Annuities and the new fiduciary rule

  In April, 2017, the Department of Labor’s new rules go into effect. Essentially, the regulation will require the financial sector to act as a fiduciary when advising consumers on their retirement plans and accounts. For those who sell annuities, this will fundamentally change their industry. Let me first state that I am not a fan of annuities (whether fixed or variable), and have written several columns over the years warning investors away from these instruments. I have received a great deal of hate mail from the insurance industry as a result. So be it. I think they are expensive, illiquid, the sales materials misleading and not appropriate for most investors. The crux of the matter is that thanks to the DOL ruling, brokers (insurance or otherwise) will no longer be able to sell these investments to retirement plans and accounts based on suitability alone. Next year, in order to sell these products, a broker must prove that their purchase is in the client’s best interest. That is going to require a comprehensive client analysis similar to one that is usually performed by a financial planner. Issues such as whether a broker is giving “prudent” advice (as opposed to simply acceptable advice) will come into play as will loyalty to the client. Most consumers are not aware that the sale of annuities was not governed by Federal suitability rules. Instead, individual states regulated annuity products and what was suitable varied from state to state. Now a whole host of factors will need to be examined. Questions such as the desire of a client for income and how much and...

IRA Distribution Time

Information abounds on why and when you should contribute to a tax-deferred savings plan such as an Individual Retirement Account (IRA). Less is known about what happens in retirement when you have to take money out of these plans. For those who turned 70 ½ years or older in 2016, pay attention, because it’s distribution time. The original idea behind tax-deferred savings was to provide Americans a tax break in order to encourage us to save towards retirement. Individuals could stash away money tax-free while they were working and then take it out again once they retired, when they were presumably earning less and at a lower tax rate. The government determined that once you reached 70 ½ you have until April 1 of the next tax year to take your first distribution. If you are older than that, you only have until the end of the year. Officially, it’s called a Required Minimum Distribution (RMD) and applies to all employee sponsored retirement plans. That includes profit-sharing plans, 401(K) plans, Self Employed Persons IRAs (SEPS), SARSEPS and SIMPLE IRAs, as well as contributory or traditional IRAs. The individual owner of each plan is responsible for computing the RMD and taking it from their accounts. There are stiff IRS penalties (of up to 50% of the total RMD) levied on those who fail to comply. The RMD is calculated by taking the total amount of money and securities in each IRA, or other tax-deferred plan, as of December 31 of the prior year and dividing it by a life expectancy factor that the Internal Revenue Service publishes in tables. The...

Dementia and your portfolio

As more Baby Boomers reach retirement age, few elderly investors are willing to discuss a growing risk to their portfolio. The onset of diminished mental capacity can cause huge losses in your life savings. Many only realize the problem in hindsight. Don’t let that happen to you. The facts are concerning. For example, one in nine people, age 65 or older, suffer from some form of dementia. That skyrockets to one in two people over the age of 85. What’s worse, there are at least 18 different diseases that bring on dementia. Alzheimer’s disease is only the most prevalent of causes. No one can predict who will get this disease, but we do know that the older we get the higher the risk. If you have been reading my columns on estate planning, you know by now that a visit to an estate planning attorney is in order. It is true that most investors with significant assets have already made wills, set up trusts and in other ways made plans to protect their money after death. In many cases, they have also set up a power of attorney to manage their affairs in the event of illness or when they can no longer manage their money themselves. The problem with all of the above is that none of it safe-guards you against an early onset of dementia. Only you can detect it, but even then, your mind can be telling you something different and usually does. It is a serious problem, since one out of seven us have it and may not know it. For investors, especially self-directed investors,...

Women need to invest more

We all know women generally make less than men. On average, female workers make 77 cents for every dollar a man earns doing the same job. If you are a woman of color, or work in some lower paid industries, the gap could be even wider. It is one of the reasons women need to invest and save more, not less. That may sound counter-intuitive. After all, if you are making less, you have less to save and invest. You are absolutely right, but there are important reasons that you still need to save more. One of the main reasons is that the chances are you will live longer than your male counterparts by about five years. That means if you are living on $50,000/year, you will need $250,000 (5 years times $50,000) in additional income and assets simply to stay afloat until you die. And guess how much the gender wage cap will cost you over your career? The Women’s Institute for a Secure Retirement figures that over your lifetime the wage gap will cost you $300,000. Do you see where I’m going here? The numbers don’t add up. Over 150 psychological studies have shown that most women are great at saving, but saving alone won’t save you. The only way I believe women can overcome the wage gap penalty, while living longer, is through investing. But unfortunately, the same studies reveal that women are generally more risk-adverse than men when it comes to investing. There are several reasons for that: everything from lack of confidence to the fear of becoming a homeless bag lady in their old...

Health Savings Accounts are a good idea

Does your employer offer a health savings plan? Many do, especially if your company’s health insurance has a high deductible. If you aren’t taking advantage of it, you should and here’s why. Health Savings Accounts (HSA) were created as a way to help control rising health care costs. An HSA is an account, similar to a personal savings account or an IRA that you can open at work or on your own. Employers consider it a supplement to their high deductible employee health insurance plan (HDHP). How do you know if your health insurance plan qualifies as a high deductible? Usually HDHPs won’t start paying out until after you’ve spent at least $1,300 (individual) or $2,600 for a family in expenses with your own money. HSAs are used to pay for things your employer plan doesn’t cover. Qualified medical expenses such as co-pays, health plan deductibles and other non-insurance covered medical expenses such as dental and vision expenses. You—not your employer or insurance company—own and control the money in your HSA. The government and the health insurers believe that most people will spend their health care dollars more wisely if they’re using their own money. HSAs function somewhat like a 401(K) or 403(B) plan. You can make contributions from your paycheck on a pre-tax basis. Your employer can also match some percentage of your contributions. No matter how much you make, you can open a HSA plan. Even though you may have already maxed out all of your other available tax-deferred savings plans, you can still open a HSA. Health Savings Plans offer a triple tax advantage in an...

Tax breaks for college savings

As the cost of college continues to soar in America, more and more states are offering tax breaks to families who are trying to save as much as they can for their kid’s educational future. The state of Massachusetts is deciding whether or not they will join the list this week. The most commonly used vehicle for that purpose is the ‘qualified tuition plan,’ more commonly known as a 529 Plan. These plans are sponsored by states, state agencies or educational institutions and were originally authorized by Section 529 of the Internal Revenue Service Code. They are tax-free on a federal level and all but eight of the 42 states that have an income tax allow families and individuals to claim a tax deduction on college savings. The idea for savers is that the state offers you two kinds of plans. A plan to prepay for your children’s college educational costs at today’s tuition rates at a certain college. In the other plan, rather than prepaying tuition, you are simply saving for future college costs by contributing to a plan that can be used at any school (not just those in your state) and for all qualified higher education expenses, including room and board. Your plan contributions are invested by professional money managers in what are called age-based portfolios. Some plans also offer a selection of stocks and bonds as well. In the age-based funds, your contributions are tilted at first toward stock funds, which have more risk but also higher growth; and as your child approaches college age, the investments are skewed more toward bonds, which are normally...