Three Ways to Make Your Financial Resolutions Doable.

Let’s be honest – most of our New Year’s resolutions get thrown by the wayside a few months (or weeks, I’m not judging) into the year. Often times, this is because our resolutions are entirely too broad to actually be implemented in our daily lives. For example, stating “I want to be healthier” is a great goal, but may be better stated by planning to cook at home five nights a week or committing to going to the gym for 30 minutes four times a week. Being specific in our goals is the key to success.

The same concept applies to make your financial resolutions doable.  When it comes to your 401(k) plan, my guess is that you set it up when you were first eligible to join your company’s plan, quickly filled out the paperwork, and maybe glance at your quarterly statement as you’re filing it away. Since we’re living longer and could spend over 30 years in retirement, our 401(k) account deserves an annual check-up and action behind it.

So how do you set realistic 401(k) resolutions this year? Here are three tips to try.

1. I will understand what investments I own and why.

Flip the ‘set it and forget it’ approach to a more active view, especially if your portfolio consists of one target-date fund. Since target-date mutual funds now hold over $1 trillion (a massive increase from $158 billion in 2008)1, it’s clear that many participants are using these strategies as an easy way to manage their retirement dollars – and for good reason. These funds can be an excellent choice for someone who is not necessarily comfortable choosing the individual funds they want to have in their portfolio. However, even if you do own a target-date fund, it should be your goal to understand what the fund is and why you are invested in that particular fund in your account.

Conversely, if you are the type of investor who likes to select your own funds, the best practice is to monitor and consider rebalancing your portfolio and adjust for any risk tolerance changes as you grow closer to retirement.

Whether you’re invested in a target-date fund or choosing your own funds, these assets are your dollars that you worked so hard to earn, so be active in reviewing your account at least annually. Even if you think your spouse “has it covered”, it’s your 401(k) and it’s important to take the initiative to understand the investments, just in case something happens suddenly to your spouse.

 

2. I will increase my contribution.

It’s rare that you find a retiree who says, “I wish I hadn’t saved so much money towards retirement”.  A 2019 study from T. Rowe Price shows the median 401(k) deferral rate for male Baby Boomers is 10% and 8% for male Millennials. For women, the deferral rate is 7% for Baby Boomers and just 5% for Millennials.2 Many retirement plan experts recommend striving for a deferral rate between 10-15% of your income. Even though the percentage varies from person to person, the fact still stands – most people aren’t saving enough.

While some plans have an efficient option called ‘automatic escalation’ in place, which increases your contribution rate each year automatically for you, many plans don’t offer this feature. This means it’s up to you, as the participant, to consider increasing what you’re putting away in your 401(k) each year. If this feels next to impossible, consider increasing your contribution by 1% this year, then reevaluate next year and try for another 1%.  Remember that your salary is likely increasing a bit each year and your investment contributions should grow as your income grows.

Keep in mind that employee contribution limits can change each year (for 2020 it’s $19,500 and if you’re over 50 years old, you are allowed a catch-up contribution of an additional $6,500), so make sure you don’t exceed those limits.

Another feature to monitor is an employer match. If your company offers one and you’re not contributing at least the full amount to receive your entire company match, you are leaving those dollars on the table.  If it’s available to you, this is a valuable compensation offer in addition to your salary – don’t miss the opportunity!

 

3. I will update my beneficiaries on my accounts.

Your beneficiary is the person who receives the money in your 401(k) in the unfortunate case that you pass away. If you’re married, you are required by federal law to have the beneficiary listed as your spouse. If you decide you do not want your spouse listed as the beneficiary, this will require a signature (that may need to be notarized) from your spouse stating that they are aware they are not the beneficiary on the account.

Failing to list a beneficiary leaves your family without access to any funds until the probate court takes the case, evaluates all of the potential recipients in the situation, and assigns a beneficiary. Most don’t want this decision to be outside of their control. If you experience a life change of any sort or have not yet named a beneficiary, be sure to update your beneficiary information to avoid a potentially sticky situation down the road.

 

Picking one of these tips to start or any combination will make your financial resolutions doable and give you more confidence in understanding your retirement strategy.  And think of how great it will feel to be able to say you’ve actually fulfilled a New Year’s resolution this year.

Hannah Walls, CRPS® – Retirement Plan Services Specialist

Budros, Ruhlin & Roe

1Morningstar 2018 Target-Date Fund Landscape Report

2 T. Rowe Price, Retirement Savings and Spending 4: Financial Behaviors and Attitudes

Proposed RMD Changes Could Impact You

For many years now, retirees have operated under a known set of rules. After reaching age 70-½, they had until April 1 of the following year to begin taking their required minimum distributions (RMDs) or face a 50% penalty for failing to do so. This has allowed the government to begin taxing dollars that have been deferred for decades likely in a 401(k) first and then in an IRA after retirement.

There are two potential changes on the horizon that not only will impact how current IRA owners calculate and take their RMDs, but also affect how their heirs will inherit any leftover IRA money upon the account owner’s death.

 

MOVE RMDs TO AGE 72 WITH CATCH

The first potential agent of change is the Setting Every Community up for Retirement Enhancement Act or SECURE Act of 2019. This piece of legislation easily cleared the House of Representatives earlier this year by a 417-3 margin, but has been mired in the Senate ever since. Its passage yet this year is in question, but it is still projected to pass at some point due to its bi-partisan support.

The SECURE Act, among other things, proposes to push back the age at which RMDs must begin from 70-½ to 72. Effectively, this gives IRA owners another year and a half to allow their account to continue to grow tax-deferred before being forced to take their first withdrawal. As with most things in life, there is a catch. While this is seen as a win for IRA owners, in order to offset this change, non-spousal beneficiaries would now be required to withdraw the entire IRA balance within 10 years versus their current ability to stretch the distribution over their own lifetime (what has been known as the stretch IRA provisions). While this may not matter to the IRA owner, the likelihood is that the beneficiary may still be in their peak earning years and end up paying at a higher income tax rate than the person from whom they inherited the IRA. This will certainly have ramifications and may lead to more or greater Roth conversions if the ultimate beneficiary of an IRA is in a higher tax bracket than the current owner.

IMPACT OF LIFE EXPECTANCY TABLE CHANGES

The other new development in the world of RMDs is news that the IRS has proposed regulations that would change the life expectancy used to calculate RMDs for the first time since 2002. The new tables reflect longer life expectancies, which result in lower RMD calculations and could impact you.

For instance, under the current tables, someone who is turning age 70-½ this year and had a beginning IRA balance of $100,000 on December 31, 2018 would need to withdraw $3,649.64 for his or her first RMD. Under the new proposed tables, this amount would decrease to $3,436.43, a decrease of almost 6%. While not a huge difference in any given year, this could add up over a normal life expectancy to a significant amount left in the tax-deferred growth bucket of the IRA.

What’s interesting is the impact that this could have along with the provisions of the SECURE Act, where an IRA owner might die with a larger IRA balance to be inherited by a child in a higher tax bracket who would then be forced to take the funds out over a 10-year period. That could ultimately lead to more income tax being paid to the government than under the current rules, albeit potentially over a longer period of time.

Again, the prospects for the SECURE Act passing this year are not looking good and the IRS will have a public hearing on the new proposed life expectancy tables on January 23, 2020. While it won’t have a direct impact on 2019 IRA planning, it’s good to be thinking about these things now to help inform a strategy in 2020 and beyond. A Certified Financial Planner™ professional can help you take all of these things into consideration and make the best decision with the information that is available on how changes to RMDs could impact you.

For additional information on required minimum distribution and IRA planning, contact Budros, Ruhlin & Roe.

Scott R. Kidwell, CFP®, RICP®

Follow Scott Kidwell on twitter at @BRR_ScottK

Making Sense of Original Medicare Insurance

Even though Medicare is a critical part of health care for all Americans over the age of 65, making sense of the alphabet soup of Medicare plans presents a challenge annually. At the most basic level, individuals need to make sense of four key components of their Original Medicare (not Medicare Advantage) insurance coverage.

 

Recurring After Enrollment

The first insurance component is Medicare Part A, which for anyone with more than 40 quarters of covered work does not require any ongoing premium. Part A is coverage for hospitalization only.  Beyond enrolling in Part A, there is no ongoing need to re-evaluate or make any changes.

The second part of the Medicare puzzle is Part B, which is for outpatient coverage. Unlike Part A, there is an ongoing monthly premium for Part B, which for 2020 will be $144.60. For most insureds, this amount is automatically deducted from their Social Security benefit. Once you are signed up for Part B, there is also no ongoing need to re-evaluate or make any changes.

 

Requiring Annual Review

The next piece of the puzzle is Part D, which provides coverage for prescription drugs. This is an area which does require at least an annual review in order to make sure that the plan that you are using is the best one for you given any medications that you might be taking. It’s not uncommon for the insurance companies offering this coverage to change their drug formularies from year to year.  Such changes can either drastically increase the price that you pay for a given prescription, or even drop a particular drug altogether which results in you paying the full retail cost of the medication.

Fortunately, Medicare’s website makes it relatively easy to create an account and add all the prescription drugs that you are taking in order to determine which plan best meets your needs.  It’s important to note that the best option isn’t always just the cheapest monthly premium.  You should sort by total cost which includes both the monthly premium as well as the estimated cost of drugs for the year. Selecting the wrong coverage has the potential to be very costly, so it is worthwhile to spend some time looking at your coverage every year during the open enrollment period.

Additional Policies

The final piece to consider is a Medicare Supplement policy, sometimes known as a Medigap policy. There are ten potential plans to choose from ranging from those that only provide very limited coverage to the most comprehensive Plan F, which essentially pays for all co-pays and deductibles that you would otherwise have to pay out of pocket.

One important thing to note is that for newly eligible Medicare enrollees beginning in 2020, Plan F will no longer be an option. The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) put an end to plans that pay the Medicare Part B deductible beginning in 2020. This means that the next best option for those wanting the most comprehensive coverage will become Plan G.

Medicare’s website also has a comprehensive comparison of Medicare Supplement policies with links to the various providers to help make sense of Original Medicare insurance. Changing Medicare Supplement policies is possible, but it could come with additional underwriting or having to wait up to six months for new benefits to be covered. Simply changing insurance companies, while keeping the same plan, is also possible and is an easier process with no exclusion of pre-existing conditions.

 

Income Related Monthly Adjustment Amounts (IRMAAs)

In addition to paying premiums for Part B, Part D and a Medicare Supplement, Medicare beneficiaries with higher adjusted gross income (AGI) should be aware of “Income-related Monthly Adjustment Amounts” (IRMAAs).  These apply to both Part B and Part D. For the wealthiest individuals who file jointly, it can drive Part B premiums from $144.60 per month up to $491.60 per month! For Part D, the wealthiest individuals will pay a Part D surcharge of $76.40 per month.1

The data used to determine if you are subject to the IRMAAs is from your tax return filed two years before the current year.  For 2020, your 2018 income tax return will be used. This can often lead to issues if someone has retired in the interim and their income has dropped significantly, or they have had some other major life change. The good news is that Medicare does allow individuals to file an SSA-44 which is titled “Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event”. If approved by Social Security, this can reduce or eliminate the amount of the IRMAA that an individual would otherwise have to pay if their situation has changed from the tax return they filed two years ago.

 

Transitioning from Private Health Insurance to Medicare

There is a lot of homework to be done as you transition from private health insurance to becoming a Medicare recipient. In addition to the initial applications and securing coverage, it certainly warrants examining the Part D coverage on an annual basis during the Medicare Open Enrollment Period (October 15 – December 7).

Medicare recipients can avoid costly mistakes by spending a few minutes reviewing their coverage and making sure they are still in the best option. It’s also worth a review of your tax return from two years prior to determine if there was an unusual income event that could otherwise result in paying the income related adjustment for both Part B and Part D. So set an annual reminder and spend some time reviewing these things to make sense of Original Medicare insurance and potentially avoid 12 months of regret. A Certified Financial Planner™ professional can also help you review and assess options and potential issues and make the best decision with the information that is available.

For additional information on Medicare, contact Budros, Ruhlin & Roe.

1 Source: https://www.medicare.gov/your-medicare-costs/part-b-costs

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Scott R. Kidwell, CFP®, RICP®

Follow Scott Kidwell on twitter at @BRR_ScottK