Click on a question below to read the answer:
Q: In our state of Washington, in the past many retiring teachers enrolled in the health authority’s Public Employee Benefits Board plan. The 2014 rates for an individual were about $550-$590/month for the typical medical coverage. This seems too high. Will the Affordable Care Act offer a better option?
A: Affordable Care Act insurance plans offered by the state of Washington do not include retiree plans—it’s targeted toward employer/active employee coverage. If you are a pre-Medicare retiree, you could look at options under the state of Washington’s insurance Marketplace (www.wahealthplanfinder.org); however, the out-of-pocket costs may be more than what you are currently paying (very high deductibles) and the Marketplace is age-rated, meaning at 60, you will be paying a considerably higher premium than a 25-year-old. Carefully review the Marketplace option so you are not surprised with the cost and coverage. Note that once you opt out of the HCA/PEBB plans, you can never rejoin.
Q: Due to the cost of LTC insurance, with rising premiums, we are considering a hybrid universal life policy that can be used for LTC. In your opinion, is this a viable alternative? The premium is high but it never increases.
A: Hybrid long-term care policies combine life insurance with a long-term care rider, thereby providing the policy owner with access to funds to cover long-term care expenses if needed, and a death benefit to beneficiaries if the long-term care benefit is not needed or not fully used. In recent years, these policies have become more popular because their costs are typically guaranteed not to go up once a policy is purchased. In comparison, traditional long- term care policies cover all qualified expenses, up to a maximum amount, but do not provide a death benefit. And, in recent years many existing policy holders have experienced significant premium increases. A few factors to consider with a hybrid policy include (1) a personal need/want for life insurance; (2) the living benefits provided are usually limited to the amount of the death benefit of the life insurance policy; (3) these policies usually require a large, single up-front premium ($50,000 or more) although some companies may allow for payment over 2-3 years. Additionally, with a hybrid universal life policy that pays fixed interest to the policy cash value, when/if general interest rates rise, there is no guarantee that the insurance company will in turn pay a higher interest rate to policy holders. There are more choices available today for covering future long-term care costs, with benefits and trade-offs for each. Please consult with an insurance agent and compare sales illustrations to understand what may work best for your personal situation.
Q: I’m 56 and retired. Can I withdraw money from my IRA without paying a penalty?
A: That depends. Generally, the early withdrawal penalty applies regardless of whether or not you are employed. However, the penalty may be waived in any of the following circumstances:
- You are disabled
- The money is used to pay medical expenses exceeding 7.5% of your adjusted gross income. (Keep in mind, though, that the amount withdrawn will be added to your income, which will have the effect of raising the 7.5% threshold.)
- The money is used to pay qualified education expenses for you or someone in your family at an eligible educational institution.
- The money is used to buy a first home (up to $10,000).
- The money is used to pay medical insurance premiums after 12 weeks of unemployment.
- You die. (Distributions to your beneficiary will not be penalized.)
- You take regular periodic distributions known as “substantially equal payments.” If you choose this option you must take the distributions for five years or until you turn 59 1/2, whichever is longer.
Please note that the technical requirements for eligibility for any of these penalty exemptions are complex; be sure to consult a tax advisor for details.
Q: I’m in my 20s, have debt and I don’t have much cash available for savings. Do I really need to save for retirement now?
A: Yes. Saving for retirement should be a priority for everyone. And, although you’re only in your 20s, it’s a great idea to think ahead and consider what your life will be like at age 65 and beyond, and how you will plan for that life.
You may be feeling financially squeezed, but your biggest asset right now is time. Take advantage of it! With the power of compounding (earning interest and/or growth in investments) and making contributions at regular intervals, you can save and invest smaller amounts now that can grow more significantly over time than if you waited. For example, if you start saving $100 per month at age 25, you could amass just over $199,000 (assuming an annual return of 6 percent) by age 65. If you wait until age 35 to start your contributions, you would need almost $200 per month to generate the same amount.
Get started now—even if it’s a small amount—and stay in the habit of saving and investing regularly. Your dedication and patience will be rewarded in the future.
Q: Since I’ll have a pension and social security income, why should I save more money for retirement?
A: For many years, the metaphor of the Three-Legged Stool of retirement income—pension + social security + personal savings—was widely used to describe how individuals could create income stability for their retirement years. That basic premise still holds true. However, the spotlight on the personal savings aspect has intensified as our state and national financial systems have strained under the weight of market volatility, recession and population longevity.
While we can recover from market volatility and recession over time, the impact of providing lifetime benefits to a population that is living longer in retirement is proving to be a tough challenge to state pensions and the social security system. To mitigate this challenge, you will continue to see things like changes in state pension benefit levels, contribution formulas and COLAs (cost of living adjustments).
What this means for you is that personal savings should play an integral part in planning for your future. While it may seem like your pension and social security income may be enough, keep in mind a few of the other variables that can reduce your purchasing power and make it harder for your dollars to last: inflation, taxes and rising healthcare costs.
Therefore, your personal savings, including cash for liquidity and investments for capital appreciation and growth, can make the difference between having enough to live comfortably in retirement and having an income shortfall that reduces your standard of living.
Q: How much should I be saving for retirement?
A: Every situation is unique. You’ll need to run the numbers to determine what makes sense for you. Use an online retirement calculator where you can do personalized projections that include income sources like your state pension, 403(b) and IRAs.
Include future expenses in the calculation, too. If you already have an idea of what those expenses will be, that’s great. If not, use an estimate that includes replacing approximately 70%-90% of your preretirement income.
Look at your situation in more than one way. Change assumptions in the calculation, such as life expectancy and levels of saving and spending, for example, so you can get a better understanding of the impact such changes can have on your future bottom line.
An online retirement calculator provides a great starting point in helping you determine how much you should be saving for retirement. You should review your calculations at least annually or as often as your financial situation changes. Also, consider talking with a financial professional to ensure that you’re covering all your bases, including appropriate savings goals for your age, risk tolerance, diversification and tax efficiency.
Q: Do I really need life insurance after I’m retired?
A: If a loved one will suffer financially when you die, chances are you need life insurance. Life insurance provides cash to your survivors after your death. This cash can help with funeral costs, medical bills, lawyers’ fees, taxes and daily living expenses. What’s more, there is no federal income tax on life insurance benefits. And understand that, depending on the size of your estate, your heirs could be hit with a large estate tax payment after you die. The proceeds of a life insurance policy are payable immediately, allowing heirs to take care of estate taxes, funeral costs and other debts without having to hastily liquidate other assets, often, unfortunately, at a fraction of their true value. Life insurance proceeds are generally income tax free and can be arranged to avoid probate.
Q: Once I turn 65, I will be covered by Medicare and all of my medical expenses will be covered, right?
A: Medicare covers many of your medical expenses, but not 100%. Medicare Part A covers up to 60 days of hospitalization with a deductible of $1,184. Medicare Part B will cover 80 percent of all approved charges for doctor's office visits, blood tests, X-Rays, CT scans, MRIs and ER visits after you pay a $147 deductible each year. A Medicare Supplement Plan helps fill in these gaps in coverage. When considering a Medicare Supplement plan, weigh how much you can afford to pay out-of-pocket against how much you want to pay for premiums. Each of the standardized plan options provides a different level of insurance protection. Select the one that fits your personal needs and budget.
Q: I hear so much about the importance of long-term care insurance, but I’m healthy and it’s so expensive. Do I really need to consider it?
A: If you can afford long-term care insurance, at least consider it. Why? Because the cost of long-term care, should you need it, can quickly deplete your life’s savings. For instance, having a home health aide visit just three days a week can cost more than $20,000 annually. Full-time nursing home care, the most expensive type of care, now averages $69,000 to $78,000 per year. In some regions of the country, like the Northeast, the cost may be twice that amount. There’s about a 70 percent chance you’ll need some type of long-term care after age 65. If you can afford to pay for care without significantly impacting your assets, you may not need long-term care insurance, but if not, long-term care insurance is something to consider as part of your retirement planning.
Q: Can I contribute to a 403(b) plan and to a Roth IRA?
A: Both the 403(b) and the Roth IRA are excellent ways to supplement your retirement savings. And you may be able to contribute to both if you’re within income limits.
The big differences between the two accounts revolve around timing of tax liability, contribution amounts, income thresholds and required minimum distributions.
For a 403(b), your contributions are made on a pre-tax basis, which means your current taxable income is reduced and you can enjoy more take-home pay. The value of your account is tax deferred until you withdraw money from it, at which time you will pay income taxes on your contributions and earnings. Withdrawals prior to age 59½ also incur a 10% penalty tax.
For 2014, the maximum contribution to a 403(b) is $17,500. If you’re 50 and over, you can contribute an additional $5,500.
Lastly, you will have to take money out of your 403(b), at least annually, in the form of a Required Minimum Distribution, beginning at age 70 ½. Failure to take out the RMD timely can result in a penalty tax.
For a Roth IRA, your contributions are made with after-tax dollars, so your current taxable income is not reduced. However, future withdrawals, including earnings, are tax-free provided you hold the Roth IRA for at least five years and reach the age of 59½. For 2014, the maximum contribution to a Roth IRA is $5,500. If you’re 50 and over, you can contribute an additional $1,000. Eligibility for the Roth is based on your adjusted gross income. For single individuals, income must be less $129,000 (contributions are reduced starting at $114,000.) For married individuals who file jointly, income must be less than $191,000 (contributions are reduced starting at $181,000.) Roth IRA owners are not subjected to Required Minimum Distributions. One caveat: RMDs do go into effect after the death of the account owner, at which time the beneficiary will choose their appropriate RMD schedule.