Your 457 Plan and Long-Term Care

A HUGE THANK YOU is owed to the 20 or so public sector employees (both active and retired) who took valuable time from their day to help me with the research presented here.  After hours of lengthy interviews, I was able to come up with a very important discovery, and that discovery is what the number 1 thing is that keeps most of you up at night, or at the very least, what that nagging feeling that follows you around is.

The information I’m going to share with you is part of a detailed guidebook that’s being written specifically for government workers and retirees.  I’ll be sharing it with you sometime in mid-August or early September.  

ENJOY... 

Most of you in government have already chosen to do something about the huge long-term care (LTC) costs that could potentially come your way.  You’re already self-insuring (intentionally or unintentionally) by contributing to your 457 deferred compensation plan.  There’s the real possibility that by the time you reach retirement, you’ll have saved $200,000-$300,000 or more in your deferred comp plan alone.  There’s also a good chance that your home mortgage will be paid off, meaning if you aren’t already in great shape financially, you probably will be.  
             

If you’ve done a good job saving and investing in your 457 plan, and through some research you’ve learned that the average annual cost of a private nursing-home room in 2013 was over $94,000³, then you know that if you only spend a couple of years in a nursing home, you’ll be burning through close to $200,000 of your retirement nest egg. 

            

Realistically, the self-insurance route could work and many of you are taking this path whether you know it or not.  You may even be subconsciously thinking that your 457 plan is your long-term care piggy bank.  The good part is at least you have some type of plan in place because a long-term illness or injury doesn’t wait around to hit you until you’ve saved enough money or bought an insurance policy.

            

If you only spent around $200,000 of your $300,000-$400,000 in savings on long-term care, then it’s realistic to guess that you and your spouse could still be okay financially for the rest of your lives.  It will be a bit of a tightrope act, but you should be able to get by.  After all, with things like deferred comp, IMRF or a similar pension, Social Security, and little to no debt, you have some room for a heavy financial hit. 

           

HOWEVER, you have to be very careful here because the cracks in the foundation of your strategy show when you need more than a couple years of care, and what can happen is your $300,000-$400,000 deferred comp plan or other savings will dry up in a hurry.

            

 Another thing you have to seriously consider is if your spouse gets sick or injured and needs long-term care for a year or two, how much of your deferred comp or other savings are you comfortable spending just on health expenses?  Are you willing to say goodbye to your hard-earned dollars that you’ve sacrificed so much for?  What if you want to pass your wealth onto your kids or grandkids?  Just one extended illness over a year or two means you and your family could be out of money quickly.

             

Also keep in mind that more than 70 percent of you over the age of 65 will need long-term care services at some point in your life¹.  If that doesn’t get you thinking, then there’s really no reason to read on.  If it does, then also consider this: Those of us who reach the age of 65 have a 40 percent chance of entering a nursing home, with a 20 percent chance of staying there for at least five years².  What this means is the chances are pretty good that you’ll need expensive care for some amount of time during your life.

            

If you think your deferred comp plan, IMRF or other pension, and Social Security will be enough to cover living expenses and LTC costs, then you’re probably okay going the self-insurance route.  Just make sure that you...

CAREFULLY THINK ABOUT THESE 2013 AVERAGE ANNUAL NATIONWIDE FIGURES³:

• $94,170: Cost of a private nursing home room 
• $82,855: Cost of a semi-private nursing home room 
• $41,124: Cost at an assisted living facility 
• $29,640: Cost of a home health aide 
• $18,460: Cost of adult daycare       

If you decide to self insure against the potential of paying these costs, just be very careful of a few things:

1)   Your IMRF or other pension and Social Security could get trimmed or more likely, lose ground to inflation

2)   An illness or injury lasting a couple of years or more could wipe out your savings

3)   Illness and injury don’t wait around until you’re prepared financially

If you’ll be self-insuring, be sure you are saving away into your 457 deferred compensation plan or other accounts and you’re doing it efficiently from a tax standpoint (read Attack of the Tax Zombies Parts I & II for more information on tax efficiency and your 457 plan).  IMRF's Voluntary Additional Contributions program is a great way to save efficiently for retirement, but consult with your tax advisor before diving in.  Anyway, self-insuring is a slippery target, but there are things you can do to improve your chances of saving enough money to pay for long-term care.  I’ll be spelling out these strategies when I complete the long-term care guidebook for the public sector and I’ll be passing the information on to you, so stay tuned.

So…How Much Does Long-Term Care Insurance Cost?

The answer to this question depends on so many different things so the only thing I can give you is what the 2014 average cost for men and women is expected to be.

In 2014, the average cost of an LTC policy for a single male age 55 with $164,000 of benefits is expected to be $925 a year.  If the age 55 male adds an option to have his benefit amount rise every year with inflation, then the average cost jumps to  $1,765⁴.        

Women, who received two-thirds of the LTC benefits paid out in 2013, pay higher premiums than men.  A single woman age 55 will pay an average of $1,225 a year for $164,000 of benefits in  2014⁴.

A married couple each buying $164,000 of coverage that rises every year with inflation will pay an average of $3,840  annually⁴.

How does $164,000 of benefits breakdown to daily coverage?  It comes to about $150 a day in paid benefits for three solid years, which is a decent amount of coverage. 

If one of your fears in life is running out of money during retirement, even if you have a pension and hundreds of thousands of dollars in your 457 plan, then it’s time to at least start planning for this possibility.  You can do this by taking a very easy step, which is listing everything that you own then compare it to the average long-term care costs I gave you, and just pay close attention to how you feel.  Are you close to 100% confident that whatever unexpected illness or injury comes your way, you’ll be able to handle the cost of care for more than a year?  How about 2 or 3 years?  What about more than 5 years?  Or do you have even the slightest feeling of uneasiness or worry about long-term care?  If you do, then figure out how you’re going to get your comfort level as close to 100% as possible.  There are a good handful of ways of doing this and I’ll be showing you how in the upcoming months.

P.S. - If you found the content useful, please SHARE this with someone you know in the public sector, whether they are working or retired.  You can share by posting this link on Linkedin or your favorite site.  The information here will get a lot of people to start seriously thinking about potentially devastating long-term care expenses.

¹ 2014 Medicare & You, National Medicare Handbook, Centers for Medicare & Medicaid Services, September 2013

²  U.S. Department of Health and Human Services

³ John Hancock 2013 Cost of Care Survey

⁴ 2014 Long Term Care Insurance Price Index, American Association for Long-Term Care Insurance

Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807    563-326-2064  www.ausdal.com.  Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and perated.

Housing Bubble Interview

THE WALL STREET JOURNAL

Alex Coppola's interview with Sev Meneshian, CFP®

June 20, 2014 10:06 a.m. ET

Picture by Bari Goodman
 

The couple was in their 30s and in debt.  In 2004, they purchased a condo for $200,000 and in 2007, at the height of the real-estate boom, opened a $60,000 home-equity line of credit to buy another property.

When the housing bubble burst a year later, the value of their properties plummeted and they found themselves close to $250,000 in debt. The couple had been working overtime at their respective jobs to keep up with their mortgage and home-equity loan payments. But they both had their hours cut after the economic downturn, and could no longer cover their debts and other expenses. 

In desperation, they reached out to Sev Meneshian, owner of Public Retirement Planners in Evanston, Ill., who has about $1 million under management for 30 families. They told him they might stop making loan payments altogether and stay in their house until the end of the long foreclosure process.

"When they walked in they were like deer in the headlights," Mr. Meneshian recalls.  He could see that the clients were overwhelmed, but he also knew that waiting longer to deal with the debt was the worst thing they could do. He needed to help them take those difficult first steps forward.

"I told them that it was simple: They made a big gamble and lost," Mr. Meneshian says. "Now it was time to focus on what they wanted for their future." 

The clients were grateful to have a guide to help them move ahead, and said they were willing to do whatever it took to rebuild their finances and their lives. The first task: tackling their debt.

Sev Meneshian 

Mr. Meneshian assisted the couple's attorney in negotiating a settlement with their lender by reviewing and organizing the couple's financial statements. They had less than $50,000 in cash and retirement savings, making it clear to both the adviser and the bank that the couple was incapable of repaying their loans.

They settled the $60,000 home-equity line of credit for $6,000 and executed a deed in lieu of foreclosure on their mortgage, handing their home over to the bank. With that, they avoided foreclosure and were released from their debt. 

They turned their attention to the next issue: Finding a new place to live. The couple told Mr. Meneshian that their dream was to own another home, but their damaged credit meant they likely would need to put a minimum of 20% down on any property they wanted to buy in the future. To afford that kind of payment in the next five to seven years, they had to start rebuilding their savings now.

Without a way to increase their income, they needed to save more of what they had. "They had to get very frugal very quickly," says the adviser.  The couple's two largest monthly expenses had been their housing payments and child care for their newborn, which totaled almost $3,500 dollars a month. So Mr. Meneshian suggested a way to reduce both those costs: The couple could rent a house near the husband's parents and sister, who could assist with child care. 

The clients followed his advice and moved into a rental home closer to their family. The move reduced their monthly expenses by $2,000, and they began putting those savings toward a future down payment.

Over the next four years the couple stuck to the budget and their savings plan. They recently became homeowners again--an accomplishment they attribute, in large part, to Mr. Meneshian's help in facing their mistakes and moving past them.

"Financially and emotionally they are back," Mr. Meneshian says. "This couple's story didn't begin well, but because of their willingness to make some serious changes, it thankfully has a much better ending."

P.S. - If you found the content useful, please SHARE this with someone you know in the public sector, whether they are working or retired.  You can share by posting this link on Linkedin or your favorite site.

Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807    563-326-2064  www.ausdal.com.  Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and perated.

 

IMRF will pay you 7.5% (rate can change) on voluntary contributions

The Illinois Municipal Retirement Fund (IMRF) Voluntary Additional Contribution program gives you the opportunity to earn 7.5% (subject to change) on after-tax contributions.  Surprisingly, only a handful of people are aware of this program and even less are taking advantage of it!  How does the program work?  IMRF allows you to make after-tax contributions up to 10% of your earnings.  Then, at the end of the year, whatever your January 1^st balance was, IMRF applies a credit to your account equal to 7.5% of that amount.

Here’s an example of how the interest crediting works:

January 1, 2014 balance: $0

2014 contributions: $1,000

Credit applied on December 31: $0

January 1, 2015 balance: $1,000

2015 contributions: $500

Credit applied on December 31: $75

Here are your 2 options if you stop making contributions:

     1. Leave your VAC on deposit with IMRF, or

     2. Request a refund

Here are your 2 options if you leave your IMRF employer:

     1. Leave your VAC on deposit with IMRF (only if you leave 
your regular 

         IMRF contributions on deposit), or                                                                                                           

     2. Withdraw your VAC (your regular 
contributions can stay)

Here are your 2 options for withdrawals:

     1. Take a lump sum, or

    2. Get a monthly annuity (if your VAC balance is $4,500
 or more)

Important things to consider:

-       You can download IMRF’s VAC enrollment form here

-    The information provided is a condensed version of the VAC program.  Please be complete 

      in your research and review all of the VAC program rules, which can be found here

-        If you withdraw your VAC before 59 ½ (or 55 if leaving an IMRF employer) you may have income tax penalties on earnings unless you rollover the taxable amount to an IRA or similar plan

-       You can get a refund of your VAC at any time, but you have to withdraw all of your VAC—you cannot take a partial refund

-       You have to consider your tax status and determine if making pre-tax or post-tax contributions to a retirement plan is right for you (my post titled “Attack of the Tax Zombies” addresses this)

Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807    563-326-2064  www.ausdal.com.  Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and operated.

Start Cashing In - Chicago Tribune Interview

 ***The content in this post is from a Chicago Tribune article I was interviewed for.  I did not write the content.

Maxing employee retirement benefits

Many Americans 50 or older will need to put saving on a fast track to retire comfortably at age 65.

A great way to do that is to ensure they are seizing every employer-provided opportunity.

According to Rob Austin, director of retirement research at Lincolnshire-based Aon Hewitt, 82 percent of those 50+ take advantage of their employers’ 401k plans.

“So right off the bat, 18 percent are not participating at all,” Austin says. “We see non-savers across every age demographic. Some of that is due to people thinking they can’t afford to save, or not knowing the steps they need to take to participate.

STEP BY STEP

Maximizing retirement savings is entirely possible with a two-step approach. The first step is participating in the 401k plan, Austin says. Step two is to “make sure you’re saving at least robustly enough to qualify for the full employer match,” he adds.

“Eighty percent of those individuals participating in their plans are saving at a rate where they receive the full match from their employers. The pessimistic angle is that one in five — 20 percent — are saving below the level at which they should be saving to receive dollars their employers are offering them.”

Sev Meneshian, president of Public Retirement Planners in Evanston, is one who observes this all too often. “A lot of people don’t take advantage of a 401k match, and it absolutely kills me when I see that,” he says. “Most of the time, if you put in three percent, (employers) will match that.”

Why don’t employees take advantage of what is essentially free money? Some argue they will have to work until they die anyway, so they don’t see the point, Meneshian says.

In other instances, a husband and wife will max out the higher earner’s 401k contribution, and forget about the lower earner’s 401k plan.

That’s a big mistake, Meneshian says. “They’re almost literally leaving money on the table by not taking advantage of that match.”

Other reasons for non-participation is the plan and match aren’t fully explained or the belief they can’t afford to invest.

WATCH FOR FEES

Employees should be watchful for high internal fees on their investment choices within a plan, says Donald B. Cummings, Jr., managing partner with Blue Haven Capital LLC, an investment advisory firm in Geneva.

The higher the fees, the lower the return. Over a decades-long career investing into a 401k, those lower returns could mean reduced retirement savings.

Also remember the lowest fees aren’t always best, Austin says. Compare the fees with the returns earned. “If you pay higher fees, you may be getting higher returns, in which case the fees are worth it,” he reports.

OTHER WAYS TO SAVE

There are other ways for employees to grow their retirement savings. Employer-paid tuition programs are an example. Many looking to quit their jobs at 55 or 60 will want to transition into second careers.

To do that, they may need to pursue a degree. “They can sharpen their skills, meet new people and possibly have (the tuition) be partially or totally free,” Meneshian says.

Corporate discounts are another area too often overlooked.

“Few people take advantage of them,” Meneshian reports. “Through my wife’s employer, we save 10 percent monthly on our cell phone bills.”

One final suggestion is that older wage earners do some belt-tightening as they get nearer 65. Reducing the amount they’re living on by 10 percent can benefit them both in saving for retirement and during retirement.

“If people tighten their belts while they are still working and save a little more, they get used to living on a slightly smaller amount,” Austin says.

 Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807    563-326-2064  www.ausdal.com.  Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and operated.

When Does 5 Minus 3.50 Equal 8?

     There's a great little pizza place near my office in Evanston that I stop in for lunch about once a week.  Recently, I picked up a slice of pizza for $3.50 and was given $1.50 back in change for my $5 bill.  On the face of things, I was given the right amount of change but in reality, the cashier actually handed me about $8.  Keeping in mind the cashier correctly handed me a $1 bill and two quarters, how did I end up with $8?  
     Pre-1965 dimes, quarters, and Kennedy half-dollars have a silver content of 90%.  The content of every dollar made up of these pre-1965 coins is about .715 ounces of silver, so almost three-quarters of an ounce.  If you have four quarters that were made before 1965, even though the face value is $1, a local coin shop will give you about $14 for those quarters (minus a small transaction charge).  At the time of this writing, an ounce of silver is worth about $20, so if you take .715 times $20, you get roughly $14.  What happened at the pizza place was the cashier gave me a $1 bill and two pre-1965 quarters.  Those two quarters weigh about a third of an ounce, and with silver at $20 an ounce, he gave me around $8 in real change back (including the $1 bill)!  
                                                  
     If you want to try making money looking for silver coins, call your local bank and ask them to put aside rolls of Kennedy half-dollars.  You can do this with quarters and dimes too, but half-dollars will obviously save you a lot of time and effort.  The number of coins you want to look through depends on your time and patience, but I think $200-$300 worth of coins is a good start.  Even though the coins you're looking for will be few and far between, it may be worth the time considering it's very possible you could come across a valuable batch of coins.  If you happen to come across 1965-1970 Kennedy half-dollars, put those aside also.  Those are comprised of 40% silver, so even though their silver content is less, $1 in face value is still worth about $7 (at the time of this writing).  Money doesn't grow on trees, but anytime you pay cash for something, take a quick look at the change you get from the cashier; you could get a nice surprise from time to time!

 Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807    563-326-2064  www.ausdal.com.  Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and operated.

    

Celebrate National Biscuit Month

     If you do a simple Web search for "bizarre and unique holidays" you'll be entertained by what's out there.  For example, there's National Welding Month, National Picnic Month (this should not apply to ants), National Sleep Comfort Month, and of course, National Fight the Filthy Fly Month.  For those that are curious about how babies are made, there's Romance Awareness Month.  On a trip through Nashville last year, my wife and I discovered that September is National Biscuit Month and I just had to take this picture:

 

www.PublicRetirementPlanners.com

      After looking through the various holidays out there, I never came across a month dedicated to beneficiaries, so I'm unofficially declaring April as National Beneficiary Month.  I'm doing this as a public service because early on in my career, I happened to take a call from a customer whose husband had just passed away.  The widow was calling in because she thought that she was the beneficiary of her husband's 457 deferred compensation plan.  Sadly, her husband forgot to update his beneficiary designation on the account, and a very large sum of money went to his ex-wife.  As hard as she tried to get access to the money, the last I heard, the court could not help her.  The judge simply could not make assumptions and the woman wound up with nothing.
     Now that your taxes are done, please take some time to make sure your beneficiary designations are up to date.  Accounts such as checking, savings, retirement, life insurance, etc. should be carefully reviewed from time to time.  Although some jurisdictions are forgiving when it comes to unintended beneficiaries, don't leave things to the courts.  Update your beneficiaries so that we can all enjoy National Beneficiary Month.

 Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807    563-326-2064  www.ausdal.com.  Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and operated.

Part II of ATTACK OF THE TAX ZOMBIES!

       

  Part II: Terrifying Income Tax Issues are Lurking for Public Sector Retirees 

www.PublicRetirementPlanners.com

            Your intention during your working years was to save a lot in taxes now and pay less in retirement - not the same or more, but the path to tax zombie land is paved with good intentions.  To help you avoid the tax zombies, there are a few solutions to this potential problem, one of which will be explained.

            The Roth IRA is a type of retirement account that allows you to save after-tax contributions for future expenses, including retirement.  Why is this type of account such a huge benefit for public sector employees?  Because during your working years, you can use tax deductions to lower your overall tax rate, then make after-tax contributions to the Roth IRA.  For example, imagine a married couple; the husband is age fifty and his wife is forty-five.  The husband is a police chief and will retire at the age of sixty.  His wife works in the private sector and will also retire at age sixty.  Currently, the couple earns $150,000, have three dependent children, and carry a mortgage.  Given these facts, it is possible for the couple to bring their effective tax rate under 10%.  Now, fast forward ten years when the mortgage has been paid off, the kids are no longer dependents, and the husband is retired.  With the former police chief now drawing a pension and his wife still working, it is possible that the couple has a lower income, yet are paying taxes at a higher overall rate!  Worse yet, suppose the couple want to put a down payment on a second home or pay for their kids' weddings.  The husband might withdraw money from his 457 plan, which will be taxed at their current, possibly higher income tax rate. 

            Our fictional couple could have avoided an attack by the tax zombies by taking the tax hit at a lower rate and funding a Roth IRA during their working years.  By doing so, they would have paid only, for example, 10% of their income to the IRS.  Then, when it came time to put the down payment on the second home or pay for their kids’ weddings, the distributions from the Roth IRA would have been totally tax free (assuming the couple followed the Roth IRA qualified distribution rules).  An even better approach from a tax standpoint, provided the municipality allowed it, would have been for the husband to make contributions to his 457 plan with a designated Roth account (DRAC).  While the Roth IRA allows $5,500 of contributions, a 457 plan with a DRAC allows contributions of $17,500 (2014 figures are are subject to change). 

            Contributions to a Roth IRA or DRAC during your working years can be one of the most tax-efficient ways of saving for retirement.  Of course, making pre-tax contributions to a 457 plan can also be tax-efficient; it just depends upon your personal circumstances, so I encourage you to review your income tax situation to determine if it's better for you to make pre-tax or post-tax contributions to your retirement plans.
            Even though the example that I provided is fairly straightforward, in reality, there are tons of moving parts involved with tax and retirement strategies, so it would serve your best interests to seek the advice of a competent, experienced financial planner and accountant before deciding on making pre-tax or post-tax contributions to your retirement accounts.


 Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC  5187 Utica Ridge Road Davenport, IA  52807 563-326-2064  www.ausdal.com.  Public Retirement Planners, LLC and Ausdal Financial Partners, Inc . are separately owned and operated.