Financial Advisory MonthlyPlanning Today for a More Secure Financial Future

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The Impact of Health-Care Costs on Social Security More Social Security income is being spent on health-related costs each year, leaving less available for other retirement expenses.

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Think Outside the Shoe Box When Organizing Financial Records If you’ve ever had trouble finding an important financial document, you know why it’s necessary to keep your financial records organized. Less clutter means less stress, and though you’ll need to commit a bit of time up front to organize your files, you can save time and money over the long term when you can find what you need when you need it.

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Divorce and Retirement Benefits While we all hope our marriages will last forever, statistics tell us that about 50% of marriages in the United States will end in divorce.* And since retirement plan benefits can be one of the most valuable marital assets, it’s important to understand how those benefits may be impacted by a divorce.

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Is there anything I can do to lower my auto insurance bill? Insurance companies base auto insurance rates on a variety of criteria, such as your age, driving record, residence, and even the type of car that you drive (though factors vary from state to state). If you find that you’re paying more than you think you should for auto insurance, there are ways you can lower your premiums.

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What unique challenges do women face in achieving a financially secure retirement? Women tend to spend less time in the workforce and earn less money than men in the same age group. As a result, their retirement plan balances, Social Security benefits, and pension benefits are often lower. In addition, women generally live longer than men, so they typically have to stretch their retirement savings and benefits over a longer period of time.

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Divorce and Retirement Benefits

While we all hope our marriages will last forever, statistics tell us that about 50% of marriages in the United States will end in divorce.* And since retirement plan benefits are frequently among the most valuable marital assets, it’s important to understand how those benefits may be impacted by a divorce.

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Identify all retirement assets

Like houses, cars, and bank accounts, retirement assets can be divided at the time of a divorce. The laws of your particular state will define just which retirement benefits are marital assets (or community property in community property states) that are subject to division.

“Retirement assets” is a broad term that covers several different account and plan types. You and your spouse may have one or more IRAs, and they may be held by various financial institutions. One or both of you may also be entitled to retirement benefits from past and current employers.

Employer retirement plans come in various forms. Most are “qualified plans,” which are entitled to special tax benefits under federal tax laws. These can be “defined contribution” plans like 401(k), 403(b), and 457(b) plans–you own an individual account that contains a specific dollar amount of benefits. Or they can be “defined benefit” plans, which pay a monthly pension benefit (currently or sometime in the future) based on your salary and number of years of service at retirement, and other factors.

Dividing marital assets

Once the retirement assets, along with all other marital assets, have been identified, you and your spouse can begin negotiating a property settlement agreement (or seek the assistance of the courts). In some cases, one spouse may agree to waive any rights to all or some of the other spouse’s retirement benefits in exchange for other marital assets (for example, the home). This strategy may be appropriate where the retirement assets consist solely of a 401(k)-like plan, where the value of the benefit is clear–generally the account balance–so trading for other marital assets is fairly straightforward.

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On the other hand, trading defined benefit pension benefits for other marital assets should be done only if you’re certain you know the full value of those benefits. This may require the assistance of an actuary, who can determine the present value of your spouse’s future benefits. And remember that you may be giving up valuable retirement benefits payable for your lifetime, so before you give these up, make sure you’ll have other adequate resources available to you at retirement.

Qualified plans–QDROs

If qualified retirement benefits (e.g., a 401(k)) must be divided, the procedure is to submit a qualified domestic relations order, or QDRO, to the retirement plan administrator. A QDRO is a court judgment, decree, or order establishing the marital property rights of a spouse, former spouse, child, or dependent of a participant in a qualified retirement plan.

There are a number of ways that plan benefits can be divided pursuant to a QDRO. For example, you could be awarded all or part of your spouse’s 401(k) plan benefit as of a certain date, or all or part of your spouse’s pension plan benefit. It’s very important to hire an attorney who has experience negotiating and drafting QDROs–especially for defined benefit plans where the QDRO may need to address such items as survivor benefits, benefits earned after the divorce, plan subsidies, COLAs, and other complex issues. (For example, a QDRO may provide that you’ll be treated as the surviving spouse for survivor annuity purposes, even if your spouse subsequently remarries.)

You’re responsible for any taxes on benefits awarded to you pursuant to a QDRO (although the 10% early distribution penalty tax will not apply). You may be able to roll certain distributions into your IRA to defer taxes.

IRAs

The QDRO rules don’t apply to IRAs or nonqualified plans. The extent to which IRAs are marital property, subject to division, is a matter of state law. However, federal law does contain rules that govern the taxation of IRA benefits distributed pursuant to a divorce. The general rule is that the IRA owner-spouse must pay tax on any IRA distributions. However, if the IRA benefits are paid to a spouse or former spouse’s IRA pursuant to a divorce decree, then the IRA owner spouse will not be responsible for any taxes on the amount distributed. Instead, the recipient spouse must pay any taxes due when payments are received from the IRA.

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Women can face special challenges when saving for retirement. Generally speaking, women tend to spend less time in the workforce, and when they do work, they typically earn less than men in comparable jobs. As a result, women’s retirement plan balances, Social Security benefits, and pension benefits are often lower than their male counterparts. In addition, women generally live longer than men, so they typically have to stretch their retirement savings and benefits over a longer period of time.

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What can you do to maximize your chances of achieving a financially secure retirement? Start saving as soon as possible. The best time to start saving for retirement is in your 20s; the second best time is right now. At every stage of your life, there will always be other financial needs competing with the need to save for retirement. Don’t make the mistake of assuming it will be easier to save for retirement in 5, 10, or 15 years. It won’t. Start small, with whatever amount you can afford, and contribute regularly, adding to your contribution when you can.

If you’re in the workforce, an employer retirement plan like a 401(k) plan can be a convenient, no hassle way to get started and build your retirement nest egg–contributions are deducted automatically from your paycheck and may qualify you for employer matching funds. If you’re out of the workforce and married, you can contribute to an IRA (traditional or Roth), provided your spouse earns enough to cover the contributions.

In many cases, your job is your lifeline to being able to save for retirement. Before leaving the workforce for family obligations, consider exploring with your employer the possibility of flexible work arrangements, including telecommuting and part-time work, that might enable you to continue to earn a paycheck as you balance your family obligations.

Start planning now by taking the following steps: (1) set a retirement savings goal; (2) start saving as much as you can on a regular basis, and track your progress at least twice per year; and (3) find out how much you can expect to receive from Social Security at www.socialsecurity.gov.

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Yes. Insurance companies base auto insurance rates on a variety of criteria, such as your age, driving record, residence, and even the type of car that you drive (though factors vary from state to state). If you find that you’re paying more than you think you should for auto insurance, there are ways you can lower your premiums.

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  • Shop around: Auto insurance rates vary from company to company, sometimes significantly. As a result, a good way to save money is to look into whether another insurer offers the same coverage at a lower rate.
  • Consider raising your deductible: For the most part, the higher your deductible, the lower your premiums. Before you raise your deductible, though, you’ll want to be sure you can cover the out-of-pocket expense should an accident occur.
  • Eliminate unnecessary coverages: For example, if you have an older car, it may make sense to drop your collision and comprehensive coverage since a claim paid by your insurance company may be minimal and might not exceed what you’d pay in premiums and deductibles. Or, maybe you are paying your insurer for roadside assistance coverage that you already have through a separate road and travel club membership.
  • Consider changing the type of car you drive: The type of car that you drive directly impacts what you pay for insurance. Typically, newer, higher-priced cars and sport/high-performance vehicles cost more to insure than used/lower-end models.
  • Check for discounts with your insurer: Depending on your circumstances, you may be eligible for one or more auto insurance discounts. For example, your insurer might provide discounts to those with a safe driving record or to those who insure more than one car with them.

One final note: don’t be tempted to save money on your auto insurance by lowering your liability coverage limits (although state minimums do apply). Having less than adequate amounts of liability coverage can expose you personally to claims for other people’s losses–which in the case of a serious accident, can be significant.

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Think Outside the Shoe Box When Organizing Financial Records

If you’ve ever had trouble finding an important financial document, you know why it’s necessary to keep your financial records organized. Less clutter means less stress, and though you’ll need to commit a bit of time up front to organize your files, you can save time and money over the long term when you can find what you need when you need it.

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What records do you need to keep?

If you keep paperwork because you “might need it someday,” your files are likely overflowing with nonessential documents. One key to organizing your financial records is to ask yourself “Why do I need to keep this?” Documents that you should retain are likely to be those that are related to tax returns, legal contracts, insurance claims, and proof of identity. On the other hand, documents that you can easily duplicate elsewhere are good candidates for the shredder. For example, if you bank online and can view or print copies of your monthly statements and cleared checks, you may not need paper copies of the same information.

How long should you keep them?

A good rule of thumb is to keep financial records only as long as necessary. For example, you may want to keep ATM receipts only temporarily, until you’ve reconciled them with your bank statement. If a document provides legal support and/or is hard to replace, you’ll want to keep it for a longer period or even indefinitely.

Records that you may want to keep for a year or less include:

  • Bank or credit union statements
  • Credit card statements
  • Utility bills
  • Annual insurance policies

Records that you may want to keep for more than a year include:

  • Tax returns and supporting documentation
  • Mortgage contracts and supporting documents
  • Receipts for home improvements
  • Property appraisals
  • Annual retirement and investment statements
  • Receipts for major purchases

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Records that you may want to keep indefinitely include:

  • Birth, death, and marriage certificates
  • Adoption papers
  • Citizenship papers
  • Military discharge papers
  • Social Security card

Of course, this list is not all-inclusive and these are just broad guidelines; you may have a good reason for keeping some records for a shorter or longer period of time.

Where should you keep them?

Where you should keep your records and documents depends on how easily you want to be able to access them, how long you plan to keep them, and how many records you have. A simple set of labeled folders in a file cabinet works fine for many people, but electronic storage is another option if space is tight.

For example, one easy way to cut down on clutter and still keep everything you need is to store some of your files on your computer. You can save copies of online documents or purchase a scanner that you can use to convert your documents to electronic form. But make sure you keep backup copies on a portable storage drive or hard drive, and make sure that your files are secure.

Another option to consider is cloud storage. Despite its lofty name, cloud storage is simply an online backup service that allows you to upload and store your files over the Internet, giving you easy access to information without the clutter. Information you upload is encrypted for security. If you’re interested, look for a company with a reliable reputation that offers automatic backup and good technical support, at a reasonable subscription cost.

Staying organized

Keeping your financial records in order can be even more challenging than organizing them in the first place. One easy way to prevent paperwork from piling up is to remember the phrase “out with the old, in with the new.” For example, when you get this year’s auto policy, discard last year’s. When you get an annual investment statement, discard the monthly or quarterly statements you’ve been keeping. It’s a good idea to do a sweep of your files at least once a year to keep your filing system on track (doing this at the same time each year may be helpful).

But don’t just throw your financial paperwork in the trash. To protect sensitive information, invest in a good quality shredder that will destroy any document that contains account numbers, Social Security numbers, or other personal information.

Whatever system you choose, keep it simple. You’ll be much more likely to keep your records organized if your system is easy to follow.

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For many retirees and their families, Social Security provides a dependable source of income. In fact, for the majority of retirees, Social Security accounts for at least half of their income (Source: Fast Facts & Figures About Social Security, 2013). However, more of that income is being spent on health-related costs each year, leaving less available for other retirement expenses.

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The importance of Social Security

Social Security is important because it provides a retirement income you can’t outlive. In addition, benefits are available for your spouse based on your benefit amount during your lifetime, and at your death in the form of survivor’s benefits. And, these benefits typically are adjusted for inflation (but not always; there was no cost-of-living increase for the years 2010 and 2011). That’s why for many people, Social Security is an especially important source of retirement income.

Rising health-care costs

You might assume that when you reach age 65, Medicare will cover most of your health-care costs. But in reality, Medicare pays for only a portion of the cost for most health-care services, leaving a potentially large amount of uninsured medical expenses.

How much you’ll ultimately spend on health care generally depends on when you retire, how long you live, your health status, and the cost of medical care in your area. Nevertheless, insurance premiums for Medicare Part B (doctor’s visits) and Part D (drug benefit), along with Medigap insurance, could cost hundreds of dollars each month for a married couple. In addition, there are co-pays and deductibles to consider (e.g., after paying the first $147 in Part B expenses per year, you pay 20% of the Medicare-approved amount for services thereafter). Your out-of-pocket yearly costs for medical care, medications, and insurance could easily exceed thousands of dollars.

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Medicare’s impact on Social Security

Most people age 65 and older receive Medicare. Part A is generally free, but Parts B and D have monthly premiums. The Part B premium generally is deducted from your Social Security check, while Part D has several payment alternatives. In 2013, the premium for Part B was $104.90 per month. The cost for Part D coverage varies, but usually averages between $30 and $60 per month (unless participants qualify for low-income assistance). Part B premiums have increased each year and are expected to continue to do so, while Part D premiums vary by plan, benefits provided, deductibles, and coinsurance amounts. And, if you enroll late for either Part B or D, your cost may be permanently increased.

In addition, Medicare Parts B and D are means tested, meaning that if your income exceeds a predetermined income cap, a surcharge is added to the basic premium. For example, an individual with a modified adjusted gross income between $85,000 and $170,000 may pay an additional 40% for Part B and an additional $11.60 per month for Part D.

Note:   Part C, Medicare Advantage plans, are offered by private companies that contract with Medicare to provide you with all your Part A and Part B benefits, often including drug coverage. While the premiums for these plans are not subtracted from Social Security income, they are increasing annually as well.

The bottom line

The combination of rising Medicare premiums and out-of-pocket health-care costs can use up more of your fixed income, such as Social Security. As a result, you may need to spend more of your retirement savings than you expected for health-related costs, leaving you unable to afford large, unanticipated expenses. Depending on your circumstances, spending more on health-care costs, including Medicare, may leave you with less available for other everyday expenditures and reduce your nest egg, which can impact the quality of your retirement.

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