Fundamentals of Finance

By Michael Lynch CFP®

We Americans, as a collective, underperform in our financial lives. Don’t get me wrong, I’m not saying we’re bums.

Quite the contrary. We’ve created the world’s most dynamic economy; we produce life-enhancing innovations at a pace that has never been matched.

We work hard, we work smart, we work creatively, and we are, in general, well rewarded for it.

In 2022, on average, Americans over the age of 15 earned just under $60,000 annually, according to the U.S. Census Bureau. Those who worked all year, full-time, pulled in just under $85,000. (U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements, 2022).

It’s Not What You Earn, It’s What You Keep

Yet I can’t help wondering why, for all the wealth produced, for all the income that flows through our checking accounts, why isn’t more retained by the average American household?

In 2022, half of American households had net worths under $193,000, according to the Federal Reserve Board’s 2022 Survey of Consumer Finances. The Fed’s survey also documents that at age 65, half of Americans have less than $200,000 invested in retirement plans. So, after a lifetime of working, half of us manage to squirrel away less than four years of income.

Money Misconceptions

I am convinced that our under-accumulation of wealth stems from a fundamental confusion about what constitutes sound financial management, a confusion of good business finance with good personal finance.

We’ve all heard the phrase, it takes money to make money. In business and investment this is certainly the case. We must spend money before any will come back to us.

The basic paradigm is the agricultural model, which provided humans with our first movement into stable, self-sustaining societies. In order to earn money farming, a person must acquire money, either through savings or loans, purchase land and seed, then work the land, rely on a bit of luck that no aberrant weather or other catastrophe wipes out the crop, then work to harvest, sell the produce, and pay off the loans. It is only then that the farmer earns a profit and starts the cycle again.

The bottom line: in business, we must spend money before we can have it to spend. Failure to spend will doom any business to stagnation and ultimate failure. Being too cheap will end an enterprise.

Our Households Aren’t Farms

The fundamentals of personal finance, however, are the opposite. In personal finance we should wait until we have the money to spend it. We must earn, set aside 10 to 20 percent, and let the pile grow. It is only after the pile has grown that the prudent person indulges in spending to upgrade one’s lifestyle.

This pay yourself first rule is not new and certainly not revolutionary. It was first put to print in 1926 by George S. Clason in his classic parable, “The Richest Man in Babylon.” Yet far too few Americans accept Clason’s advice.

Instead, we tend to justify today’s consumption with expectations of future earning increases. Many of us actually use the business paradigm to rationalize spending on the personal side.  We categorize personal consumption as an investment in business.

Can Old Cars Lead to Riches?

I may, for example, have a Toyota Camry that, while a decade old, is paid off, running fine and inexpensive to maintain. Not having a car payment of $500 enables me to invest an equivalent amount in a taxable account or far more in a retirement account, as I don’t have to pay taxes.

I want a Lexus. I don’t have the money saved. I will have to take a loan. No problem. I tell myself it is important for me to have a nice car for business appearances. Just as a dentist must have teeth, a financial advisor must drive an upper-end automobile.

I’ve rationalized personal consumption as a business expense and diminished my future net worth--my ability to achieve real financial freedom--in the process.  I could do the same with any number of nice-to-have lifestyle items, including a larger house, a vacation home, a country club membership, a boat, season tickets for the Yankees and Red Sox (I have clients who are fans of both teams,) private schools for the children, and expensive suits, just to name a few.

It’s Always a Judgment Call

Now some of these expenditures may in fact improve my bottom line. Dentists do need teeth and I can’t live in a tent and ride a bicycle to appointments with clients in second-hand blue jeans. Some purchases, such as vacation homes, may be a great investment in family time. But each dollar must come from somewhere and I can justify almost any purchase as an investment, when, in fact, many will simply be lifestyle-enhancing consumption.

Ultimately, there is no objective measure that can neatly pinpoint the optimal spot between the bicycle and the Rolls Royce or the second-hand jeans and the five-figure suit where I should place my marker. The principles, however, are useful. They provide a gut check as well as the ability for us to understand our spending habits, our choices, and the consequences of these choices. Most important, they allow us to be honest with ourselves and make smart money choices.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Ft Myers, FL, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial education courses for leading organizations. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Michael Lynch is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484. Tel: 203-513-6000

Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.  CRN202706-6735304

Back to School

By Michael Lynch

It’s back to school time. Your little charges may be getting dropped off at preschool, boarding a bus for elementary school, or driving themselves to high school. Regardless, at some point in the not-so-distant future they may be heading off to college. That carries a financial wallop. It’s never too early to start planning.

The price tag hanging on college educations can appear staggering. Private colleges average $39,400 for just tuition, fees, and books. Living is extra. Throw that in for the full experience, and the sticker price jumps to $57,570, according to the College Board.[1] The average price of a new car, by way of comparison, is $48,644 according to Cox Automotive.[2]

Here in Connecticut, UConn will set a student back just over $35,000 a year for the full package of tuition, room, board, and books.[3] Even Connecticut’s two-year colleges cost more than $5,000 a year. That’s before you purchase a single book.[4]

The price, however, is often well worth it. According to the U.S. Bureau of Labor Statistics, bachelor’s degree holders earn an average two-thirds more than people with only a high school diploma.[5]

But how to pay? Like all things financial, there is no one right answer for everyone but a variety of options and strategies to investigate and pursue.

One is waiting and paying out of pocket or relying on aid. This is the most dangerous, as most aid arrives in the form of loans that will likely need to be paid back with some interest.

Some sort of pre-funding college remains prudent. There are many good options available, ranging from traditional college accounts to less traditional strategies. Most will employ some form of tax deferral.

The traditional college accounts are now state-sponsored 529 plans. Every state sponsors at least one. People can use any state plan, but up-front state income tax advantages often require the use of a resident state’s plan. In Connecticut and New York, for example, state residents get state income tax deductions for contributions to state plans for up to $10,000 for married couples.

Section 529 plans work like Roth IRAs for higher education. Contributions are made with after-tax money. The money can be invested in an array of options, depending on the state plan. It grows tax-deferred. When it’s spent on qualified higher education expenses, the gains will not be taxed.[6]

There are also prepaid tuition plans. These allow people to lock in today’s tuition rates, effectively hedging against inflation. A downside is that they tend to be state- or school-specific.

Other options include Roth IRAs, traditional IRAs, cash value life insurance, taxable savings and investment accounts, and uniform gift to minor accounts. Each of these can be appropriate for families depending on their unique circumstances.

A Roth IRA, for example, might be a good choice for a family that wants to maintain a favorable position for needs-based financial aid and whose adults are at or near retirement age when a child hits college. For families with younger parents, a cash value life insurance policy may provide similar benefits. For a family that has significant retirement assets but little non-retirement savings, tapping an IRA penalty-free for qualified higher education expenses can make sense.

And don’t forget grandparents. Anyone, including these very special people, can help with the college bill. If they pay directly to the school, it doesn’t even count as an annual gift for tax purposes.

Education is more valuable than ever for many Americans—and more costly too. Fortunately, our complex financial and tax system offers a variety of effective options for accumulating resources to pay tuition and other expenses. There is no one best way. There are a variety of tools that can be used to build a plan to suit a family’s unique needs. Like most things financial, the best strategy is to get started as early as possible. Contact us to get started.  We’ll help simplify the options to produce some big results. Time, combined with prudent tax advantaged investing, can make a little money stretch a long way[AR1] .

_________________________________________________

[1] Average Cost of College, Bankrate.com, https://www.bankrate.com/loans/student-loans/average-cost-of-college/ Accessed 8/25/2024. Source data from the College Board.

[2] Cox Automotive, New-Vehicle Prices Hold Steady in June, as price pressures continue to steer market, according to Kelly Blue Book Estimates, Wednesday, July 10, 2024. https://www.coxautoinc.com/market-insights/june-2024-atp-report/#:~:text=ATLANTA%2C%20July%2010%2C%202024%20%E2%80%93,in%20the%20U.S.%20was%20%2448%2C644. Accessed August 25, 2024.

[3] University of Connecticut website. https://financialaid.uconn.edu/cost/ Accessed August, 25, 2024.

[4] Data from Connecticut community colleges.  https://ctstate.edu/admissions-registration/investing-in-a-ct-state-education Accessed August 25, 2024.

[5] “Education Pays,” U.S. Bureau of Labor Statistics, https://www.bls.gov/emp/chart-unemployment-earnings-education.htm Accessed August 25, 2024.

[6] 529 plans are established by states or eligible educational institutions under IRC Section 529 as “qualified tuition programs.” There is no guarantee offered by the issuing municipality or any government agency. You should consider the potential benefits (if any) that your own state’s plan (if available) offers to residents prior to considering another state’s plan. There may be tax benefits to plans offered by your resident state. Non-qualified withdrawals from a 529 plan are subject to a 10% federal tax penalty and current income tax and may also be subject to state tax penalties. As with all tax-related decisions, consult with your tax advisor.

CRN202511-7104045

Summer's Going, Going, Gone!!!!!

By Michael W Lynch

As hard as it is to believe and accept, summer will soon be on its way out. I hope each of you is making the most of it. Hello football, falling leaves, and, for those working for large institutions, open enrollment for benefit elections. It’s this once-a-year opportunity on which I will now focus.

Employees of large institutions, government, corporations, and non-profits such as hospital chains typically enjoy a period in the fall of each year in which they can adjust their benefit elections, including health care, life and disability insurance coverage, and often ancillary benefits such as prepaid legal plans. The window is often tight—ten days for example—so it’s prudent to be prepared for the offering when it comes. These benefits are a key component of most people’s financial plans and it’s important to optimize them. (Our friends who are retired get a typically later and usually longer open enrollment period for Medicare, from October 15th to December 7th.)

Healthy Choices

Health coverage is traditionally the dominant benefit elected in open enrollment. The coverages and costs of the plans offered are compared in side-by-side tables. In recent years, high-deductible plans with health savings accounts (HSAs) have increasingly appeared on the scene. These can be confusing, as they present a higher potential initial out-of-pocket cost, but also contain a total stop-loss on payments, potentially an employer cash contribution to the HSA, and then the ability to accumulate money completely tax-free for spending on health care in the current or future years. As a financial planner, I value these flexible tools and have written about them. You can find my article here: Tax Me Never, Yeah Baby! It does require some analysis to know if such a plan will fit a person. We are happy to help you with this. Contact Sarah at my office to schedule a call at 203-513-6058 or sarah.rizk@barnumfg.com.

Who Doesn’t Like Tax-Free Money?

One way to spend $1 for every $1 you earn is to funnel it through a flexible spending account for health care. This is typically “use it or lose it,” so you need to figure out how much you are likely to spend on deductibles, copays, and other costs associated with the account. The IRS offers a splendid publication that details all that can be purchased under the umbrella of health care. Typically, you will elect either an HSA or a flexible spending account. The former accompanies a high-deductible plan, and the money will remain in plan from year to year. The latter sits beside a more traditional health care plan, and the money is “use it or lose it.”

Another tax break is available to those with children who need day care. A dependent spending account, which allowed up to $5,000 in contributions in 2021, will let you purchase child care tax-free. It can also apply to a disabled spouse who needs attention or even to dependent parents. At a 35 percent marginal tax rate, moving $5,000 this way saves you $2,700 in income, Social Security, and Medicare taxes.

Protect the Money Machine

Income if You Can’t Go to Work

Disability income Insurance is increasingly becoming an option to elect at open enrollment. With disability, as with life, you should conduct a thorough needs analysis to determine how much after-tax income your family needs if you can’t work. Insurance is always an expense, so you want to make sure you obtain the proper amount. Here too we can help. Contact Sarah at my office to schedule a call, 203-513-6058 or sarah.rizk@barnumfg.com. Plans vary widely, but one thing they all have in common is that they won’t replace 100 percent of your income. Given that most people live on all their income—when essential savings are included—I typically recommend taking as much as possible. Your needs analysis will determine if this is true for you. Exceptions to this include people who don’t need their full income to support themselves and sometimes workers past age 65 for whom the group coverage would pay out for only a few months or years. The second election that is increasingly common is whether to have the benefit paid by your employer or have you pay it or pay tax on the premium. Counterintuitively, you usually should pay it or have the employer’s payment count as taxable income to you. Here’s why. If you pay the premium or have it included in taxable compensation—a small amount--the benefit,  which is large, is free of income tax. If your company does not pass the premium through to you as taxable compensation, the benefit is taxable. Finally, if your group plan is insufficient to meet your needs—or unusually expensive—you should look to the private marketplace to secure an individually owned policy.

Money if You Don’t Return from Work

Don’t neglect your potential need for life insurance. Make sure you’re not paying too much for it. Most employers offer some group term life insurance. It’s typically easy to enroll and, when you’re young, it’s very inexpensive. There is a catch, however, which is that the cost increases as you age, and you may lose it or its low price when you leave the company or experience a long-term disability. Now is the time to determine two things. First, how much insurance do you need and for how long do you expect to need it? Ask yourself what happens to the ones I love financially if I’m gone. Second, is it more cost-effective over the expected time I need insurance to acquire it through my employer, the private marketplace, or a combination? If you’re in good health and you expect to need insurance into your 50s and 60s, the private marketplace is usually substantially less expensive. It also provides you with ownership and control of the valuable policy. If you need help with the analysis, contact Sarah Rizk at 203-513-6058 or sarah.rizk@barnumfg.com and our team will be happy to assist.

Bells and Whistles

Your company may offer other valuable benefits in addition to these core offerings. Common free offerings include employee assistance plans that provide professional help in tough times. A potentially valuable offering I’ve used myself in the past is group legal plans—I think of them as HMOs for lawyers—that provide access to pre-paid legal services based on a low payroll contribution. Common uses for this include real estate transactions, wills and estate planning, and even traffic violations. Be sure to read carefully the offering booklet your employer provides. You never know when you may need to rely on some of the services. They are part of your overall compensation package.

Don’t Delay

Life’s busy and open enrollment comes and goes quicky. The default is typically last year’s elections, although some benefits may expire unless renewed. The status quo may serve your needs or it may not. Do yourself and your family a favor and take the time to thoroughly analyze your employer’s offerings and compare them to private alternatives. It may just make a big financial difference someday. As always, we are here to help.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT, and the author of three books: It’s All About The Income: A Simple System for a Big Retirement (2022), Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and most recently Taking Care of Your Future: The Yale New Haven Nurse’s Guide to Retirement (2024). You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032. CRN202511-6990081

Pay a Little Now or a Lot Later

Your Worst Accounts for Taxes While Working May Be Your Best in Retirement 

By Michael Lynch CFP® 

I’m gonna tell you something few others will. It’ll cost you a bit today, perhaps, but like a habit of taking regular trips to the gym in your 30s and 40s, it’ll pay off big in your 60s and beyond. 

Here goes: Open and fund an account, ideally based on well-managed equity mutual funds, that will give you an annual tax bill. 

Get annoyed each year when that 1099-Div tax form forces you to pay taxes on reinvested dividends and distributed capital gains that you didn’t need. 

You’ll likely never sell an investment to pay the tax.  

This will set you free to spend big in retirement. 

Okay, Not Really Advice for You 

This of course isn’t advice specific to you. I don’t know you. It’s not good for everyone, just millions of Americans. Stick with me to determine if you’re one of them. 

This strategy of taking a steady stream of predictably manageable pain may help you avoid a worse fate in the future. It’s not unlike those strategies employed by nervous and realistic aristocracy back in the day. Recall from your high school learning how nervous royalty, with lots of jealous enemies, perhaps even a spouse who wanted all the money and none of the wife or husband, would regularly ingest small doses of the preferred poisons to build up immunity.  When the terrible day came, they’d survive and be able to go about their business. 

So too is it with income taxes and the business of retirement. 

In retirement, this business is likely to be fun trips, new cars, and other things that require substantial, non-budgeted cash outlays. And you can be certain that someone will try to poison you: your Uncle Sam with taxes on your IRAs and other pre-tax retirement plans. 

The Courtiers Often Mislead 

Full disclosure: I’m approaching 55 and I’ve been intensely interested in personal finance since my early 20s. My earliest memories up through today focus on tax deferral and tax savings, stressed both in the personal financial press and by representatives of companies offering products that provide tax deferral. (We all know that the insurance industry makes a huge deal about the tax benefits of tax-deferred, non-qualified annuities and cash value life insurance.) 

The basic approach recommended involves some variation of accumulating a cash reserve and then contributing the maximum to pre-tax retirement accounts, and then filling up Roth IRA or tax-favorable insurance-based products prior to investing in taxable accounts. The latter are often presented as problematic because of the annual tax bill they foist on us. 

Therefore, the standard advice goes, if you must use taxable accounts--and many middle-class Americans don’t need to, since retirement plan limits are high--use tax-efficient exchange traded funds (ETFs) to avoid annual tax hits. These tend to preserve the original cost basis and don’t pass along annual capital gains distributions. 

I’m not saying this advice is always wrong. If you’re in the top tax brackets today and expect at least a one-tick step down in retirement, fill up the pre-tax accounts. But if you’re in the top tax brackets, you’ll need to invest more than these accounts allow anyway, so chances are that you’re already using non-qualified accounts. 

And there’s certainly a role for low-taxed basis accounts for many who are not in the top brackets. These are great tools for some tasks. It’s just not providing you with tax-free income. 

Die with them and, under current law, you’ll avoid paying on the gains, and not just because you’re gone. They’ll “step up in basis,” meaning the price of the securities on the day you pass becomes the new tax basis. You can’t spend it tax-free, but your heirs can. 

If you want to avoid the tax while alive, low-basis stock and ETFs are fantastic assets to donate to charities, which can sell even the most appreciated securities without incurring a tax. 

Don’t Get Stuck in the Middle 

My focus here is on the middle-class millionaires. You know who you are. You live on modest amounts of money each year but have accumulated substantial retirement accounts. The biggest frustration I see my middle-class millionaire financial planning clients experiencing is not having too few funds in retirement accounts. Far from it: they become frustrated by having too much money parked there. 

In other words, you’re constantly told that you may run out of money when in fact you’re far more likely to be an involuntary generous funder of the U.S. government. 

Sure, your pre-tax retirement accounts provided pleasure on the way in, but that was then and this is now.  On the way out it’s all income tax pain, combined with other indignities like being forced to pay more for Medicare Parts B and D. 

The solution, it turns out, is a properly sized, good old-fashioned non-qualified investment account filled with mutual funds that dish out income, dividends, and capital gains distributions each year. You’ll pay some extra tax each year, which is a cost for sure. But the benefit is that every dollar of taxable distribution, of which you pay only a fraction in taxes, increases your taxable cost basis by a dollar. When it comes time to use the money—such as spending it on fun things like vacations for the entire family or cash purchases of cars and trucks--it’ll come out practically tax-free. 

The $64,000 Car 

Let me put this in perspective. Let’s say you want to withdraw $50,000 from an account for a one-time expense, an example I recently had with a client. The purchase could be a new car or perhaps a beach house vacation for the extended family. 

If this money must come from an IRA or other pre-tax retirement plan, you’ll have to take out just over $64,000 to spend the $50K. That’s only for the feds and assumes you’re lucky enough to stay in the 22 percent tax bracket and it does not increase, as scheduled under current law, to 25 percent in 2026. 

Alternatively, if the money is in a bank account, it’s dollar for dollar. You take out $50,000 to spend the $50,000. The problem here is that until just recently, there was no growth for 20 years. So, you will be spending depreciated dollars. 

If you could take this money from an account that had doubled in value and in which 90 percent of gains came from annual distributions, you would likely pay, at most, just 15 percent capital gains tax on this gain and nothing on your contribution. In this example, that would be roughly $378 in tax. 

That’s right. Your tax as a percent of the money out of your account is less than 1 percent! This is Roth-like treatment on the way out and you’re smiling all the way to the dealership or travel agent. 

Speaking of Roths, you probably have Roth IRAs available to you, either by direct or back-door contributions, and should likely use them aggressively. (I say probably and likely because, well, I don’t know you.) But there’s only so much you can contribute to these accounts. If you have an employer plan, the limits are now high.  But this does not apply to everyone. 

What About Low Tax Basis? 

So, we’re back to taxable investment accounts. With the rise of ETFs in the last 20 years, investment advisors like me have been busy building tax-efficient accounts. This involves minimizing capital gains distributions and sometimes even dividends so that year to year the tax bill is minimal. 

This keeps the cost basis low, however, so the more you win with the investment the more you’ll lose to taxes when you sell it. 

In other words, the more gains you have here, the more these accounts resemble IRAs, for which people have a natural aversion to using the money. 

Cure the Parking Disease 

I call it the parking disease, a term I developed living in San Francisco’s Mission District in my twenties. The trap is simple. You get a car to be free and do such things as shop more efficiently, visit friends, and leave town on long weekends. The problem is that you can’t use it.  Street parking spots are few and far between and garages don’t exist, aren’t convenient, or are unaffordable. Therefore, once you secure a free parking spot, you don’t dare use the car as you fear you’ll have no place to put in upon your return home. 

In my San Francisco days, I solved this by using my motorcycle to save my spot until I returned. With taxes and investments, the solution is the old-fashioned mutual funds that are forced to distribute dividends and gains each year. 

Pay as You Go May Be the Way to Go 

Two things may both be true. You can hate something today and love it tomorrow. That’s the case with taxable accounts. 

I also know that although having 100 percent of the best thing is ideal—like, let’s say, owning only seven stocks in 2023—it’s an impossible goal. The next best thing is to be allocated across a range of options, some of which will always be suboptimal at any given time. 

When it comes to investing for personal finance, this is true for asset classes, the individual securities in these classes, and the accounts in which these asset classes and securities are held. 

Although I don’t love rules of thumb, they are often better than conventional wisdom, at least if they are a bit counterintuitive and heterodox. So, here’s a structure to examine and determine whether it’s a fit for you.  

• Fill your cash reserve to avoid any credit card interest ever. 
   
   

• Fund pre-tax accounts at levels that, when combined with Social Security and any expected pension, will provide for a base of income at retirement that at least fills most of the 12 percent tax bracket. 
   
   

• Fund Roth IRAs and perhaps even Roth 401ks and after-tax Roth conversions, Mega-Back Door Roths, in employer plans. 
   
   

• Fund taxable investment accounts with a split between tax-efficient ETFs, for use with charitable giving and estate planning, and tax-inefficient mutual funds. 

The latter will prevent a potentially debilitating case of the parking disease in retirement. After all, what good is even the safest and most comfortable car if you won’t drive it? 

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Ft Myers, FL, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032. 

Michael Lynch is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. [link to www.SIPC.org on electronic advertisements] [6 Corporate Drive, Shelton, CT 06484 Tel: 203-513-6000 

Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. CRN202704-6369455 

Retirees: Health Care May Cost Less Than You Think

Ask a room of aspiring retirees, as I often do, to name their number one worry as they approach calling it quits and the overwhelming consensus will be the affordability of health care. This seemingly primal fear is both reflected and fueled by much-publicized studies that show staggering sums for the expected costs.

“65-Year-Old Couple Retiring Today Will Need an Average of $315,000 for Medical Expenses” blares the press release for the 2022 edition of the now two-decade-running Fidelity Investments.

The usually sober Employee Benefits Research Institute (EBRI) comes up with similar numbers, albeit with far more nuance and variance. Its most recent study, released in February 2023, creates a per couple range from $72,000 to $383,000.

This is particularly scary given the context. EBRI places the average 401(k) balance of people in their 60s, with 30 years of participation, at roughly $350,000.

Is the average American really facing a future of devoting her entire retirement nest egg to health care? Is the alternative to go from the timeclock to the casket, unable to break free due to the cost of care?

Both logic and evidence say no. You’ll be just fine.

I’ll explain in detail below.

But here’s the gist: if you’re high-income, your premium costs may be high, but you can afford them. If you’re low-income, the entire system will be yours for free. If you’re middle-class, you’ll have a variety of options to make the expenses affordable and predictable.

Empiricism Rules

First the evidence. Health care’s been expensive and getting more so in America for a long time. Yet as brutal as reports of the bills are, seniors seem to be managing just fine.

The bankruptcy rate for those over age 65 is barely within a rounding error of zero. Of 374,240 personal bankruptcies in America in 2022, a mere 8 percent were among the over-65 age group. There are 56 million seniors in America. This comes to 0.05 percent of the over-65 population.

EBRI’s annual study on retirement readiness consistently finds that retirees are satisfied with their finances and their ability to meet their expenses.

And data collected on health care spending comes up with far lower numbers. The Bureau of Labor Statistics Consumer Expenditure Survey of 2021, for example, pegs total average annual health care spending for American households headed by 65- to 75-year-olds at just under $7,000.

An empirical study for T. Rowe Price by long-time health researcher Sudipto Banerjee places average annual out-of-pocket health costs for seniors at $700 to $900. An earlier study by Dr. Banerjee for EBRI found that, on average, retirees spent $27,000 out of pocket from age 70 to 95. This spending does not include Medicare Part B premiums. Other researchers including Vanguard Investments and New York Life have also shown that health care costs are manageable.

.

The $45,000 Restaurant Bill

Where’s the disconnect?

The big-number studies are designed to scare people, not to reflect reality. Fidelity’s shocking sums are generated by capitalizing all expected health care costs—including premiums taken directly from your Social Security check—into a lump sum at the start of retirement.

Consider that by this same logic, you’ll need $45,000 at retirement to fund the average American’s restaurant bill, $95,000 for groceries, and $80,000 for utilities. These numbers are simply the lump sum of the expected annual costs for these items based on data from the Bureau of Labor Statistics Survey of Consumer Finances.

For all but the most analytical, this is not a particularly useful way to look at your expected health care costs or their affordability. In fact, it’s not a useful way to look at any expected costs or affordability.

But even this is not the largest problem.

The Fidelity Retiree Health Care Cost Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government's insurance program, Original Medicare. The investment firm’s calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. Fidelity’s estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

In other words, Fidelity is assuming that Americans don’t have any supplemental coverage nor enrolled in a Medicare Advantage plan!

Yet we know that nine in 10 people with Medicare either had traditional Medicare along with some type of supplemental coverage (Medigap: 21%; employer-sponsored insurance: 18%; and Medicaid: 12%) or were enrolled in Medicare Advantage (39%) in 2018, according to Kaiser Family Foundation.

In other words, only one in 10 Medicare beneficiaries have original Medicare only and therefore fit the assumptions of the Fidelity model.

Cash Flow Is King

We don’t live off lump sums, after all, but rather we live off the income they generate. In retirement, you will have substantial monthly income that is unattached to any lump sum. That’s Social Security and perhaps a pension.

Let’s take it one month at a time.

We’ll start with Medicare, since with a few exceptions such as federal retirees, that’s where most of us will end up.

In 2023, the standard Medicare premium for Part B is $164.90 per person. If you’re collecting Social Security, it’ll come directly from your check. Chances are, you’ll barely notice the dough is gone, just as most people can’t quote their pre-tax employer-deducted health care premium. Seven in 10 enrollees pay just the standard premium.

The tab can be higher for retirees that Uncle Sam considers high-income. Make more than $97,000 (double if you’re married), and you’ll find yourself in IRMAA land. This stands for Income-Related Monthly Adjustment Amount. Make enough and your Part B premiums more than triple to $560.50 a month. Only three in 10 enrollees pay an additional premium for Part B.

We spend a lot of time managing this for our clients. It’s no fun and makes people mad. But, by definition, the folks it affects can afford it. This unwelcome hit won’t cause them to be evicted because they can’t make rent.

Is the Medicare Part B premium an out-of-pocket expense, like that cable bill that keeps creeping up? Technically, I say yes and model it as such for my clients. Practically, it feels automatic, provided you are collecting Social Security. (If not, the bill comes quarterly so you’ll feel the pain.)

Medicare Part A, which covers hospital stays, is free to collect, provided you’ve paid into the system or are married to someone who has. You may pay for this, but it’ll be indirectly and because you’re working and paying FICA while collecting it.

Alas, there are at least two more potential bills. I say potential because just as high-income people pay more for Medicare, low-income retirees may actually pay nothing.

Filling[EP1] [GU2] [GU3]  the Gaps

Medicare arrived on the scene in 1965. Parts A and B reflected the structure of private health insurance in those days. Things have changed a lot since then, but less so with traditional Medicare. This traditional Medicare structure creates plenty of deductible and coverage gaps that should be filled.

Part A picks up the tab for hospital stays only after a $1,600 deductible which covers the patient’s share of costs for 60 days. For days 61 to 90, the daily bill jumps to $400. For days 91 to 150 it’s $800 per day and unlimited after that. There’s no out-of-pocket maximum.

Part B pays the doctors. The deductible is a more manageable $226 after which patients face a 20% co-pay.

Clearly, the costs could stack up for a long hospital stay or an expensive chronic condition. So, you’ll likely want to get supplemental or Medigap insurance, enroll in a Medicare Advantage plan, or pick up some government subsidy if eligible.

The average cost for the most popular Medigap plans is between $135 and $185 a month. Medigap is extra insurance you can buy from a private health insurance company to help pay your share of out-of-pocket costs in Original Medicare.

One in two Medicare recipients are enrolled in Medicare Advantage plans. The average monthly premium for these plans in 2022 was $18.

As of 2022, there are 12 million people age 65 and older who are dually eligible for Medicaid and Medicare. This means that they are enrolled in both programs and receive benefits from both. Dually eligible individuals make up more than 15% of all Medicaid enrollees.

Suffice to say that many people don’t face the same health care costs in retirement as those who are enrolled only in original Medicare.

But we’re working on the worst case, so let’s stay with paying for a gap plan.

So now we are up to $350 per month per person ($164.90 for Medicare Part B and $185 for a Medigap plan) or $700 per month per couple.

Don’t Forget Your Pills

There’s also Part D, the prescription drug plan, to consider. The average monthly cost of these plans in 2023, according to KFF, is $43 per month.

Add it Up

For the middle-income American retiree, the bill per beneficiary will[EP4] [LM(5]  be just under $400 a month. Of this, $228 will come out of pocket. In fact, according to the Consumer Expenditure Survey, the average household headed by a 65-year-old will spend $4,954 on health insurance premiums. Given that the average income is $63,319, this is 8% of income.

In our practice, we conservatively estimated $1,000 a month or $12,000 per year per Medicare-eligible couple when doing projections.

Beware of Averages

No doubt, the average won’t apply to you. If you’re reading Retirement Daily, chances are you have a few dollars. If too many of these dollars are in the form of monthly income you will confront IRMAA. This won’t put a smile on your face. But it won’t send you to the soup kitchen either. We employ many strategies to contain this beast for our clients, but that’s not the focus of this article. It’s not a scarcity of funds problem. (Read Avoid This Pitfall When Planning for IRMAA.)

For those under the IRMAA limits, you may have some great options to future reduce your costs. Start with your employer. KFF finds that one in five Medicare beneficiaries are getting some employer support. The help may come in three potential forms.

First, many large employers help pay for the supplemental plans. Take that away, and you’re down to $208 per person with only Part D coming from your checking account.

A second piece of help may be an employer-funded Health Reimbursement Account (HRA). This may come as an annual subsidy to use for health care or as a one-time lump sum at retirement of which you can spend a portion each year.

Finally, during your working years, your employer may have put plenty of money into a health savings account (HSA) for you. This travels with you. For some reason, it cannot be used to pay for Medicare supplemental plan premiums. It can, however, be used to reimburse you for Medicare Part B premiums as well as other qualified health care expenses.

The Zero-Cost Option

How would you like to pay nothing?

Your answer is probably dependent on why? Recall that the KFF study shows that two in 10 Medicare recipients are on Medicaid as well. This is known as dually eligible and if one qualifies, the price of Medicare and gap insurance is zero.

In many states, it’s rolled up into the Medicare Savings Programs and there are several plans. The federal government has an income limit as low as $20,000 and an asset test of $13,630 for married couples. At this level of income and assets, any premium would be a huge hardship. This plan takes care of the neediest American seniors.

That said, I’ve known people with high six figures in investment assets who get free Medicare. Crazy, perhaps, but nevertheless true. They’ve just figured out how to work the system.

It’s very important to understand the rules and how they are applied in the jurisdiction in which you live. Although the federal website lists asset tests, they may be different in your state. In Connecticut, people with incomes below $28,680 pay nothing for a comprehensive Medicare package.

Income is not what you spend. It’s what you remove from taxable accounts and other taxable sources, such as Social Security and pensions. Retire at 65 and delay your Social Security until age 70. Limit pre-tax withdrawals to $2,300 a month and you’re good to go. Remove the rest from a bank account. Take low-cost loans from your life insurance policy. Or maybe from a reverse mortgage. This is not considered income. These are just some options. There are plenty more.

What about your assets? The government of Connecticut is clear. “Is there an asset limit?” the brochure asks. “No. There is no asset limit for any of these programs.”

Crack Your State’s Code

Check your state’s rules and plan accordingly. What works in Connecticut won’t work in my new state of Florida.

These savings can surely add up. They’ll be time limited, however. At age 70, you’ll be smart to collect Social Security and that will put you back on a payment plan.

Be careful, because you may give all the savings back when your RMDs kick in at age 73 if that puts you into IRMAA. This stuff is tricky. You must do the calculations. The key that makes this strategy possible is having the foresight to build up after-tax assets that can be drawn down prior to age 70.

For You Young’ns.

You can see that Medicare is not going to break you. Back to the summary. If you’re in IRMAA, you can afford it. If you’re under-resourced, you have the Medicare Savings Programs, which are are federally funded programs administered by each individual state. These programs are for people with limited income and resources to help pay some or all of their Medicare premiums, deductibles, copayments, and coinsurance.

If you’re in the middle, you have many options including zero-cost Medicare Advantage, and perhaps Medicare Savings with enough planning.

But what about getting to Medicare for early retirees? Leaving employer-supported group health plans is plenty scary.

If this applies to you, take a deep breath. It’s far better than you think. The old days of job-lock are gone, having given way to fun-and-games with the Affordable Care Act (ACA).

Keep (Him/Her) Working

The best option for those who have this option is to stay on a spouse’s plan—that is, keep a spouse working while you, well, take it easy. I’ve seen this work well, at least for the lounger. If you’re not married, see if you can get into a committed relationship quickly and claim domestic partnership with a still productive member of society. Given the employer subsidy, group insurance is usually a better deal than the stuff we get on the individual market.

If you’re technically single like me or lucky enough to be retiring in synchrony with a spouse—and you’re not age 65—you have some good options.

There’s always 18 months of COBRA, a thankfully cogent acronym for the Consolidated Omnibus Budget Reconciliation Act. This law allows you to keep your group plan for 18 months provided you pay 102% of the premium. Retire close to age 65 or have serious health issues and this can be an attractive option. Others will likely head to the ACA exchanges.

Your Time to Collect

Every American now has a right to health care provided through an exchange at standardized prices. These exchanges are either state-run or facilitated by the federal government through healthcare.gov. This is how I get my insurance so I’m very familiar with it and I know it works and works well.

Prior to age 65, you’ll have an array of insurance options. You can get PPOs, HMOs, and EPOs. You can get high-deductible health plans with HSAs, my favorite. You can’t get turned down or charged more due to your health, except for smoking.

The quoted premiums may in fact be quite large. Don’t worry. You’ll likely find a workaround.

Uncle Sam to the Rescue

The premiums in most cases are too much for people of modest income to afford. We’re a democratic republic and this is understandably unacceptable to the people who want our votes. Therefore, subsidies (advance premium tax credit) are available for those of limited income.

By now, you likely can guess the strategy. Uncle Sam’s generous subsidies are based on taxable income. That is, income produced by earnings, withdrawals from pretax retirement accounts, and dividends and interest. The stuff that hits your tax return.

Just as post-65-year-olds can get free Medicare by drawing down bank cash instead of tapping taxable IRAs, the pre-65 set can draw down gobs of government money to pay their insurance premiums. Your $2 million in IRAs, 401(k)s, Roth IRAs, non-qualified annuities, and low-interest bank-accounts have no effect on the subsidies. Only the taxable income created by these accounts dings you.

Free Ride Until 70

If you prepare early enough and apply some street smarts, you may be able to retire early and get a decade of free health care. Pile up your funds in places that don’t count: after-tax investment accounts, bank accounts, cash value life insurance, non-qualified annuities, and Roth IRAs.

So much for needing that $315,000 that Fidelity claims you need. Use it on boats, vacations, cars, and dining out. If you’re particularly frugal, you might calculate and invest the subsidies you pulled down from the ACA and Medicare Savings Program. You can then use the government’s money and the earnings on it to fund a lifetime of future Medicare premiums. You may make money on the deal.

Back here in reality

Now for the disclaimer. I don’t know you. Perhaps none of these strategies apply to you. You may need to fret about health care costs in retirement. If you find yourself on Medicare Parts A, B, and D with no access to a Medicare Advantage plan or a reasonably priced Medigap plan, you may be in big trouble.

I doubt that this is the case. My guess is that once you hit Medicare, you’ll be well covered. At an average combined monthly cost of $2,069, your utility, grocery, and housing bills—all necessities—will be a far larger burden than health care. Using Fidelity’s methodology, you’ll need $500,000 in savings just for these. Don’t hold your breath waiting for a study and news story on this. It violates common sense. It’s easily covered from the $2,739 a month your household receives in Social Security. Who would publish that drivel.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Ft Myers, FL, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Michael Lynch is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. [link to www.SIPC.org on electronic advertisements] [6 Corporate Drive, Shelton, CT 06484 Tel: 203-513-6000

Representatives do not provide tax and/or legal advice.  Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice.  Clients should confer with their qualified legal, tax and accounting advisors as appropriate.

Some health insurance products offered by unaffiliated insurers.

CRN202607-4684003

Tales from the Trenches

Life insurance, notes industry expert Barry Flagg, is America’s worst managed asset.  This is not good. One in two Americans own at least one life insurance contract.[1] One in five Americans own a contract with cash value.[2] There is nearly $20 trillion in face amount in force.  

Confusion Leads to Failure

Having spent nearly two decades attached to life insurance companies, I believe structural reasons prevent people from properly managing this important asset. 

Starting with the consumer, people think of a life insurance transaction as one-and-done event, rather than start of an important relationship that involves a complicated contract that must be understood, monitored, and managed. In fact, I find few people understand even the basic features of their contract.  

Term means term

Level Term is perhaps the simplest contract, offering a fixed premium for a fixed number of years, after which it’s gone unless extremely high premiums are paid.  I’ve seen people shocked that, as year 20 approaches, their premiums are increasing to unaffordability.  This is a feature, as the tech-industry saying goes, not a bug.  

Permanent may not mean forever

The consumer’s understanding approaches zero as we move from term to the land of permanent insurance. Here the products range from traditional whole life to investment based VUL with a few stops in between for Universal Life and Indexed Universal Life.  These contracts are complicated with varying features of guarantees and flexibility.  People think if they pay the premium on the statement, the insurance will last forever.  This may be true for whole life—provided it does not have a loan—but it’s not the case for many other contracts.  Most people think they own whole life if the policy is permanent.  Yet only a fraction of contracts are whole life. 

Built for Failure 

Finally, the industry is set up to sell policies, not service them.  Insurance agents collect the bulk of their income in up front or “heaped” commissions. Even the most successful professionals cannot afford to spend time reviewing they policies they’ve sold. The average agent has failed out of the typically 100 percent commission business in fewer than five years.[3] The home offices pay people to be reactive not proactive. These policies are known as orphans and we all know from reading Dickens that an orphanage is not an ideal place to be. 

The sad result is often frustration and lost value for the consumer.  Interestingly, best estimates of this closely held secret figure a mere 20 percent of whole life insurance policies eventually pay a death benefit.[4]  Since we all must die, what went wrong? Here are a few examples from my recent travels. 

Studies of Distress

Work is a great place to start with stories of distress. Employers are providing more and more benefits these days, and one popular benefit is group life insurance.  Four in ten life insurance policies are group or employer provided.  This makes sense as it’s easy for companies to distribute and consumer to acquire this insurance. Premiums tend to start absurdly low and then bump every five years, jumping considerably in the 50s and 60s. 

High prices in one’s fifties is not the only thing that can go wrong with group coverage.  Try getting terminal cancer, being forced to go on disability, and a year later, being terminated from active employment.  Your disability carrier will keep sending checks, but you’ll say goodbye group health and life insurance. Not all companies work this way, but some do.  I’ve seen it happen twice.  

The simple lesson: confirm with your human resources that you will remain an active employee if long-term disabled.  If not, secure a contract in the individual market.  You will own and control it, not your employer.   

Universal Confusion

The insurance industry innovated in the late 1970s. Faced with high interest rates and lagging whole life returns, it developed a product known as universal life.  These policies are designed to be permanent—that is, last until the insured no longer does. 

This goal is frequently undermined, however, by the flexibility the policy offers its owners.  The premium required to keep a policy in force is dependent on interest rates, and if those drop the premium must increase or the policy has a good chance of expiring.  The interest rates for the policies set up in the 1980s and 1990s were high, and therefore the suggested premiums were low.  As the rates dropped, few people understood that the premiums they needed to pay moved in the opposite direction.  

I’ve seen happen to scores of clients.  It’s an industry problem. Not company specific.  Joe and Jane provide an illustrative case.  They purchased a universal life policy on Jane in 1985 when she was 21 years old. The Ten-Year Treasury was 10.65 percent.[5]  The suggested premium was $250.  By the time they I stumbled on their policies in 2020, rates hovered at .89 percent, a 92 percent collapse!  

They told me they had whole life when we first talked.  The statement told me otherwise.  I had them call the company for projections of what they will get if they keep paying what they are paying.  These are called in-force projections. 

The sad truth, the policy would expire worthless at age 73 unless substantially higher premiums were paid.  In this case, the solution was worse than the problem.  They could expect to put in more premiums than the death benefit of the policy or walk away with $2,000.  This was after paying $9,000 in premiums.  

The simple solution here is to read your annual statement or get it to an unbiased professional to do so.  Ask for annual in-force projections and adjust premiums slowly to ensure that your permanent life insurance in fact lasts longer than you. 

Tax Free Sometimes Creates Big Taxes

One of the most tragic cases I’ve stumbled up centers on an old whole life policy known as endowment contract.  These policies were designed with good intentions.  Pay a certain amount and had a guaranteed insurance amount and cash buildup during working years.  At retirement, when insurance was projected to be less in need, the cash could produce income for life.  

What could go wrong?  

In this case, the culprit was a feature of the policy that allowed for the cash value to be loaned.  Times can get tough and when they do, a benefit of whole life contracts is that they allow contract owners to borrow their funds, albeit at substantial interest rates, and not have to pay the money back on any particular schedule.  If the loan exits when one dies, the life insurance pays it back.  Until then, the company considers the loan an “asset” and makes money on the interest.  

In this case the contract matured at age 65, at which time the loan either needed to be paid back or the amount withdrawn, plus interest never repaid, in excess of the premiums paid, would be considered taxable income in the year the contract matured.  This unexpected maturity added $180,000 of taxable income in one year.  

The simple solution is to understand the terms of any life insurance loans take. When will they need to be paid back and what are consequences if you fail to do so. 

Yes, You Must Pay the Premium!

The life insurance industry is innovative, and this in generally a very good thing.  In 1986, with the stock market booming, creative people built on the universal life concept.  They reasoned in money market funds could be installed as the engine for life insurance cash values, why not stocks and bonds directly? These registered with the Security and Exchange Commission (SEC) products—sub accounts—soon created the basis for Variable Universal Life Insurance or VUL. 

I confess that I am an equity zealot. I love to own stock in the world’s great companies. As a result, I have a natural bias to this “innovation.” I’ve used it successfully in my life. But there’s plenty of ways to run this train off its promising track. 

I ran into one such derailment early in my career when I met a couple who insisted that their VUL policy was going to last a lifetime as they paid the premium that was established with the agent who sold it to them years prior.  

The agent was of course long since on to other pursuits, which is why I, as a new representative, was attending to this orphan couple.  I had the pleasure to inform them that despite their premium payments, the policy had the trajectory of a Japanese Kamikaze pilot due to the loan they extracted from it a few years prior and never paid back.  

They protested and insisted that this couldn’t be the case, as they always paid the premium.  I explained that a dollar can only be one place at a time, and if they extracted and spent these dollars, they could not possibly support the insurance contract.  I’m not sure they ever understood.  

Fortunately, in this case there was a fix.  By the late 1990s, the industry had developed a new product, a universal life with a secondary guarantee.  This meant that if a preset premium was paid and no loans taken, the policy would last until a person was 121 or dead, whichever came first.  In other words, it was in fact permanent, just like the original whole life contracts.  The catch—which exists with them as well—there is no flexibility. 

The simple solution here lines up with the others.  If you have a VUL, get an annual projection of the expected future values.  Since the returns vary, ask for low future rates such as 6 percent and higher ones such as 8 percent. The company will also provide a zero percent return. 

Push Momma from the Train

No, this is not a section on Danny DeVito’s’ greatest roles.  It’s an exploration of the side effects of a good problem—people are living longer.  It seems that few days pass without news stories of famous members of the greatest generation making it into their 11th decade before moving on. In 1990 only fewer than 100,000 people worldwide were older than 100.  By 2020, that nearly 600,000 will blow out more than 100 candles on their special day.[6]  

This is good news, right? Sure, unless you are the owner of a life insurance policy bought prior to the 2000s that matures at age 95 or 100. 

With many people living past age 95, the question begs: What happens to the life insurance policies? Interestingly, the answer is an adult diaper: It Depends.  

I have one couple who owns two substantial second-to-die policies for whom I started to ponder this question. Second to die or survivorship life insurance policies insure two people, typically and husband and a wife, and pay only on the second death.  These contracts mesh nicely with the formerly rapacious U.S. estate tax rules that delivered a bill when the second person in a marriage died. 

In this case, I have a notion that the woman may in fact make it past 95, the age of maturity for each of their two contracts.  I instructed an employee to call the insurance carriers and get in writing what in fact will happen if she doesn’t get unlucky and die prior to age 95.  The answers did not make me happy. 

For one contract, the policy will remain in force, with no further premiums required.  This is good.  For the other, the policy is done, and the cash value, a sum deliberately far less than the face amount of the life insurance death benefit, will be delivered to the client.  And it gets better.  The amount over and above the premiums paid, will of course be taxable. 

Not much to do here other than the sit tight and hope for the best, or worse, depending on one’s point of view. The simple lesson is to know that life changes, good things can have bad effects and contracts that establish security for the future can blow up. That’s just how it is. 

Bottom Line

I could go on and on, rambling with cautionary tales from nearly twenty years is the life insurance industry trenches.  But what good would that do?  Life insurance is an incredibly important product, and many of you have it.  If this is the case the simple lesson is to take the time to understand what you own, the job it needs to do and whether it is likely to actually do it.  Don’t assume it’s designed to last forever. Then monitor it each year on its contract anniversary.  If you don’t want to do this, hire someone who will.  This will replace big frustrations with big payoffs. 

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory and financial planning services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to complete or cover every situation, and should not be construed as legal, tax or accounting advise. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. CRN202412-1384458

[1] Facts About Life 2020: Facts from LIMRA Life Insurance Awareness Month, September 2020. 

[2] Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances. Federal Reserve Bulletin, Board of Governors of the Federal Reserve System, September 2020 Vol. 106 No. 5 pg. 16.

[3] Greg Depersio, “How Hard Is a Career Selling Life Insurance?” January 28, 2021 Invdstopedia, https://www.investopedia.com/articles/professionals/101215/how-hard-career-selling-life-insurance.asp#:~:text=Most%20life%20insurance%20agents%20do,rewarded%20immensely%20with%20renewal%20commissions. accessed April 10, 2021

[4] Brandon Roberts, “Whole Life Insurance Lapse Rates,” The Insurance Pro Blog, June 18, 2018, https://theinsuranceproblog.com/whole-life-insurance-lapse-rates/ accessed April 10, 2021

[5] Historical annual average Treasury Rates quoted on macrotrends.net. https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart accessed April 10, 2021

[6] Katharina Buchholz, “Is 100 the New 80? Centenarians Are Becoming More Common,” Statistica, Feb 5, 2021. https://www.statista.com/chart/18826/number-of-hundred-year-olds-centenarians-worldwide/ accessed April 10, 2021

Four Lessons to Maximize Your ROY: Returns on Yourself

By Michael Lynch CFP

It’s a cliché, but perhaps that’s why I employ it with prospective clients. “What’s your largest asset?” is the query.

“My home” is a common but incorrect reply, a delusion fueled by the real estate industry. “My 401(k)” is a close second for diligent investors.

Wrong again, in most cases.

On rare occasions, someone will tell me what I want to hear: “myself.”

I use this question to put many stressful issues in context. Stock market plunges, for example, become opportunities rather than calamities, when someone is highly likely to stay employed and systematically feed investments that are temporarily on sale.

This question and answer also help to reveal the need for life and disability income insurance for people who can expect to look forward to at least as many tomorrows as they can look back to yesterdays.

For most of our working lives, after all, we are money machines grinding out dollars for ourselves and those who depend on us. Retirement Daily contributor Jane Mepham stressed this point in her excellent article. {figure out how to insert link https://www.thestreet.com/retirement-daily/nextgen-money/recession-proof-your-financial-future-by-investing-in-yourself]

As I pointed out here [ figure out how to insert https://www.thestreet.com/retirement-daily/planning-living-retirement/take-your-job-and-shove-it], your human capital may even play a significant role in your retirement. Given that it takes $100,000 of assets to generate $4,000 to $6,000 of income, even modest earnings can substitute for large investment balances. An income of $20,000 a year, for example, represents $500,000 invested in an IRA.

All of this brings us to the first and perhaps most obvious lesson.

Lesson One: You really are your biggest asset and will be for most of your life.

The significance of human capital—and the potential outside returns on focusing on growing it—hit home recently when I met Alicia, a woman looking forward to retiring in five years. She swings big wood, earning just over $300,000 annually, plus a potential bonus. But it wasn’t always that way.

In 2006 she was working at a non-profit, barely breaking 100K. She was divorced and had two children to educate. “I knew I had to make smart money moves,” she told me, adding “I knew that my biggest move was focusing on myself.”

How right she was. Her first move was to move to another non-profit—a high-profile university. That bumped her salary by 50 percent to $150,000. (She was 50 at the time.) This would generate $750,000 in nominal cash if she stayed put until 65. Given a 3 percent annual salary increase and 2 percent estimated inflation, the net present value of this move was just under $700,000 on day one.

Not bad for a job hop.

Lesson Two: Focus on the perks.

Alicia’s real payoff, however, came when her two daughters attended college tuition-free. There are a few ways to do the math, but if we keep it simple, $60,000 a year for eight years equals just under $500,000 in her pocket. The daughters were only two years away from matriculating, so the payoff came soon.

Did I mention it was tax-free? Apply a modest combined federal and state tax rate of 25 percent, and this amounts to $667,000 of pre-tax earnings.

Lesson Three: Don’t stay put. It’s a hassle to move, but it’ll pay off.

The university job was great. But a large portion of the compensation was the free tuition. She could only cash that check twice, once for each child. With both her daughters graduated, she popped her head up like a Meerkat to look for more opportunities. She managed her human capital into a big payday.

Her next job doubled her pay to just over $300,000 plus a bonus. She was 62. This one will likely ride her to her promised land of financial independence at age 70. This move should produce $1.3 million in additional value by the time Alicia retires at 70.

Adding it all up, Alicia’s late-in-the-game career prowess is stunning. She created just under $2 million of asset value at age 50 and above by deploying her human capital through strategic career moves. Short of hitting it big betting all her funds on a single stock, she would not have been able to create this value with traditional investing.

Lesson Four: Take a victory lap.

Alicia took her profitable journey in the non-profit sector. She built on success after success both to deliver what her employers needed and to meet her present and future needs. I see a similar strategy working well for clients in other industries as well.

If you have a traditional pension, there’s a chance that you may be fully eligible for it long before you turn 65. Each pension is unique, and you can easily find out the details of yours by securing the Summary Plan Description (SPD) from your human resources department. Some employees are eligible for a full unreduced pension at age 55 provided they’ve been with the company for 30 years.

This is commonly called the Rule of 85. It activates when your years of service plus your age equals 85, with a minimum age of 55. In these cases, a person can collect a full pension and go to work somewhere else. I call it taking the victory lap.

Consider a person earning $120,000 a year who is eligible for a $40,000 pension. She is not really earning $120,000, because she could stay home and collect $40,000 from her pension. If she’s highly skilled and well networked, she can retire from her job, collect her pension and work for another company for a similar or greater salary. She can use the pension to fund college for children, pay off her mortgage, maximize her retirement plans, or fulfill any other desire she may have. As in Alicia’s case, a job hop can pay big bucks.

I’ve assisted in this move many times. The ingredients for success are marketable skills, a network that recognizes this, a vested pension, and a willingness to move out of one’s comfort zone and change jobs.

This last criterion is usually the limiting step. People who spend 30 years in one job aren’t the switching type.

If this is you, get some help. Crunch the numbers. Ask yourself, do you want to be comfortable or wealthy in retirement? If the answer is the latter, get out of your comfort zone and work on that victory lap.

Wealth Comes from Many Places

If you want to be wealthy, count your blessings. That’s good mental health advice. If you want to achieve financial independence, consider all your potential sources of wealth. A dollar saved may be a dollar earned. Yet another $500,000 earned because of a job or career move means you can both save more and spend more, a win-win outcome for sure.

There’s only so much you can do with investing. Investing in yourself and managing your career like the asset it is, however, can catapult you into a new tier of prosperity.

Not everyone can replicate Alicia’s journey. Nor is everyone vested in a generous pension. Understood. But many readers approaching retirement are doing so with peak skills and are well networked. With a little creative thinking and daring, you may be able to create your own custom victory lap.

Sure, your current employer will be happy to exchange dollars for your time until retirement arrives. Alicia’s certainly would have been. But after just a bit of leg work you may discover as Alicia did that there are a few others who may put up many more dollars along with some perks. Focus on building and deploying all your capital--especially human. It’s a simple step that just pays off big.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Ft Myers, FL, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory services, and financial planning services are offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to be complete or to cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.

Year End Moves

As we enter the beginning of the end of 2022, I can only think of the Grateful Dead lyric, “what a long, strange trip it’s been.” And while I couldn’t blame anyone for being Dazed and Confused these days, I want to point out a few simple year-end strategies that may have a big financial impact on you.

Given that taxes are most of my clients’ largest expense, it’s no surprise that most strategies focus on tax-related moves.

Do the Bracket Bump

Move number one: bump your bracket. My dad fed our family as a general contractor specializing in underground construction. He won or lost jobs at blind bids, where he put in a price at which he was willing and committed to complete the job. On bid day, I’d have two questions for him upon his return from the office. (These would usually be asked as I racked for a game of eight ball after putting Merle Haggard on the stereo.) First, “did you get the job?” If he said yes, I would follow up: “How much did you leave on the table?” This refers to the gap between his winning bid and the next lowest, that is, the amount of money he could have earned and still secured the contract. Leaving too much green on the table turns a win into a psychological loss.

I’ve brought this concept to my financial planning practice, in which I encourage clients not to leave anything on the table if they find themselves in low tax brackets. The U.S. tax code is progressive, which means if you can keep your “taxable” income modest, you will pay very little income tax. For retirees, this may mean they are in the 12 percent bracket in early years only to jump to 22 percent with RMDS kicking in in later years. Don’t waste the low 12 percent bracket.

The simple strategy is to “bump” your income to take full advantage of the lower bracket. Options include taking a withdrawal and investing it in a non-qualified account or converting it to a Roth IRA and never paying tax on it again. Each of these strategies will pay off big in future years for you or your heirs.

IRMAA Is Not Just a Hurricane

How do you feel about paying extra for Medicare? You most certainly will, without any extra services, if your Modified Adjusted Gross Income (MAGI) exceeds $91,000 per person in 2022.  Earn $91,100--$100 above the limit-- and you’ll pay $973 a year more for Medicare Part B and D. That’s a take rate of more than 800 percent! There are other income thresholds as well.

This is the Income-Related Monthly Adjustment Amount (IRMAA) and it’s often triggered by unwanted RMDs once you mature to age 72. The simple solution is to plan, in advance, to lower RMDs. If the threshold is $91,000, consider withdrawing or converting pre-tax retirement assets to Roth IRA assets to approach but not exceed this threshold.  If you find yourself paying IRMAA, make sure you use the entire allotted bracket. Call it IRMAA optimization.

IRMAA is driven by MAGI not by taxable income so traditional charitable contributions will not lower it. People who are 70.5 years old can send non-profit organizations money directly from an IRA--a Qualified Charitable Contribution (QCD), which will reduce their income for purposes of IRMAA.

Do the Roth Conversion

Roth conversions are both a tool and a strategy. They are a tool for IRMAA optimization and bracket bumping. They can be a strategy to take advantage of stock market dips, converting and therefore paying taxes as temporarily depressed prices. The simple strategy is to optimize tax brackets or Medicare limits and keep a keen eye for distress in financial markets. That’s the time to strike for big results.

It’s Harvest Season

Look for year-end tax loss or gain harvesting opportunities. These shouldn’t be hard to fine in 2022. Under the current tax code, you always pay lower taxes on capital gains than on your earned and ordinary income. Better yet, if you fall into the 12 percent bracket you will pay nothing--zero percent, my favorite tax rate. One strategy involves selling losing investments to offset other gains or even $3,000 of ordinary income. This should be an ongoing, not just a year-end, strategy, but year-end provides the last chance to deploy it. Another, less intuitive, strategy is to take only gains. If you are in the 12 percent tax bracket, this simple move will free up funds or just reset your tax basis higher at no cost. This may pay off big later.

Bring on 2023

Working with my clients, an often-expressed sentiment is that 2023 cannot come too soon. Whether or not that’s the case for you, take a few minutes to reflect on some good things in 2022 and some last-minute moves that might benefit you and your loved ones financially.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton, CT, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory and financial planning services offered through qualified registered representatives of MML Investors Services,LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to complete or cover every situation, and should not be construed as legal, tax or accounting advise. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.

New Year’s Numbers

For some, fall is fantastic for its colors. For others it’s football, October baseball, or the few weeks when basketball overwhelms sports fans with viewing choices. Farmers bring in the harvest which we all celebrate with festivals and fairs.

For us financial planning aficionados, fall is all about open enrollment and a look to next year’s numbers.  This year’s harvest, fertilized with high inflation, is bountiful.

A Big Raise

Let’s start with the big one. Nine in ten Americans are getting a raise next year of 8.7 percent in 2023.[i]  That’s the amount Social Security benefits are increasing.

Wait, I’m not collecting, you may react. Will I still get the increase? The answer is yes.  It’ll be baked into your future benefit.

It’s an annual click on your benefit’s ratchet.  Rest assured that when it’s time to collect, the benefit will be at least 8.7 percent larger than it would have been without 2022.

Senior Bonus

For seniors the news gets a little better. A common complaint I hear is that what Social Security gives with its COLA, its cousin Medicare takes away with a premium increase.

Not next year. Not only is Medicare not raising its Part B base premium, but it’s decreasing the premium by $5.20 from $170.10 to $164.90 a month.[ii]

Take an average couple with 2022 Social Security benefits of $1,681 each. The benefit bump to $1,827, combined with the premium giveback, will produce $302 a month, pretax.[iii] That’s enough to cover the cost of a few 18-packs of eggs if the store is nearby.

The Taxes of Our Future

When it comes to taxes, bigger here is better. How can that be, you may ask? 

We’re focusing on standard deductions and the size of the tax brackets.

Let’s stay positive and mine some nuggets of good news—like those provided by the IRS’s mandatory adjustments to more than 60 tax provisions.

2023 inflation adjustments will increase the standard deduction by $1,800 to $27,700 for married couples (and by $900 to $13,850 for single filers). The senior bonus jumped from $1,350 to $1,500 per person. The combined amount that a couple over 65 can earn before paying any taxes will be $30,700.[iv]

The Bracket Escalator

This table previews the actual changes in the tax brackets. If you want some good news in these dark days, rough out an estimate of how much this may save you in 2023.

[i] 96 percent of Americans will receive Social Security Benefits at some point in their lives.  Kevin Whitman, Gayle L. Reznik, and Dale Shoffner “Who Never Receives Social Security Benefits? Social Security Bulletin, Vol. 71, No.2, 2011. Inflator from Social Security Administration press release.

[ii] Center for Medicare & Medicaid Services Fact Sheet, “2023 Medicare Parts A & B Premiums and Deductibles 2023 Medicare Part D Income-Related Monthly Adjustment Amounts,” September 27, 2022. https://www.cms.gov/newsroom/fact-sheets/2023-medicare-parts-b-premiums-and-deductibles-2023-medicare-part-d-income-related-monthly

[iii] Data from the Social Security Administration Fact Sheet attached to SSA press release of October 13, 2022 release. https://www.ssa.gov/news/press/factsheets/colafacts2023.pdf

[iv] IRS provides tax inflation adjustments for the tax year 2023, October 18, 2022.  https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023

Go ahead, open your 2021 1040 and focus on line 11. This is your adjusted gross income (AGI), which also stands for all goes in.

If you’re one of the estimated 90 percent of Americans who now use the standard deduction,[i] place that on line 12c and then follow the instructions on line 14, which simply says subtract your deductions from your AGI. That’s your taxable income. Apply that to the brackets. Feel free to contact us if you want help.

Each of us is unique, of course, but I’d like to note a sweet spot. In general, hanging out in the 12 percent tax bracket puts a person in a tax-friendly place. If you’re under 65 and married, you can do that with AGI up to $117,150 in 2023.[ii]

[i] Lauren Ward “Standard deduction vs itemized deduction: Pros and cons, and how to decide,” Bankrate.com October 4, 2021. https://www.bankrate.com/taxes/standard-or-itemized-tax-deduction/

[ii] Calculations from IRS data cited in note 4.

First, the table means that, on average, one must give Uncle Sam only $0.09 cents on the dollar at most.  In other words, depending on your state of residence, you may get to spend up to $910 for every $1,000 of your AGI if you’re retired and no longer funding Social Security and Medicare through FICA.[i]

Second, your capital gains and dividends are taxed at my favorite rate: 0 percent. This is how you turn an investment account into the tax equivalent of a Roth IRA.

Putting It into Dollars

A 66-year-old couple with an AGI in 2022 of $120,000, taking the standard deduction, will have taxable income of $91,400 and owe an estimated $11,342 in federal taxes. This is an average rate of 9.5 percent.

In 2023, this couple will pay an estimated $10,276 on taxable income of $89,300. That’s a savings of $1,066. As I said, it’ll help offset the high price of poultry products.

[i] Earned income is also subject to taxes to fund Social Security 6.20 percent and Medicare 1.45 percent. These are often referred to as payroll taxes. See the Social Security Administration Fact Sheet attached to SSA press release of October 13, 2022 release. https://www.ssa.gov/news/press/factsheets/colafacts2023.pdf

Save More, Pay Less Tax

Speaking of saving, it’s going to be easy for working Americans to do more of it in a tax-favored manner in 2023. 

One of the most effective ways to drive down AGI is to increase contributions to pre-tax retirement plans.

One of the best ways to keep taxes down in retirement is to contribute to Roth or back-ended retirement plans.

Health Savings Accounts accomplish both goals and create a pool of money for health expenses.

The MTV Solution

Like Billy Idol’s 1983 hit Rebel Yell, 2023 will allow you to do More! More! More!

If employed, you can put more into your workplace retirement plans. Contributions limits will jump by $2,000 to $22,500 for those under 50, with a catch-up of $7,500 for those over 50.

Roth and traditional IRA contribution limits will increase by $500 to $6,500, with another $1,000 for those over 50.[i]

Health Savings Accounts are set to bounce to $3,850 for individuals, with $1,000 to catch up for those over age 55.[ii]

The government restricts Roth IRA contributions if people make too much money. These caps are increasing as well.

In 2022, Roth contributions were prohibited once an individual earned $144,000 for taxpayers filing as single or head of household and $214,000 for couples. In 2023, these caps will increase to $153,000 and $228,000.[iii]  (If you notice a penalty for being married, you are not delusional.)

Give Back May Be Good Sign

These jumbo boosts are one layer of silver linings on this year’s inflation clouds. Another layer, which I examined in my June 2022 article The Unicorn[TK(1] , is the outsized rate Uncle Sam was forced to pay on its Series I Bonds when it let inflation get out of control. This rate adjusts every six months based on the most recent three-month trend in inflation.

The bad or perhaps good news: this rate will drop from 9.62 percent annualized to 6.42 percent annualized for bonds purchased after November 1, 2022.[iv] We can only hope that this marks the beginning of the end of our post-Covid inflation. If prices stabilize, this year’s bumps will prove to be a one-time windfall. We can be grateful for small blessings.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton, CT, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory services, and financial planning services are offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to be complete or to cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.

[i] 401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500 IR-2022-188, October 21, 2022  https://www.irs.gov/pub/irs-drop/n-22-55.pdf

[ii] IRS.gov  https://www.irs.gov/pub/irs-drop/rp-22-24.pdf

[iii] See note 4.

[iv] Medora Lee, “Buy I bonds now to lock in a record 9.62% for 6 months. On Nov. 1, the rate drops to 6.48%,” USA Today, October 20, 2022.  https://www.usatoday.com/story/money/personalfinance/2022/10/20/i-bond-rate-drop-from-record-high/10536818002/

 [TK(1]CRN202504-2238704

The Unicorn

Retirees Should Enjoy Their Savings More, Here's How

If you’re approaching retirement—or even made the leap from work to leisure already—you’ve been bombarded with stories, studies, and tales of how unprepared your compatriots (and by implication you) are to finance your golden years. Google ( (GOOGL) - Get Alphabet Inc. Report) “retirement crisis” and close to 390 million hits appear. No wonder nearly one in two Americans tell Gallup that they fear not having enough money to fund a comfortable retirement. (Megan Brenan “U.S. Retirees’ Experienced Differs From Nonretirees’ Outlook,” May 28, 2021, Gallup)

You can relax. You certainly have problems in your future, but paying your bills isn’t among them. This so-called crisis is akin to the global overpopulation crisis of the 1970s that has not only disappeared but morphed into its opposite. The experts now fret that we aren’t having enough children. I’m here to tell you that if you’re reading this article, there is no “retirement crisis” in your future. Your problem will be giving yourself permission to enjoy your money. I’ve got a strategy for that. But first, let me support my countercultural assertions.

Let’s start with the half of working Americans who are worried about retirement. Gallup started collecting this data in 2001 and got similar responses. Those early folks are now retired. Guess what? Eight in ten report that they are doing just fine. (Megan Brenan “U.S. Retirees’ Experienced Differs From Nonretirees’ Outlook,” May 28, 2021, Gallup)

This rosy picture is supported by the people at the Employee Benefit Research Institute (EBRI) who’ve been studying retirees for decades. A recent report found that eight in ten retirees report themselves as doing well. (“2021 Retirement Confidence Survey” Employee Benefit Research Institute and Greenwald Research.) Another EBRI study found that only 20 percent of retirees even make withdrawals from retirement plans prior to being required to do so. Once required to withdraw, eight in ten take only the minimum required. (Jack VanDerhei, Kelly Hahn, Katherine Roy “In Data There is Truth: Understanding How Households Actually Support Spending in Retirement,” Employee Benefit Research Institute, June 25, 2021.)

No wonder: the older the American, the more likely they'll be wealthy. Americans over age 70 have assets valued at $35 trillion. That includes Warren Buffet, of course, but not Elon Musk, Jeff Bezos, Mark Zuckerberg, or Peter Thiel’s $5 billion Roth IRA. (Ben Eisen and Anne Tergesen, “Older Americans Stockpiled a Record 35 Trillion. The Time Has Come to Give It Away,” Wall Street Journal, July 2, 2021.) Even after a lifetime of required withdrawals, a substantial portion of people die wealthier than they retired.

Don’t feel guilty if you have a few dollars saved when you read about your destitute compatriots. They likely aren’t destitute. All those stories you read that ten percent of seniors are in poverty and one in three rely solely on Social Security for income? They are bogus, according to American Enterprise Institute fellow Andrew Biggs, who takes the time to fact-check the reports.

Those reports are based on surveys, yet Biggs and other researchers dug into IRS data—on what people and institutions report and on the taxes they actually pay—and found as far back as 2008 that retirees self-reported far less income than hit their bank accounts. Retirees reported collecting $250 billion from investments. But IRS data on the same people show that $450 billion hit tax returns. (Andrew G. Biggs, “At last, some action on misleading retirement income statistics,” Forbes, April 29, 2021.)

Biggs, citing other research by Census Bureau economists and the IRS using similar methods, shows reported median retiree household income as $41,000 versus actual income of $52,000, a 27 percent jump. This drops the percent of retirees relying on Social Security for at least 90 percent of their income to 14 percent. The poverty rate for seniors drops to less than 7 percent. (By way of comparison, the U.S. government says 16 percent of children live in poverty.)

There are no doubt pockets of financial pain among American seniors. But the norm is financial and life success, not failure and misery.

Back to you. It’s likely that you resemble most of my boomer clients. You are a responsible citizen who took advantage of the myriad saving and investing opportunities that emerged over your working life. You funded your employer-sponsored defined-contribution plans and Roth IRAs when they appeared from a massive tax overhaul in 1997. You may have a pension, which certainly helps. But if not, you’ll likely have made it up from personal savings.

Here’s my general impression, not knowing your situation. You’ll do well to replace “or” with “and.” This is advice I recently blurted out on a check-in call with a long-time client, who was asking questions about what to do with required minimum distributions from retirement plans.

Do whatever you want, I said.

Here’s what I mean. In this case, I knew that my clients like travel and dining out. I used a food example and counseled, when perusing the appetizer menu at their favorite restaurant, don’t ask whether to get the oysters, clams casino, or Caesar salad. Instead, put an “and” in the sentence and order the oyster, clams casino, and the Caesar salad.

I’m not trying to fatten you up, I explained. You don’t have to eat it all – take the leftovers home and replace a future meal. If it will make you happy in the moment, order it and swipe your card with a smile. It’s not going to break you.

This feels unnatural. I get it. When we were building wealth, most of us did so by deftly using the “or” and avoiding the “and” with ourselves and our family. We couldn’t have it all, after all, so we needed to make choices, economize, and save. We could put the pool in the backyard or take the expensive summer vacations. If we did both, we’d be among those who don’t have the dough to retire.

Your discipline in the accumulation phase, combined with smart investing, built a nice pile of money. For many pre-retirees and those who’ve already called it quits, that pile has now taken on a life of its own, compounding nicely. It’s time to spend. That’s out of your comfort zone. The very habits that made you successful work against your enjoying your success to the full.

Back to my clients. We continued our brainstorming, applying the “or/and” concept to travel. You’re planning a cruise, I said. It’s not a question of first-class airfare or an upgraded stateroom. It’s first-class airfare and a premium stateroom. Take the same approach when purchasing excursions. Take the helicopter to the glacier and go salmon fishing. You’re only likely to be in Alaska once. It’s only money. If you don’t spend it, your kids will. They may in fact pay extra to fish for salmon from the helicopter on the way to the glacier. All with your money. Ponder that.

Speaking of kids, you can bring them and the grandkids into the “and” if that makes you happy. You can either snowbird for Christmas (spend the holiday in a warmer climate) or spend it with your children. Do both: snowbird with your children by sending them tickets and putting them up. Consider it an advance on their inheritance.

Don’t get hung up on these examples. They may very well not fit your desires, tastes, or budget. I get it. Absorb the concept and apply it to your life. If you’re reading Retirement Daily, chances are you have enough to put the “and” in your retirement. Take the leap. Do it. You won’t spend you last dollar. So why are you worried about conserving it?

Michael Lynch, CFP®, is a financial planner with the Barnum Financial Group in Shelton, CT, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale-New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of “Keep It Simple, Make It Big: Money Management for a Meaningful Life,” October 2020. You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory services, and financial planning services are offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to be complete or to cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.

My Three Sons: Equal Isn’t Always Optimal

The SECURE Act, passed and signed into law in the waning days of 2019, upended traditional legacy planning relating to retirement plans. Since these never-taxed assets account for the bulk of most Americans non-real estate wealth, this is a big deal. For many, it’s a game changer that will result in a major tax hit if you don’t adjust.

Prior to this new “security,” the straightforward strategy for most Americans was simply to live off their IRAs and other retirement plans, paying taxes as they withdrew the funds. When a person no longer needed the money—that is, they needed an undertaker—the accounts could pass to the next generation. The key is that beneficiaries had the option to withdraw the funds over their life expectancy. This continued slow use of the funds allowed them to grow as well as smooth out the taxes paid. The slang for this strategy was “stretching” the IRA.

Death of a Tax Strategy

The SECURE ACT killed the stretch IRA for non-spouses, replacing it with a ten-year-and-out rule for people who inherited in 2020 going forward. There are no longer any required annual withdrawals, but the entire account must be emptied in ten years. If not, half the account plus taxes will head to DC.

Consider a $1 million IRA transferring to a 50—year old child. Under the old rules, she’d have to withdraw just over $29,000 in the first year after mom’s death. Over ten years, given a 6 percent rate of return, she’d withdraw $442,000. If the beneficiary had a household income of $150,000, she would pay just over $100,000 in taxes over a decade with plenty more to come in the future.

The account balance at that point would be $1,292,683. By her life expectancy at 84 she would have turned the $1 million of initial value into $3.6 million of withdrawals. She’d pay $950,000 in taxes. Seemed like a good deal for everyone, save mom, of course, who had to die for it.

The New Reality

Post-Secure Act, if she elected to take $100,000 out a year and the gains in year 10, she’d pay $378,000 in taxes – $278,000 more. The withdrawals would also move her up the tax brackets, eventually right to the top. If she waited until year ten, she’d withdraw $1.7 million and pay $590,000 in federal taxes. A loss of more than a third of the account.

Although customized inheritance planning was always advisable, the death of the stretch IRA makes it imperative for people who want to maximize money to family. I was struck by this recently when reviewing with a client his substantial IRAs. He and his wife live in a zero-tax state. They are practicing the planning of plentitude. They will likely leave substantial IRA inheritance to their three sons.

Three Sons, Three Strategies

This couple has an above average, if not burning, desire for their hard-earned money to benefit their boys. One son is a high earning executive. One earns an above-average income in a two-income household. The third is a bit of a free spirit and let’s just say income taxes are not a concern at this point. Each of the boys lives in a state that taxes income.

To optimize the after-tax value of the IRAs, we developed the following strategy for the $300,000 of funds that he and his wife knew they were not going to need for their own support.

The First Strategy

For the high earning son’s third of the inheritance, my clients would create an IRA and convert it to a Roth. This would create a taxable event of $24,000 for my clients, as it put them in the 24 percent bracket. I said send the bill to your son. He pays the $24,000 out of pocket. This is far lower than his combined tax rate of 44 percent. He has effectively bought out the IRS’s interest in his inheritance. The $100,000 now compounds for thirty years. You live 20 years and then there’s 10 years before it must be withdrawn. That $24,000 today generates $575,000 of tax-free money in the future.

Although customized inheritance planning was always advisable, the death of the stretch IRA makes it imperative for people who want to maximize money to family. I was struck by this recently when reviewing with a client his substantial IRAs. He and his wife live in a zero-tax state. They are practicing the planning of plentitude. They will likely leave substantial IRA inheritance to their three sons.

Three Sons, Three Strategies

This couple has an above average, if not burning, desire for their hard-earned money to benefit their boys. One son is a high earning executive. One earns an above-average income in a two-income household. The third is a bit of a free spirit and let’s just say income taxes are not a concern at this point. Each of the boys lives in a state that taxes income.

To optimize the after-tax value of the IRAs, we developed the following strategy for the $300,000 of funds that he and his wife knew they were not going to need for their own support.

The First Strategy

For the high earning son’s third of the inheritance, my clients would create an IRA and convert it to a Roth. This would create a taxable event of $24,000 for my clients, as it put them in the 24 percent bracket. I said send the bill to your son. He pays the $24,000 out of pocket. This is far lower than his combined tax rate of 44 percent. He has effectively bought out the IRS’s interest in his inheritance. The $100,000 now compounds for thirty years. You live 20 years and then there’s 10 years before it must be withdrawn. That $24,000 today generates $575,000 of tax-free money in the future.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory and financial planning services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to complete or cover every situation, and should not be construed as legal, tax or accounting advise. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. CRN202304-282065

Life Insurance - Tales from the Trenches

Life insurance, notes industry expert Barry Flagg, is America’s worst managed asset. This is not good. One in two Americans own at least one life insurance contract. One in five Americans own a contract with cash value. There is nearly $20 trillion in face amount in force.

Confusion Leads to Failure

Having spent nearly two decades attached to life insurance companies, I believe structural reasons prevent people from properly managing this important asset.

Starting with the consumer, people think of a life insurance transaction as one-and-done event, rather than the start of an important relationship that involves a complicated contract that must be understood, monitored, and managed. In fact, I find few people understand even the basic features of their contract.

Term means term

Level Term is perhaps the simplest contract, offering a fixed premium for a fixed number of years, after which it’s gone unless extremely high premiums are paid. I’ve seen people shocked that, as year 20 approaches, their premiums are increasing to unaffordability. This is a feature, as the tech-industry saying goes, not a bug.

Permanent may not mean forever

The consumer’s understanding approaches zero as we move from term to the land of permanent insurance. Here the products range from traditional whole life to investment-based VUL (variable universal life) with a few stops in between for Universal Life and Indexed Universal Life. These contracts are complicated with varying features of guarantees and flexibility. People think if they pay the premium on the statement, the insurance will last forever. This may be true for whole life—provided it does not have a loan—but it’s not the case for many other contracts. Most people think they own whole life if the policy is permanent. Yet only a fraction of contracts are whole life.

Built for Failure

Finally, the industry is set up to sell policies, not service them. Insurance agents collect the bulk of their income in up-front or “heaped” commissions. Even the most successful professionals cannot afford to spend time reviewing the policies they’ve sold. The average agent has failed out of the typically 100% commission business in fewer than five years. The home offices pay people to be reactive not proactive. These policies are known as orphans and we all know from reading Dickens that an orphanage is not an ideal place to be.

The sad result is often frustration and lost value for the consumer. Interestingly, best estimates of this closely held secret figure a mere 20 percent of whole life insurance policies eventually pay a death benefit. Since we all must die, what went wrong? Here are a few examples from my recent travels.
Studies of Distress

Work is a great place to start with stories of distress. Employers are providing more and more benefits these days, and one popular benefit is group life insurance. Four in ten life insurance policies are group or employer provided. This makes sense as it’s easy for companies to distribute and consumers to acquire this insurance. Premiums tend to start absurdly low and then bump every five years, jumping considerably in the ages of 50s and 60s.

High prices in one’s fifties is not the only thing that can go wrong with group coverage. Try getting terminal cancer, being forced to go on disability, and a year later, being terminated from active employment. Your disability carrier will keep sending checks, but you’ll say goodbye group health and life insurance. Not all companies work this way, but some do. I’ve seen it happen twice.

The simple lesson: confirm with your human resources that you will remain an active employee if long-term disabled. If not, secure a contract in the individual market. You will own and control it, not your employer.

Universal Confusion

The insurance industry innovated in the late 1970s. Faced with high interest rates and lagging whole life returns, it developed a product known as universal life. These policies are designed to be permanent—that is, last until the insured no longer does.

This goal is frequently undermined, however, by the flexibility the policy offers its owners. The premium required to keep a policy in force is dependent on interest rates, and if those drop the premium must increase or the policy has a good chance of expiring. The interest rates for the policies set up in the 1980s and 1990s were high, and therefore the suggested premiums were low. As interest rates dropped, few people understood that the premiums they needed to pay moved in the opposite direction.

I’ve seen this happen to scores of clients. It’s an industry problem, not company specific. Joe and Jane provide an illustrative case. They purchased a universal life policy on Jane in 1985 when she was 21 years old. The 10 year Treasury was 10.65 percent. The suggested premium was $250. By the time I stumbled on their policies in 2020, interest rates hovered at .89 percent, a 92 percent collapse!

They told me they had whole life when we first talked. The policy’s statement told me otherwise. I had them call the company for projections of what they will get if they keep paying what they are paying. These are called in-force projections.

The sad truth, the policy would expire worthless at age 73 unless substantially higher premiums were paid. In this case, the solution was worse than the problem. They could expect to put in more premiums than the death benefit of the policy or walk away with $2,000. This was after paying $9,000 in premiums.

The simple solution here is to read your annual statement or get it to an unbiased professional to do so. Ask for annual in-force projections and adjust premiums slowly to ensure that your permanent life insurance in fact lasts longer than you.
Tax Free Sometimes Creates Big Taxes

One of the most tragic cases I’ve stumbled upon centers on an old whole life policy known as endowment contract. These policies were designed with good intentions: Pay a certain amount and have a guaranteed insurance amount and cash buildup during working years. At retirement, when insurance was projected to be less in need, the cash could produce income for life.

What could go wrong?

In this case, the culprit was a feature of the policy that allowed for the cash value to be loaned. Times can get tough and when they do, a benefit of whole life contracts is that they allow contract owners to borrow their funds, albeit at substantial interest rates, and not have to pay the money back on any particular schedule. If the loan exists when one dies, the life insurance pays it back. Until then, the company considers the loan an “asset” and makes money on the interest.

In this case the contract matured at age 65, at which time the loan either needed to be paid back or the amount withdrawn, plus interest never repaid, in excess of the premiums paid, would be considered taxable income in the year the contract matured. This unexpected maturity added $180,000 of taxable income in one year.

The simple solution is to understand the terms of any life insurance loans take. When will they need to be paid back and what are consequences if you fail to do so.

Yes, You Must Pay the Premium!

The life insurance industry is innovative, and this in generally a very good thing. In 1986, with the stock market booming, creative people built on the universal life concept. They reasoned if money market funds could be installed as the engine for life insurance cash values, why not stocks and bonds directly? These products registered with the Security and Exchange Commission (SEC) —sub accounts—soon created the basis for Variable Universal Life Insurance or VUL.

I confess that I am an equity zealot. I love to own stock in the world’s great companies. As a result, I have a natural bias to this “innovation.” I’ve used it successfully in my life. But there’s plenty of ways to run this train off its promising track.

I ran into one such derailment early in my career when I met a couple who insisted that their VUL policy was going to last a lifetime as they paid the premium that was established with the agent who sold it to them years prior.
The agent was of course long since on to other pursuits, which is why I, as a new representative, was attending to this orphan couple. I had the pleasure to inform them that despite their premium payments, the policy had the trajectory of a Japanese Kamikaze pilot due to the loan they extracted from it a few years prior and never paid back.

They protested and insisted that this couldn’t be the case, as they always paid the premium. I explained that a dollar can only be one place at a time, and if they extracted and spent these dollars, they could not possibly support the insurance contract. I’m not sure they ever understood.

Fortunately, in this case there was a fix. By the late 1990s, the industry had developed a new product, a universal life with a secondary guarantee. This meant that if a preset premium was paid and no loans taken, the policy would last until a person was 121 or dead, whichever came first. In other words, it was in fact permanent, just like the original whole life contracts. The catch—which exists with them as well—there is no flexibility.

The simple solution here lines up with the others. If you have a VUL, get an annual projection of the expected future values. Since the returns vary, ask for low future rates such as 6 percent and higher ones such as 8 percent. The company will also provide a zero percent return.

Push Momma from the Train

No, this is not a section on Danny DeVito’s’ greatest roles. It’s an exploration of the side effects of a good problem—people are living longer. It seems that few days pass without news stories of famous members of the greatest generation making it into their 11th decade before moving on. In 1990 only fewer than 100,000 people worldwide were older than 100. By 2020, nearly 600,000 will blow out more than 100 candles on their special day.

This is good news, right? Sure, unless you are the owner of a life insurance policy bought prior to the 2000s that matures at age 95 or 100.

With many people living past age 95, the question begs: What happens to the life insurance policies? Interestingly, the answer is an adult diaper: It Depends.

I have one couple who owns two substantial second-to-die policies for whom I started to ponder this question. Second-to-die or survivorship life insurance policies insure two people, typically a husband and a wife, and pay out only on the second death. These contracts mesh nicely with the formerly rapacious U.S. estate tax rules that delivered a bill when the second person in a marriage died.

In this case, I have a notion that the woman may in fact make it past 95, the age of maturity for each of their two contracts. I instructed an employee to call the insurance carriers and get in writing what in fact will happen if she doesn’t get unlucky and die prior to age 95. The answers did not make me happy.

For one contract, the policy will remain in force, with no further premiums required. This is good. For the other, the policy is done, and the cash value, a sum deliberately far less than the face amount of the life insurance death benefit, will be delivered to the client. And it gets better. The amount over and above the premiums paid, will of course be taxable.

Not much to do here other than the sit tight and hope for the best, or worse, depending on one’s point of view. The simple lesson is to know that life changes, good things can have bad effects, and contracts that establish security for the future can blow up. That’s just how it is.

Bottom Line

I could go on and on, rambling with cautionary tales from nearly twenty years in the life insurance industry trenches. But what good would that do? Life insurance is an incredibly important product, and many of you have it. If this is the case the simple lesson is to take the time to understand what you own, the job it needs to do, and whether it is likely to actually do it. Don’t assume it’s designed to last forever. Then monitor it each year on its contract anniversary. If you don’t want to do this, hire someone who will. This will replace big frustrations with big payoffs.

Michael Lynch, CFP®, is a financial planner with the Barnum Financial Group in Shelton, CT, and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory and financial planning services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to complete or cover every situation, and should not be construed as legal, tax or accounting advise. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. CRN202304-282235 

Managing RMDs in Tough Times

Sarah’s on a bad run. She’s an equity zealot, hates all bonds, and focuses her entire portfolio on U.S. stock. She’s 73 and is facing required minimum distributions (RMDs) based on December 31, 2021, high-water values. Down 12% on a portfolio this year, she’s months away from locking in a decline, or is she?

She’s non-repentant, of course, as bonds are down and the real return from cash—although better than that of her publicly traded stocks—is negative as well. By March 2022, inflation had jumped to 7.9% over the last year. So even cash is a loser, as it has lost purchasing power. It’s an asset class with dim hope of ever beating inflation and taxes over the long term.

Sarah’s Predicament

The first lesson for more traditional retirees is that they should never let themselves get into Sarah’s predicament. Our current market collapse is a college-level lesson in sequence of returns risk. This big term describes the financial phenomenon of how a six-foot-tall person can drown in a lake with an average depth of four feet. There’s a ten-foot hole somewhere. He stepped in it.

For investments, the ten-foot hole is a big down year—or a consecutive sequence of smaller ones—that erodes principal while a person is taking withdrawals. It’s possible for a person with an average return of 6% to run out of money if he withdraws 6% of the initial balance each year. The reason is that early declines turn the initial 6% into an unsustainable 8% withdrawal rate. If unaddressed, the result is the dreaded running out of money before a person runs out of breath.

The key to mitigating the sequence of return risks is to have non-affected assets. These are funds in fixed accounts or more stable U.S. government-backed assets that won’t decline drastically, or perhaps even at all, when stocks get crushed. Sarah, of course, shudders at this thought. Other people will find it attractive.

Build a Buffer

RMDs are only 3.65% at age 72. They don’t reach 6% until age 84. Setting aside 20% of your money in stable assets goes a long way toward neutralizing sequence of return risk. It provides an initial five and a half years of income. Just as you need a cash reserve for emergencies while working, you need an income reserve for bad markets when retired. This buffer provides that income reserve.
It turns our Sarah has some fixed income, but it’s in a former employer’s 401(k) or 403(b) plan, not an IRA. They are taxed very similarly, but there are subtle differences in the plans’ governing rules. RMDs from IRAs can be aggregated. In other worlds, the RMDs from three IRAs could be removed from only one, provided it summed to the amount required from all three.

RMDs from employer plans can be aggregated as well, provided that they all operate under the same section of the tax code. The combined RMDs from two 401(k)s, for example, can be removed from just one. No problem. Ditto for the RMDs from two 403(b)s. The three--IRAs, 403(b)s and 401(k)s--can never cross, however.

Using an Employer Plan for IRA RMD

The first nut we had to crack was how Sarah could use the cash assets in her employer plan to satisfy the RMD from her IRAs. The former balance is small, roughly $200,000, and the latter larger, roughly $2 million.

Here’s what we came up with. Sarah’s RMD from the employer plan was $7,500. The IRA RMD is ten times the size, at $75,000. RMDs cannot be rolled over. They are the first dollars out. That’s that. Also, RMDs from employer plans cannot be used for qualified charitable distributions (QCD). Sarah must take her $7,500 and pay income tax on it.

Given that the RMD from her IRA is 3.65%, and her stable value is up in nominal terms, I devised a plan to use it for her RMD. Call the custodian, I advised, and direct it to complete a partial rollover of $75,000 into your IRA. Shortly after this cash arrives in the IRA, send it out to your checking account. I told Sarah that she will have effectively used her stable value fund in her employer plan to fund her RMD from her temporarily depreciated IRA.

Put it Back in Better Times

The reverse of this is also advisable, I told her. When the equity market rebounds, you should complete a rollover from your IRA to your employer plan. Her plan allows this, as most large plans do. Not all plans will, however. She liked this idea less, as it meant selling stocks and purchasing fixed assets. No matter. She should do it. She likely won’t.

That was Sarah’s option one. For her, the juice may not be worth the squeeze. By this I mean the benefit of not having to see stock low may not justify the hassle of moving money from the employer plan to her IRA.

Just Send Stock

The reason: She’s not living on the distributions. The only problem with taking large distributions in bad times is the opportunity cost of selling her beloved stocks at depressed prices. The remedy: distribute the shares directly to her brokerage account.

That’s right. “In God we trust, all others pay cash” may be a humorous sign at the local diner, but it does not apply to RMDs. Sarah has the option of simply distributing enough shares in kind that, on the day of the distribution, it satisfies her total value. She’ll pay no costs to buy and sell and she’ll fully participate in the expected rebound.

Add a Charity

There’s one more issue to factor into Sarah’s decision. She is charitably minded and likes to leverage the QCD strategy to fund her favorite non-profits. This strategy reduces her adjusted gross income and minimizes the amount of Medicare Parts B and D premium penalties she’ll pay under the government’s income related monthly adjustment amount (IRMAA) provision. This consideration gives her a reason to take the cash. She’s not holding onto the stock so sending it will deprive her of the rebound. She might as well send stable cash.

Ultimately, she settled on a 50/50 split between stocks and cash.

Sarah’s Down-Market Action Plan

She will roll $37,500 of the stable cash from her former employer plan into her IRA. This goes out as a QCD. She will then directly distribute $37,500 worth of depressed equity shares. She’ll get this done right away so that any increase bolsters her non-qualified brokerage account. Keeping it out of her IRA will help with next year’s distribution.
She expects that these investments will not only return to their former glory but will surpass them. She’s held tight this long, and it’s worked so far. I can’t predict markets and I never try to do so. Still, I concurred that she has no reason to go wobbly now and I endorsed her strategy.

Michael Lynch, CFP®, is a financial planner with the Barnum Financial Group in Shelton, CT, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of “Keep It Simple, Make It Big: Money Management for a Meaningful Life,” October 2020. You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory services, and financial planning services are offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to be complete or to cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate. CRN202503-2068409

Future Pensioners Alert: Act Now or Potentially Lose Thousands

The traditional defined benefit pension may be on its way to extinction. But according to the Congressional Research Service, 24 percent of civilian workers still have one, including one in seven private sector employees. Given that more than 153 million Americans suit up for work each week, tens of millions can look forward to some sort of pension at some point. If you’re one of these lucky people--and you plan to retire soon--tens of thousands of dollars may hinge on your nailing down your plan’s particulars.

Get the Skinny on the Formula

First, call your employer’s human resource department, go online, and do whatever it takes to determine the parameters of your future payday. Will you be forced to take a monthly annuity, an income for life? Or will you also have the option to elect a lump sum as a full or partial exchange of the annuity?

I’m shocked at how few people I encounter understand even the basic features of the pensions they are promised. This is all available in the Summary Plan Description (SPD). Your friendly human resource professionals will happily send it to you or tell you how to access it. The plan will be long, but it’s written so simply that even I, someone blessed with an off and on public education, can understand it. And it comes with a table of contents so you can skip the real boring stuff.

If the plan offers only a monthly benefit, you should figure out the formula and apply it to yourself. As I detailed here, inflation is the enemy of annuity pensions. If the formula is based on the highest five years, and you have some big salary raises on the way, it may pay for you to sit tight a few extra years. Or it may be that the formula increases your benefit substantially once you meet certain milestones. The Rule of 85 is a common one, which means once your age and years of service reach 85, your benefit gets very large. (For example, a person aged 55 with 30 years of service could retire on full pension.) It’s best to get mentally prepared now for the time you’ll serve.

Rick’s Dilemma

This is the path Rick is plodding down. At 55, he’s set financially. A lifetime of diligent savings, smart investing, and an early stint counting beans for a state government means he can quit his current job today. This job is stressful. He’d love to leave, except it’s not a smart move.

Rick is currently vested in a private-sector pension at his current job. At age 56, it’d pay $3,000 a month for the rest of his life. Not too shabby. His financial plan shows he could shove off and be done with the 9 to 5. Yet because of a formula in his pension, he’ll pocket $5,800 a month if he remains employed and a little stressed to age 59. Three years puts $2,800 a month more in his pocket for as long as he remains on the right side of the grass. It takes him only a little over three years to make up all the money he gave up by not leaving at 56. That’s his “what if I die?” breakeven. If he lives 26 years to age 85, the three years of extra toil will produce $765,600 in nominal money. That’s $255,000 for every extra year of work.

Is this worth it? I suspect most people would answer yes. That’s Rick’s position. I remind him of the lifetime value every time we speak.  

Take the Money and Run

Pre-retirees who have a lump sum option may want to follow the opposite strategy: take the money and run before the formula changes. Some hitters should bunt. Others are wise to swing for the fence.

Pension math, like anything that derives from the intersection of government and large corporations, can be a bit baffling. But the core concept is that the lower the interest rates, the larger the lump sum a company must provide to buy you out of taking a stream of monthly payments.

Upon reflection this makes sense. A pension, as I detail in my most recent book, It’s All About the Income (Lioncrest 2022), is essentially liquidating a sum of money, together with the interest it earns on the declining balance, over a person’s life expectancy. The lower the interest rate, the more money is needed to generate the level income. Higher rates, less initial money. The lump sum is the initial money.

No More Dynamite!

The table below illustrates this well. This is not a real life example of a pension. Actuaries would not make the big bucks if it were this simple. But it does illustrate the mechanics.

In this case, the fabled ACME Corporation is on the hook to pay Wile E Coyote, after years of doing his best to destroy Roadrunner, a monthly retirement income benefit of $5,000. The corporation, which (as one episode indicates) is owned by Roadrunner, has promised to finance a fixed portion of Wile E’s monthly income needs.

Wile E has a statistical life expectancy of 15 years. He’s 60 now and coyotes, on average, make it only to 75. If ACME assumes it earns 6 percent on the funds it is paying Wile E, it needs just under $600,000 when he commences his retirement. If interest rates are in the tank and it can safely earn only 4 percent, the initial lump sum increases by 15 percent to roughly $675,000. 

Less Is More and More Is Less

It may be counterintuitive, but low rates are your friend if you have a lump sum pension option. High rates are your enemy.

Why does this matter? You may have noticed that interest rates are spiking off historic lows, and this won’t be good for your lump sum. Each pension plans sets its rates at different times, but many do it once a year, late in the year. If this applies to your plan, the lump sum you’re quoted today is likely based on 2021 low interest rates. Wait until 2022 and you may do a Wendy’s “Where’s the Beef?” when you confront the 2023 offer.

This shrinkage may also make the after-tax value of working an extra year or even a few extra months paltry if not negative. Consider Wile E, who was taking down a considerable $150,000 a year as he approached retirement, much of the comp in hazard pay. If he worked an extra six months, his entire pretax salary of $75,000 (half of $150,000) would have been consumed by his reduced pension.

One Day May Cost You $100,000!

I saw this back in the late 2000s when a company at which I taught financial planning classes allowed employees to model the pensions based on current and future year projections. Although the monthly benefit stayed the same, the lump-sum offer of one soon-to-be retired was reduced by six figures—more than he’d earn if he’d worked the entire year—if he left in January as opposed to December. If he worked one month, he would lose more than a year’s salary in reduced lump sum payout.

Thanks to good planning, that man left with a smile and a seven-figure check.  He got a free year of life.

Not a bad payday for spending a little time analyzing.

It May Matter even if You Plan to Take the Monthly Check

You might be tempted to relax and write off the above as hysterics of an overanalytical financial planning dork. After all, you plan to take the monthly benefit. That’s not changing and, unlike the highly stressed Rick, you’re not working a few years more to boost your payout. You’re leaving soon and your monthly mailbox money will not be affected by any of these analytics.

In the past, I’d have agreed with this logic. A recent planning case, however, rocked my world. I saw something I’d never seen before. I’ll get to that in a minute. First, the background.

My engagement centered on straight fee-only retirement planning for Roy, a 58-year-old man who, like Rick, was sick of his job. Examine the facts, model the options, and advise on the best course of action. Roy had a complex pension. It offered a straight life annuity (SLA), lump sum, partial lump sum, and even an inflation-adjusted option. This is just the sort of thing that prompts academics to quiver with delight.

Getting paid to dive into this is not a bad way to spend the day. It was just the sort of job that provided an excuse to break out the Excel.

I ran the lump sum versus the SLA as a liquidation percent.  It came to 5.4 percent, as the table below illustrates. In other words, the pension offer was just over $2,060 a month for the rest of his life. He could take this or $460,000. The liquidation percent was 5.37 percent. This too was not surprising, given the many pensions I’ve analyzed in recent years.

My Shock and Delight

As a general practice, we always check a lump sum and annuity option against what a lump sum could purchase in the private single premium immediate annuity (SPIA) market. For example, in this case the lump sum offer is $460,000 and the monthly payment option is $2,060. This transparency makes it easy to verify the value of the deal.

We know the age, so we take the lump sum and see how much monthly income this will purchase from a highly rated insurance company. These private annuities pay commissions to agents, so it stands to reason that they pay less, per dollar of lump sum, than the employer’s annuity offer.

The World’s Changed—At Least for Now

I was shocked when I checked and found that the lump sum would purchase $2,399 in monthly income from a highly rated insurer on the open market.

That’s right! If he took the lump sum and purchased a Single Premium Immediate Annuity (SPIA) from a highly rated insurance company instead of letting his former employer send him the funds, he stood to get $2,399 instead of $2,060 a month.

I could not believe it. I don’t recall ever witnessing a commission-loaded SPIA beating a group annuity by more than 15 percent! I double checked with multiple carriers. The results replicated across multiple companies. It’s true, at least for now.

Take the Income and Pocket the Change

This opened a world of favorable options for Roy and may do the same for you. Recall that he had the lump sum option or the annuity option. In this case, a private insurance company would match his pension option for only $395,000. That is, he could take the lump sum, transfer $395,000 of it to an insurance company in exchange for $2,060 for the rest of his life, and invest $65,000 in an IRA to use as he pleases.

Once he is in the world of lump sums, he can select his monthly income amount. No need to be tied to the company’s preset options. The takeaway is that he is getting a much better deal in the private market. As you can see from the table, the increased annuity income will pay out just over $100,000 more than the pension if Roy makes it to 85 and plenty more if he keeps on going. If he uses the lump sum to match the employer pension, it frees up $65,000 immediately.

Consider the Risks

Life is all about tradeoffs and we are rarely comparing apples to apples. Corporate pensions are governed by the Employee Retirement Income Security Act of 1974 or ERISA. This means that they are guaranteed by the federal government through the Pension Benefit Guaranty Corporation (PBGC) up to preset limits by age. The PBGC would fully guarantee my client Roy, at age 58, against default for a monthly pension of up to $3,537. This more than covered his amount.

Once he steps out of the ERISA-protected world, he loses this backing. In the private annuity space, the income is backed by the claims paying ability of the carriers with some additional protection provided at the state level. That is why I compared only highly rated carriers. Is the PBGC protection worth a 15 percent reduction in income? $65,000 today? $109,000 by age 85? Some people may say yes, others no. There is no right or wrong answer here. It is important that you understand the tradeoffs and draw your own conclusion.

Limited Time Offer

This opportunity is not likely to stick around for long. I am no actuary, and I don’t work in any pension department or for any insurance company. That said, my hunch is that this money shot is the result of private insurers responding quickly to rising interest rates and corporations adjusting their assumed interest rates annually.

The purpose of this article is to ring the bell alerting you to the opportunity to potentially make some lemonade from the lemons this year’s financial markets have offered up. To paraphrase the counsel of the Zac Brown Band in its song “Let it Go,” when a pony comes a-walking by, you might want to put your rear end on it.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton, CT, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory services, and financial planning services are offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to be complete or to cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.

CRN202507-2830038

Take Your Job and Shove It

“A Harvard-trained economist says ‘early retirement is one of the worst money mistakes—here’s why you’ll regret it,’” blared a masterfully crafted clickbait headline.

I couldn’t resist. I clicked. 

The author is prominent economist and personal finance author and entrepreneur Lawrence J. Kotlikoff.

He wasted no time delivering his thesis: “For most Americans, early retirement isn’t just a decision to take the longest vacation of their lives — it’s one of the biggest money mistakes that they will regret,” he writes. “The reason is simple: We are, as a group, lousy savers, making early retirement unaffordable. Financially speaking, it’s generally far safer and far smarter to retire later.”

Kotlikoff makes a familiar case in this piece. He cites the meager saving of the average American and notes the substantial increase in annual income from delaying Social Security.

His tight and entertaining presentation makes sense. It represents the conventional wisdom on retirement in America. Yet I can’t buy in. In my experience as a retirement practitioner—a facilitator of financial independence—I find that the decision to leave full-time paid work behind is nearly universally positive.

I set the article aside and pondered our disconnect. Why my unease? A month and a few re-reads later, it hit me. The key words were right there at the top of Kotlikoff’s piece: “regret,” “as a group,” and “safer.”

Pick your poison

Let’s start with regret. Kotlikoff worries that people will regret retiring early and then coming up a few dollars short. That may be a mistake. But so would working an extra decade to pad the portfolio, only to find yourself among the half of people who stop needing any money prior to average life expectancy.

Reframe regret

What if the article headline had blared, “Working too long is something you’ll likely regret: Experts say the safest way to ensure you enjoy years of financial freedom is to call it quits as soon as you can”?

Minimizing one regret may maximize another

I often ask groups of people to take a moment and recall the thing they did that they regretted the most. After a minute invariably smiles will appear on many faces.  Why? Since they aren’t serving time for their act, I suspect it’s now water under the bridge and often a funny story. I’m sure you have one. I have a few.

I then ask people to ponder a thing that they regret not doing, a shot they didn’t take. The room’s mood sours and smiles turn upside down. The regret for missed opportunities grows over time. This is the asymmetry of regret.

Getting retirement right or wrong

Faced with a retirement decision, there are two ways to be right and two ways to be wrong. You can retire and enjoy it, and therefore be right. You can also continue to work, live a long life, and have the extra years of earnings play a critical role in your advanced years. Here too you’d be right.

Alternatively, you can retire early or at least from a job that you could have kept and either not like the new freedom or eventually run short of money. You were of course wrong.

So too if you kept your nose to the grindstone enriching yourself and the company only to expire with significant unspent funds. That’s akin to trading in a car with new brakes, fresh tires, and a full tank of gas with no compensation. Now there’s some regret.

The endlessly fretting retirement experts focus only on one type of error and one type of regret. For the risk-averse, the very sorts of people who flock to tenured academia, government bureaucracies, policy think tanks, and the media, this may be correct. For many others it misses the point entirely.

Groups don’t retire, individuals do

The next disconnect derives from the academic’s focus on aggregate data rather than individual reality. Much is made of the meager average savings of Americans, with no reference to the variability. Many households are statistical zeros. They’ve never had money and never will. They’ve been living tight for years and will continue to do so in retirement. For some, it’s due to low-paying jobs. Others just refuse to delay gratification and invest.

In a free society, this may or may not be a pressing public policy issue. It shouldn’t be a personal concern for people who have high retirement funds of six or seven figures, ready to provide income. These people will also have Social Security on deck and perhaps even a pension or two.

The perpetually broke are certainly not the audience reading this article or CNBC websites where Kotlikoff rang his warning bell. There’s never any evidence presented that it’s these folks who are retiring and therefore in peril. In fact, a long-running Gallup survey of actual retirees consistently shows that they have no trouble generating enough income to live comfortably.[1] And if you enter retirement with a few dollars, your chances of spending your last dollar are thankfully low. An in-depth study found that people who entered retirement with at least $500,000 typically spent down only 12 percent of their principal in 20 years.[2]

Digging into data

The best look at American household finances comes from the Federal Reserve Survey of Consumer Finances (SCF). This triannual deep dive examines our income, assets, liabilities, and even insurance. It paints a far more complex and happier picture of personal finance and retirement readiness than the straight average of retirement plan balances.

For example, the oldest Americans have the most money, which makes sense when we consider how it compounds. The median net worth of Americans aged 65 to 74 is $266,000. The mean is $1.27 million.[3] 

Combine this with the typical spending needs of Americans. The Federal Reserve Survey shows a median income for Americans aged 65 to 74 of $50,000 a year.  The 2021 U.S. Bureau of Labor Statistics Consumer Expenditure Survey provides deep empirical insight into the actual financial lives of Americans. Its most recent report pegs the average (mean) income for American households headed by boomers born between 1946 and 1964 at $78,000.[4]

This data set dives deep into consumption data. Two-person households over age 55 spend roughly $55,000 at the mean.   

This level of spending may seem low to the coastal and urban professionals who write about retirement. But it puts the shockingly low aggregate savings numbers in perspective. Suddenly a couple’s $3,200 a month in tax-free Social Security, along with a paid-off house and $250,000 in retirement investments, cover the spending needs of a substantial portion of retirees. It even explains why few Americans spend down their assets in retirement.

The problem is framing. Six- and seven-figure-income professionals know very few people who support households on $50,000 to $75,000. But these are most Americans. Social Security is progressive and income taxes are extremely so. It just doesn’t take multi-millions of investments to fund the average retirement. It may, however, take millions to fund yours.

Safety matters

It’s easy to conceive of retirement as a binary choice. Many people will work and retire completely. It’s a light switch. Retirement in this view is risky, as it entails walking away from a steady paycheck that can never be replaced.

Many of my clients get their last paycheck, settle on an income strategy for retirement funds, and book the winter in Florida or South Carolina. Others, however, will push off from the 5-day, 40-hour week and 50-week year to work part-time, often in the field they ostensibly left.

In both cases an early retiree’s risk of poverty is mitigated by a substantial reserve of human capital. We’re all knowledge workers now. We get more valuable and have more leverage as we age. A person’s human capital doesn’t evaporate the day he or she retires. Their networks don’t disappear. In cases where early retirement may in fact be a mistake, the destination is not destitution. The mistake, if it is one, is not irreparable.

Earn a little, live a lot

This ability to earn provides a serious safety net. In retirement a little earning goes a long way. Social Security provides a floor below which retirees can’t fall. Then there are the accumulated funds that in most years will earn more than a person’s withdrawals.

Retirement Daily readers will be familiar with the 4% withdrawal guideline. Adherents to this approach to retirement accumulation and income generation need $1 million to generate $40,000 of annual income that they can expect to inflate to match increases in the cost of living.

These number can be depressing. Researchers hark on them constantly, with some particularly nervous types making predictions that even the 4% percent withdrawal rate is too aggressive. Examined from another angle, this guideline highlights the massive value of even part-time work kept in reserve. A part-time job bringing in $30,000 a year is the equivalent of $750,000 of capital. Most retirees are highly skilled, so generating this sum annually is not difficult.

Speaking of a cash infusion

In my experience, few people explicitly base their retirement plans on catching an inheritance. Reasons for this are myriad, from not knowing how much mom and dad have, to loving one’s parents and not wanting to face the inevitable, to the reality that it’s their money, they worked hard for it, and they have every right to spend it all.

All well and good. But the reality is that trillions of dollars are headed down as I write. The adoption of 401(k)s and IRAs as a dominant retirement system means that retirement income comes from mounds of money saved by individuals, not corporate coffers, government budgets, or insurance companies. A 60-year-old likely has at least one parent in his or her 80s. Again, the Federal Reserve pegs average net worth for Americans over 75 at $254,000 (median) or $977,000 (mean).[5] When the older generation no longer needs the income, the capital passes down. Houses come with cash these days.

They call it work for a reason

Work provides many non-monetary benefits: human interaction; fulfilling, meaningful tasks; and structure to the day, week, and even year. For some of us, our vocation is our avocation and we’d rather work than do most other things. I suspect this is true for most intellectual earners. We get paid for having fun.

But each positive arrives with an offsetting negative. At low levels, work is a grind and the pay sucks. Physical jobs such as the heavy construction field in which I grew up wears people out physically. Not everyone can work until age 70 or even 65. Even cushy jobs get repetitive and require us to leave home in snowstorms, request time off for family functions, and push household chores to the weekends. Would you rather spend time with Martha at the office listening to tales of her grandkids or with your grandkids manufacturing tales of your own?

A recent study published by the Center for Retirement Research at Boston College indicates that, on average, Americans work to live rather than live to work.[6] These researchers focused on how empty nesters use any freed-up funds to invest or pay down debt. It appears from this data set that on average, recently liberated parents neither pay down debt nor increase retirement savings. Instead, they reduce their hours and take more of their lives back when they no longer need to support the kids.

When financial independence appears possible, the benefits of leaving paid work outweigh the risks. Many people still have pensions that make leaving possible. Others have large investment balances from years of diligent investing. For others, lower levels of income mean a less expensive lifestyle that can be supported with Social Security and a cash side hustle.

You’re the only expert that matters

At the end of the day, it’s likely the clickbait nature of the news business that drives these retirement crisis articles. If it bleeds, it leads. People worry about a mistake and these stories feed fear.

This doesn’t explain why we don’t see equivalent stories about the half of people who die before their life expectancy and therefore worked far longer than necessary. Perhaps it’s because these folks are harder to pin down for interviews and don’t do so well on camera.

The data point that matters to you is one: your family’s. It doesn’t matter how much the average American your age has saved for retirement. It’s not a decision point how many people don’t have pensions any longer. The only thing that matters is how much you have stashed and what other resources—pensions, social security, part-time earnings, and spousal earnings—you can count on.

Once you have enough, you’re financially independent, even if you’re 60. Quit that job and do what you want. That’s the safest way for you to maximize the time you spend retired. If you stay a day longer than you must, there’s no doubt that you’ll regret it.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton, CT, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities, investment advisory services, and financial planning services are offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. Any discussion of taxes is for general informational purposes only, does not purport to be complete or to cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.

[1] Megan Brenan “U.S. Retirees’ Experience Differs from Nonretirees’ Outlook,” Gallup, May 18, 2021.

[2] Sudiptp Bamerjee, “Asset Decumulation or Preservation? What Guides Retirement Spending?” EBRI Issue Brief, no. 447 (Employee Benefit Research Institute, April 3, 2018).

[3] “Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin, Board of Governors of the Federal Reserve System, September 2020, Vol. 106, No. 5

[4] U.S. Bureau of Labor Statistics, “Consumer Expenditures-2000,” www.bls.gov/cex/

[5] “Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin, Board of Governors of the Federal Reserve System, September 2020, Vol. 106, No. 5

[6] Andrew G. Biggs, Anqi Chen, and Alicia H. Munnell, “How Do Households Adjust Their Earnings, Savings, and Consumption after Children Leave?” November 2021

CRN202509-2338118

The Unicorn

The second chapter of my forthcoming book It’s All About the Income (May 2022) kicks off with a picture of a unicorn to make the point that there’s no such thing as pure safety, a government-backed investment that “produces high levels of reliable income.” My point is not subtle and in general I’m sticking to it. True financial safety requires a diversified approach, a mix of investments of which some will always be underperforming at any given time.

Yet I’m being proven wrong as I write. I was alerted to this a few months ago on a call with Tom, a smart man who was spending hours educating himself on the ins and outs of personal finance. He’d been spending time on Tik Tok and asked me about a U.S. government-backed bond that pays just over 7 percent. I smelled a scam, explaining that risk always comes with reward, that the 10-year treasury just broached 2 percent, and that this must be a junk bond. “You’re getting ripped off,” I condescended.

I was wrong. Very wrong. And I owe Tom an apology for my arrogance. He was referring to Series I Savings Bonds (I Bonds) that as of November 2021 were paying a six-month interest rate of 7.12 percent annualized on newly purchased paper.

I’ve been pulling penance for my ignorance and arrogance by discussing this opportunity in one-on-one meetings. But it’s long overdue to blast the news. This is not a recommendation to purchase these securities from the U.S. government. They may or may not be appropriate for you. They may work for your financial plan or just be an annoyance. That’s for you to decide. If you want advice, you know where to get me.

That said, here’s the skinny.

I Bonds date back to 1998. They are the direct version of Treasury Inflation Protected Securities and have some important differences. They can only be purchased directly from the government on treasurydirect.com or through a tax return. Each person is limited to $10,000 worth a year, plus a potential for $5,000 more paper bonds purchased with tax refunds.

This provides a strange incentive to overpay taxes to generate a refund of this magnitude. Here’s a hack. Make a fourth quarter estimated tax payment of $5,000 on January 15th. You won’t be providing Uncle Sam much float.

The bonds mature in 30 years and taxation on the interest is deferred until you cash them in. (You can elect to pay the taxes each year if you prefer.) The principal value will never go negative. You must hold them for at least one year.  If you cash them in prior to five years, you will give back three months interest. After five years they are fully liquid without any penalty.

These are the cousins to Series EE Savings Bonds, the traditional U.S. Savings bonds. The returns comprise two features. First, the underlying interest rate, which is currently zero. This rate is set at issue for each bond and will never change.

The second component is a principal adjustment for inflation that is based on the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CFI-U). This index includes energy and food, two of the leading expenditures for many consumers. This rate resets twice a year, in November and again in May. Your bond will reset every six months in the month in which it was purchased.

Given the recent price spikes, the rate jumped to 7.15 annualized in November 2021. As the table below illustrates, some purchasers of I Bonds in previous years are already enjoying 10 percent or higher returns due to base interest rates of more than 3 percent in earlier times. Hence my Unicorn, almost. In my defense, there have been plenty of years in which these bonds did not produce high income. Therefore, the current rate of return can’t be considered reliable. 

I like to say that there’s always something good going down somewhere in personal finance opportunities. Right now, I Bonds present an interesting opportunity for risk-averse investors who seek inflation linked interest rates. The only drawbacks are the small quantity of these bonds which you can purchase and the inconvenient fact that, given today’s high prices, the real returns are set at zero. That’s still better than what banks are offering.

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Any discussion of taxes is for general informational purposes only, does not purport to be complete or to cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. CRN

3 Business Growth Tips from "Keep it Simple and Make It Big"

What happened that made you decide to write the book? What was the exact moment when you realized these ideas needed to get out there?

I’ve spent much of my life and certainly now most of my day telling stories to illustrate important concepts and things I feel are deep truths.  The urge to get it all in one place consumed me two years back, as the summer gave way to the New England fall colors.  I lit a fire and started writing.  Keep It Simple, Make it Big is the result.  I designed this book as a comprehensive, yet extremely accessible overview of the fundamentals and strategies of personal financial success.  I’ve had years of experience working every day with middle-class American families and I wanted to share the strategies that create financial success.  The United States retirement system is often criticized for not really being a “system.” That is, journalists and academics are inherently biased to favor a top down, one size fits all system that is regulated and controlled by government and other large I institutions that can be manipulated, prodded and controlled by pressure groups.  I, on the other hand, think of system is not only not broke but it offers fantastic opportunities for almost everyone to create their own financial success.  It is self-serve, however, so people must act. 

1. What's your favorite specific, actionable idea in the book?
   
   

Hands down, it’s big goals motivate.  Don’t ask “why” ask “why not?”  A great life doesn’t just happen, it’s created.  I view finance as a fuel to power the life of one’s dreams.  For most people, wealth is not an end in and of itself, it’s a means to an end.  We all need to understand this, take a step back and, as Dr. Stephen Covey wrote, begin with the end in mind, and decide what we want out of our short time on this earth and then go get it.  As it relates to finance, this goal will determine how much one needs to accumulate and that will determine the best places to do so, Roth IRAs, employer plans, non-qualified investment accounts. Getting into financial details, the actionable items include people really understanding the basic structure of our tax code and how it relates to their family’s income and what they get to keep.  Also the proper use of insurance to protect that which they can least afford to lose. And a proper understanding of investment risk and time horizon, specifically that assets such as CDs that appear safe are actually high risk over the long run and assets that are risky in the short term, such as ownership of publicly traded corporations, are the safest over the long run.  Finally, returning to a core concept, our financial lives tend to be based the primacy of income while we are working and the primacy of expenses when we are retired. 

1. What's a story of how you've applied this lesson in your own life? What has this lesson done for you?

I’ve pretty much spent my entire life applying these principals.  Asking why not, allowed me to change careers twice, each time with a reduced income stream.  The second transition, from a writer to financial advisor, occurred when I had a brand-new baby and a brand-new mortgage.  I left a near six figure writing career for a position that paid $800 a week for 13 weeks and zero after that.  I was able to do it because I followed the principals I document in the book.  I always saved and invested and understood my expenses, necessary and otherwise.  I dug in and paid the price of success.  With family help, I was able to take care of a disable daughter and build a good life.  These days, I track all my time.  I work a 50-hour week, I’ve been fishing 40 days this summer with friends, family and clients, and pre-and post-covid I will visit every major league baseball park with my parents.  My son is getting a fantastic education at a boarding school, which I can afford due to years off business building. Again ask why not? I am currently in the process of getting my Commercial Driver’s License back so I can drive Semi-Trucks.  I love trucks and I had a license when I was 18 but I went to college, drove buses then, and eventually let it lapse.  I’m nor sure how I’ll use it, but you may just see me in your rear-view mirror heading south.  I’m pretty sure I’ll in a rare club: a financial advisor who published a book and secured a Class A license in the same year.   

Back to School

It’s back to school time. Your little charges may be getting dropped off at preschool, boarding a bus for elementary school or driving themselves to high school. Regardless, at some point in the not so distant future they may be heading off to college. That carries a financial wallop. It’s never to early to start planning. 

The price tag hanging on college educations can appear staggering. Private Colleges average $22,000 for just tuition, fees and books. Living is extra. Here in Connecticut, UCONN will set a student back just over $17,000 for the full package of tuition, room board and books. Even Connecticut’s two year colleges cost $3,300 for tuition and books. The room and board is extra. (Source: The College Board 2006-2007 Survey of Colleges.)  

The price, however, is often well worth it. In financial terms, college graduates earn an average of 60 percent more than people with a high school diploma. (The College Board, Education Pays 2007) In addition, the experience often confers maturity and allows for more options and freedom.

But how to pay?  Like all things financial, there is no one right answer for everyone but a variety of options and strategies that can be pursued.

One is waiting and paying out of pocket or relying on aid. This is the most dangerous, as most aid arrives in the form of loans that need to be paid back. 

Some sort of pre-funding college is often prudent. There are many good options available ranging from traditional college accounts to less traditional strategies. Most will employ some form of tax deferral. 

The traditional college accounts are now state sponsored 529 plans. Every state sponsors at least one. People can use any state plan, but up front tax advantages often require the use of a resident state’s plan. In Connecticut and New York, for example, state residents get state income tax deductions for contributions to state plans up to $10,000. 

Section 529 plans work like Roth IRA for higher education. Contributions are made with after tax money. The money can be invested in an array of options, depending on the state plan. It grows tax deferred. When it’s spent on qualified higher education expenses, the gains will not be taxed.* 

There are also pre-paid tuition plans. These allow people to lock in today’s tuition rates, effectively hedging against inflation. A downside is that they tend to be state or school specific. 

Education Savings Accounts, which work like 529 plans with a few differences. Joint filers with incomes greater than $220,000 cannot contribute. Nobody can put in more than $2,000 a year per beneficiary. This money can be spent on K-12 education expenses, in addition to college. 

Other options include Roth IRAs, traditional IRAs, cash value life insurance, taxable savings and investment accounts and uniform gift to minor accounts. Each of these can be appropriate for families depending on their unique circumstances. 

A Roth IRA, for example, might be a good choice for family that wants to maintain a favorable position for needs based financial aid and whose adults are retirement age or near retirement age when a child hits college. For families with younger parents, a cash value life insurance policy may provide similar benefits. For a family that has significant retirement assets but little non retirement savings, tapping an IRA penalty free for qualified higher education expenses can make sense.

Education is more valuable than ever—and more costly too. Fortunately, families have many good options for accumulating resources to pay tuition and other expenses. There is no one best way. There are a variety of tools that can be used build a plan to suit a family’s unique needs. Like most things financial, the best strategy is to get started as early as possible. Contact a professional and design a plan. Time, combined with prudent tax advantaged investing, makes a little money stretch a long way. 

*529 Plans are established by states or eligible educational institutions under IRC Section 529 as “qualified tuition programs.” There is no guarantee offered by the issuing municipality or any government agency. You should consider the potential benefits (if any) that your own state’s plan (if available) offers to residents prior to considering another state’s plan.  There may be tax benefits to plans offered by your resident state.  Non-qualified withdrawals from a 529 Plan are subject to a 10% federal tax penalty and current income tax and may also be subject to state tax penalties. As with all tax-related decisions, consult with your tax advisor.

Eggs in a Basket

Who among us has not been warned against putting all of our eggs in one basket? This wisdom, handed down through the ages, reminds us that success often depends as much on our ability to manage life’s risks as it does to seek life’s rewards.

The fact is that through much of our lives, in most of life’s aspects, we are in fact highly concentrated. After a few years of general study, for example, we settle down and concentrate our knowledge in a specific area, be it engineering, medicine, business or some other field. If we don’t do so in school, the workplace pushes us in this direction. We may progress from laborer, to heavy equipment operator to specializing in a particular piece of equipment. 

We concentrate our affections, when we say “I do,” after hearing the better and worse line. Our real estate holding are usually limited to one zip code. 

I do know for sure that in the area of our financial lives, it’s imperative that we manage concentrated risk. While it’s not limited to investments, we often find people are taking far too much risk in their retirement and investment accounts. 

The most common way people find their investments concentrated is in a company 401k plan. Many companies matched contributions in employer stock and many people put their contributions into employer stock as well. It’s not uncommon to find a person with more than half of their invested wealth in a single company. 

People may also find themselves with a large amount of stock due to an inheritance, the purchase of company stock through an employee stock purchase plan or systematic investing in a dividend reinvestment plan. It’s never a bad thing to own the stock of great companies. But it is possible to have too much of a good thing. Especially if that good thing turns not so good.

Stock prices move quickly and significantly, sometimes when the market is closed and retail investors have no way to get out. I don’t need to name companies, but there have been some high profile disasters for rank-and-file employees in the last few months and years. 

Investors have many good options to diversify their investments and spread risk. Inside employer-sponsored 401k plans, there are no tax consequences for selling and the trading costs may be paid by the employer. Many 401k plans offer diversified investments in most asset classes where a single selection will offer ownership in hundreds of companies. The company stock you sell may very well be one of the companies, but it will be joined by many, many more.

Stock positions in taxable accounts can offer more challenges. Sometimes the challenge is emotional, when the stock was acquired through inheritance. Often it’s a tax issue. People know they should diversify a position, but selling often triggers a tax on the gain.

There is no best way to deal with emotions. One strategy, however, is to determine the amount of shares the individual originally purchased and sell down to that number. One can also keep a token amount of stock in honor of the grantor.

As for taxes, we must always remember that we pay taxes only on the gain, not the entire amount. Under current tax laws, the maximum capital gains tax rate is 15 percent federal plus applicable state tax, which in Connecticut is an additional 5 percent. Market fluctuations, in contrast, affect the entire value of the stock. They can be severe, wiping out in a day far more than taxes would have claimed had the position been trimmed.  Investors must also remember that they will have the cash to pay the taxes by reserving a portion of the sale proceeds. 

Concentrated stock can be addressed by hedging, selling or gifting. A hedging strategy entails setting floors on the price at which one will keep the stock. The best way is through options, and it requires attention as well as expense.

Selling the stock is generally straightforward. One exception might be for a person who is an executive and considered a control person of the company.  In that case they may have to establish a systematic plan.

Investors can pool large positions into exchange funds, which are vehicles that allow many people with concentrated positions to come together and pool their shares. There are risks and costs associated with such pooled funds that need to be fully evaluated before entering such an arrangement.

People should also consider the charitable option, especially if they are currently giving cash to a church or charity. If they gift stock, the charity can sell it and pay no tax due to their tax-exempt status.

There is no single-best way to manage the risk of a concentrated stock position. Thankfully, there are many good ways to do so. The one that’s best for you will depend on your individual circumstances.

Facts of Life Part II

Normal people don’t spend excessive time contemplating their demise. That said, the last column started a conversation on just this topic, covering the issue of who might need life insurance and how to figure out how much is needed.  This column will address what kind of life insurance might meet your needs, should you need it.

First a review. The first step is to ask the question: I’m dead, now what? If the answer is someone you love needs money, then you have a need for life insurance. Step two is to determine how much is enough (there’s never too much), which can be accomplished by either putting a value to foregone future earnings or a more detailed determination of what it would take to support those who depend on you. 

It is only then that we get to the third step, determining which type of insurance best suits your needs. Although the type of insurance comes third in the process of evaluating a life insurance need, it is the focus of many debates over life insurance and it often causes paralysis, or creates an excuse to do nothing. Not acquiring life insurance because of an inability to determine the kind is the equivalent of not eating because one can’t determine the perfect meal. At some point, it makes sense to simply pick a dish and meet your basic obligation to yourself. 

The kind of insurance should always be a tertiary consideration to determining the need and amount. If one needs life insurance, taking action to purchase it is a moral decision, similar to securing a safe residence for one’s family. The particular type one acquires is a business decision, akin to deciding whether it’s best to rent or buy an apartment, condominium house or country estate.  

So what are the choices?

There are two type of policies, let’s call them “If” policies and “When” policies, temporary and permanent, often known as term and permanent.  One is not better than the others, just as a sedan is not better than a pickup truck. They are simply designed for different jobs. 

Let’s start with term insurance—the “If” policies. Term is pure life insurance, a contract that is in force for a period of time or term, generally referenced to the period of time over which the premium payments are fixed.  These contracts pay an income-tax free death benefit if the insured dies while the contract is in force. Most policies through work are term policies. 

These policies offer no cash values or investment features. Since the probability of death is low for healthy people who are young, term insurance is inexpensive on a cash flow basis for young people. Term is generally appropriate to cover large temporary needs, such as replacing money for a child’s education, a spouse’s income should death occur before retirement assets have been amassed. 

Permanent policies are designed to be, well, permanent. These are the “when” policies, as in they will pay an income-tax free benefit when the insured passes on.  The varieties include whole life, universal life, and variable universal life. 

These variations, while significant, are dwarfed by the similarities. Permanent policies combine an insurance feature with a cash accumulation account. The premiums may be level or variable, but in the early years they will generally be more expensive than term. They are, however, designed to remain in force and therefore pay a benefit at advanced ages. This makes it an appropriate choice to cover long term and permanent needs, such as replacing lost pension and social security income, providing for children with special needs, or providing money to pay estate taxes. Since they are designed to pay when one dies, they may end up significantly less expensive than term over their lifetime. 

In the long run, the best investment is the investment that provides the right amount of money when it is needed the most. The best insurance is that which provides the appropriate benefit when it is needed. Sometimes the need is temporary, and therefore a term insurance solution is appropriate. Sometimes, it is permanent and requires a permanent solution. 

The first step, in either case, is taking the time and making the effort, either by oneself or with a professional, to identify your needs and put dollar figures to them. After that, one makes the business decision as to what combination of insurance to use to meet those needs.