteed income payments. Consequently, you should carefully evaluate your specific financial needs and objectives in addition to the specific restrictions and limitations of a GLWB option.

Caution: Annuity guarantees, including guarantees associated with benefit riders, are based on the claims-paying ability and financial strength of the annuity issuer and may be limited. Annuity withdrawals made prior to age 59½ may be subject to a 10% federal tax penalty.

The step-up feature

It’s possible the GLWB payments can increase over time if the issuer includes a step-up feature with the rider. At certain intervals (e.g., once a year), the issuer compares the annuity’s current cash value to the value used to determine your minimum guaranteed withdrawal. If the current value is greater, the issuer applies the withdrawal percentage to the current, higher value, thus increasing your minimum guaranteed withdrawals.

Access to the cash value

Most issuers allow you to take money from your cash value, even if you are also receiving GLWB withdrawals. However, some issuers reduce subsequent GLWB withdrawals in proportion to the amount you take from the cash value. For example, you have a cash value of $100,000 and your guaranteed withdrawals are $5,000 per year. One year you withdraw an additional 10% ($10,000) from the cash value. Correspondingly, your later GLWB payments will be reduced by 10% to $4,500.

Death benefit

Unless altered by a death benefit provision or rider, annuities with the GLWB rider usually pay a death benefit equal to the greater of the remaining cash value, or the remaining premium, if any, less withdrawals and applicable surrender charges. Generally, GLWB withdrawals are available only to the annuity owner and not his/her beneficiaries, unless the beneficiary is the owner’s surviving spouse, in which case the withdrawals may be continued for the benefit of the spouse.

GLWB costs

Issuers generally charge an annual fee for the GLWB rider, usually as a percentage of the annuity’s cash value. Also, the step-up feature associated with a GLWB may subject the annuity owner to an increased cost in addition to the regular fee charged for GLWB option. Thus, you should consider this fact when evaluating such a feature. Review annuity sales materials, the prospectus, and the contract for information on charges and fees.

Some other living benefit riders

The GLWB is one of many living benefit riders available on some annuities that provides a minimum accumulation value or income. As with most annuity riders, they may differ depending on the issuer offering them. Also, since these benefits are offered as riders, there is usually a charge associated with each one.

Guaranteed minimum payments benefit

The guaranteed minimum payments benefit allows you to recover your total premium through annual payments from your annuity, even if the cash value is less than the premium due to poor market performance (and not withdrawals).

Guaranteed minimum income benefit

The guaranteed minimum income benefit pays a minimum yearly income even if your annuity decreases in value due to poor subaccount performance. But you must own the annuity for a minimum number of years before exercising the rider, and you must exchange the cash value of the annuity in return for the minimum payments (annuitization).

Guaranteed accumulation benefit

This rider guarantees the return of your premium (less withdrawals) regardless of the actual investment performance of your annuity subaccounts at the end of a stated period of time.

Is it right for you?

The GLWB rider can be a good idea if you want a fixed income but don’t like the idea of giving up access to your money that annuitization requires. However, like all deferred annuities, they are intended as long-term investments, suitable for retirement funding. The annuity’s cash value may be subject to market fluctuations and investment risk. In addition, GLWB withdrawals are subtracted from the annuity’s cash value.

Caution: Based on the guarantees of the issuing company, it may be possible to lose money with this type of investment. Any guaranteed minimum rate of return is contingent upon holding the indexed annuity until the end of the term.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by Alcatel-Lucent, Bank of America, fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Health Savings Accounts: Are They Just What the Doctor Ordered?

Are health insurance premiums taking too big of a bite out of your budget? Do you wish you had better control over how you spend your health-care dollars? If so, you may be interested in an alternative to traditional health insurance called a health savings account (HSA).

How does this health-care option work?

An HSA is a tax-advantaged account that’s paired with a high-deductible health plan (HDHP). Let’s look at how an HSA works with an HDHP to enable you to cover your current health-care costs and also save for your future needs.

Before opening an HSA, you must first enroll in an HDHP, either on your own or through your employer. An HDHP is “catastrophic” health coverage that pays benefits only after you’ve satisfied a high annual deductible. (Some preventative care, such as routine physicals, may be covered without being subject to the deductible). For 2016, the annual deductible for an HSA-qualified HDHP must be at least $1,300 for individual coverage and $2,600 for family coverage. However, your deductible may be higher, depending on the plan.

Once you’ve satisfied your deductible, the HDHP will provide comprehensive coverage for your medical expenses (though you may continue to owe co-payments or coinsurance costs until you reach your plan’s annual out-of-pocket limit). A qualifying HDHP must limit annual out-of-pocket expenses (including the deductible) to no more than $6,550 for individual coverage and $13,100 for family coverage for 2016. Once this limit is reached, the HDHP will cover 100% of your costs, as outlined in your policy. Because you’re shouldering a greater portion of your health-care costs, you’ll usually pay a much lower premium for an HDHP than for traditional health insurance, allowing you to contribute the premium dollars you’re saving to your HSA. Your employer may also contribute to your HSA, or pay part of your HDHP premium. Then, when you need medical care, you can withdraw HSA funds to cover your expenses, or opt to pay your costs out-of-pocket if you want to save your account funds.

An HSA can be a powerful savings tool. Because there’s no “use it or lose it” provision, funds roll over from year to year. And the account is yours, so you can keep it even if you change employers or lose your job. If your health expenses are relatively low, you may be able to build up a significant balance in your HSA over time. You can even let your money grow until retirement, when your health expenses are likely to be substantial. However, HSAs aren’t foolproof. If you have relatively high health expenses (especially within the first year or two of opening your account, before you’ve built up a balance), you could deplete your HSA or even face a shortfall.

How can an HSA help you save on taxes?

HSAs offer several valuable tax benefits:

  • You may be able to make pretax contributions via payroll deduction through your employer, reducing your current income tax.
  • If you make contributions on your own using after-tax dollars, they’re deductible from your federal income tax (and perhaps from your state income tax) whether you itemize or not. You can also deduct contributions made on your behalf by family members.
  • Contributions to your HSA, and any interest or earnings, grow tax deferred.
  • Contributions and any earnings you withdraw will be tax free if they’re used to pay qualified medical expenses.

Consult a tax professional if you have questions about the tax advantages offered by an HSA

Can anyone open an HSA?

Any individual with qualifying HDHP coverage can open an HSA. However, you won’t be eligible to open an HSA if you’re already covered by another health plan (although some specialized health plans are exempt from this provision). You’re also out of luck if you’re 65 and enrolled in Medicare or if you can be claimed as a dependent on someone else’s tax return.

How much can you contribute to an HSA?

For 2016, you can contribute up to $3,350 for individual coverage and $6,750 for family coverage. This annual limit applies to all contributions, whether they’re made by you, your employer, or your family members. You can make contributions up to April 15th of the following year (i.e., you can make 2015 contributions up to April 15, 2016). If you’re 55 or older, you may also be eligible to make “catch-up contributions” to your HSA, but you can’t contribute anything once you reach age 65 and enroll in Medicare.

Can you invest your HSA funds?

HSAs typically offer several savings and investment options. These may include interest-earning savings, checking, and money market accounts, or investments such as stocks, bonds, and mutual funds that offer the potential to earn higher returns but carry more risk (including the risk of loss of principal). Make sure that you carefully consider the investment objectives, risks, charges, and expenses associated with each option before investing. A financial professional can help you decide which savings or investment options are appropriate.

How can you use your HSA funds?

You can use your HSA funds for many types of health-care expenses, including prescription drugs, eyeglasses, deductibles, and co-payments. Although you can’t use funds to pay regular health insurance premiums, you can withdraw money to pay for specialized types of insurance such as long-term care or disability insurance. IRS Publication 502 contains a list of allowable expenses.

There’s no rule against using your HSA funds for expenses that aren’t health-care related, but watch out–you’ll pay a 20% penalty if you withdraw money and use it for nonqualified expenses, and you’ll owe income taxes as well. Once you reach age 65, however, this penalty no longer applies, though you’ll owe income taxes on any money you withdraw that isn’t used for qualified medical expenses.

Questions to consider

  • How much will you save on your health insurance premium by enrolling in an HDHP? If you’re currently paying a high premium for individual health insurance (perhaps because you’re self-employed), your savings will be greater than if you currently have group coverage and your employer is paying a substantial portion of the premium.
  • What will your annual out-of-pocket costs be under the HDHP you’re considering? Estimate these based on your current health expenses. The lower your costs, the easier it may be to accumulate HSA funds.
  • How much can you afford to contribute to your HSA every year? Contributing as much as you can on a regular basis is key to building up a cushion against future expenses.
  • Will your employer contribute to your HSA? Employer contributions can help offset the increased financial risk that you’re assuming by enrolling in an HDHP rather than traditional employer-sponsored health insurance.
  • Are you willing to take on more responsibility for your own health care? For example, to achieve the maximum cost savings, you may need to research costs and negotiate fees with health providers when paying out-of-pocket.
  • How does the coverage provided by the HDHP compare with your current health plan? Don’t sacrifice coverage to save money. Read all plan materials to make sure you understand benefits, exclusions, and all costs.
  • What tax savings might you expect? Tax savings will be greatest for individuals in higher income tax brackets. Ask your tax advisor or financial professional for help in determining how HSA contributions will impact your taxes.

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, Alcatel-Lucent, AT&T, Bank of America, Qwest, Chevron, Hughes, ExxonMobil, Glaxosmithkline, Merck, Northrop Grumman, Pfizer, Raytheon, Verizon or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.

Common Annuity Riders

An annuity is a contract between you (the purchaser or owner) and the issuer (an insurance company). In its simplest form, you pay money to the annuity issuer, the issuer invests the money for you, and then the issuer pays out the principal and earnings back to you or to a named beneficiary.

An immediate annuity is a contract between you and an insurance company in which you pay a single sum of money to the company in exchange for its promise to make payments to you for a fixed period of time or for the rest of your life.

Annuity riders are optional features that provide added benefits to a basic annuity contract. For example, some riders focus on offering greater access to the annuity’s principal, or providing long-term income.

Annuity riders usually come with an annual cost, generally ranging from.1% to 1.0% or more of the annuity’s value. Review the annuity sales materials and prospectus for a description of applicable fees and charges. The availability of a specific annuity rider usually depends on the annuity issuer and the type of annuity you are considering. 

Cost-of-living adjustment rider

The cost-of-living adjustment rider, available on some immediate annuities, increases immediate annuity payments by a stated annual percentage to offset the effects of inflation. However, due to the added cost of this rider to the issuer, the first few payments from an annuity with this rider are typically less than they would be without the rider. It usually takes several years before cost-of-living immediate annuity payments equal or exceed immediate annuity payments without this rider. 

Cash/installment refund rider

Available on some immediate annuities, the cash refund rider provides that if the total of all immediate annuity payments received by the time of your death is less than the investment (the premium) you paid into the immediate annuity, the difference is paid in a lump sum to your annuity beneficiary. The installment refund rider is similar to the cash refund rider, except that your beneficiary receives the balance of the immediate annuity premium in installment payments instead of a lump sum. 

Impaired risk (medically underwritten) rider

This rider may be added to an immediate annuity. Ordinarily, an insurance company bases the amount of immediate annuity payments on the amount of premium you pay, your age at the time payments begin, and how long you are expected to live if payments are to be made for the rest of your life. If you have a medical condition that reduces your life expectancy, the impaired risk rider bases your annuity payments on your shortened life expectancy. This results in payments being greater than they would be for a person in good health, or the payments can be the same but for a smaller premium.

Commuted payout rider

This immediate annuity rider allows you to withdraw a lump-sum amount from your immediate annuity in addition to the regular payments you are receiving. Usually, this option is available for a limited period of time, and may be limited to a maximum dollar amount or a maximum percentage of your premium.

Guaranteed minimum accumulation benefit rider (GMAB)

The GMAB rider, available with some variable annuities, restores your annuity’s accumulation value to the amount of your total premiums paid if, after a prescribed number of years (usually 5 to 10), the annuity’s accumulation value is less than the premiums you paid (excluding your withdrawals). Some issuers offer this rider with the ability to lock in any gains in the accumulation value. Thereafter, your guaranteed minimum accumulation value will equal your total premiums paid, plus locked-in gains, less withdrawals.

Guaranteed minimum withdrawal benefit rider (GMWB) 

The GMWB rider provides you with a minimum income by allowing you to take withdrawals from your annuity up to an amount at least equal to the premiums you paid. Annual withdrawals are usually limited to a percentage of the total premiums paid (5% to 12% per year). Both the GMAB rider and the GMWB rider provide you with the opportunity to secure the return of your investment (the premium) in the annuity, even if the annuity’s accumulation value decreases due to poor subaccount performance. 

Guaranteed minimum income benefit rider (GMIB)

The GMIB rider, included with some variable annuities, offers a minimum income regardless of your actual accumulation value. The annuity issuer adds a growth rate to your premiums (usually 5% to 7% per year) that becomes your guaranteed minimum account value. After a minimum number of years (often 5 to 10), the rider allows you to convert the variable annuity to an immediate annuity and receive payments based on the greater of the minimum account value or the annuity’s accumulation value. 

Guaranteed lifetime withdrawal benefit rider (GLWB)

The GLWB rider may be added to some annuity contracts. It allows you to receive an annual income for the rest of your life without having to convert to an immediate annuity. And you can usually access the remaining accumulation value in addition to the income payments received. Income payments and withdrawals are subtracted from the annuity’s cash value.  

Long-term care rider

The long-term care rider is available with many fixed deferred annuities. If you become confined to a nursing home, or are unable to take care of yourself, this rider allows you to access more of your annuity’s accumulation value, possibly up to 100%, without the imposition of surrender charges or distribution costs otherwise applicable. 

Disability/unemployment rider

These riders are offered with fixed and variable annuities. If you become disabled for an extended period of time (usually from 60 days to 1 year), or if you are unemployed for a similar length of time and are eligible for unemployment benefits, these riders allow you to access a portion or all of your annuity’s accumulation value without the imposition of surrender charges. 

Terminal illness rider

This rider, available with both fixed and variable annuities, waives surrender charges otherwise applicable for a portion or all of your annuity’s accumulation value if you suffer from a terminal illness with a medical life expectancy of one year or less. 

Immediate Variable Fixed
Cost-of-Living GMAB LTC
Cash/Installment GMWB Disability
Impaired Risk GMIB Terminal Illness
Commuted Payout GLWB GLWB
Disability Disability

 

Terminal Illness

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of Patrick Ray, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Bank of America, Northrop Grumman, Raytheon, Alcatel-Lucent, Qwest, Chevron, Hughes, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Patrick Ray is a Representative with FSC Securities and may be reached at www.theretirementgroup.com.