Category: Retirement Planning

Social Security and Medicare: What the Future Holds

by Elizabeth Camp

Social Security benefits currently represent approximately 37% of the aggregate total income of Americans aged 65 and older, according to the Social Security Administration.1 But for future generations of retirees, Social Security may represent a much smaller percentage of retirement income. In fact, the 2014 Trustees’ Reports for Medicare and Social Security bring some cautionary forecasts for the future as the nation’s baby boomers put ever-increasing stress on these two government programs.
Social Security

The 2014 Social Security Trustees’ Report2 indicates that, by 2020, the Social Security Trust Fund will begin operating at a deficit—workers’ payroll taxes combined with Trust Fund interest will not be enough to cover annual benefit payments. The report further estimates that by 2033, assets in the Trust Fund will be exhausted. The slow increase in costs is being driven by well-documented demographic trends: fewer workers to fund the system and more retirees tapping into it. Until 2009, Social Security was running cash surpluses—bringing in more tax revenue than it was paying out to retirees—and these surpluses were expected to last for years. But the Great Recession brought with it a decline in payroll taxes coupled with an increase in benefit claims. In 2010, these factors resulted in Social Security outflows exceeding its income—a pattern that experts say will continue indefinitely.3

Medicare

The 2014 Medicare Trustees Report2 indicates that the program’s outlook has improved considerably in the past year, and it attributes that good news in large part to the passage of the Affordable Care Act (ACA). Specifically, the trustees found that Medicare’s Hospital Insurance Trust Fund is in good shape until 2030—that’s four years longer than the trustees projected last year—and 13 years longer than they anticipated the year before the passage of the ACA.3

 

But even though Medicare appears to be in good shape for the time being, serious fiscal issues loom in the decades ahead as the nation’s population ages. Today 54 million Americans receive Medicare benefits. By 2030, when the trustees indicate Medicare will start having financial difficulties, the ranks of Medicare enrollees will hit 81 million and the numbers will keep growing.4

 

The upshot of both reports is that future retirees may need to depend more on their own resources to fund their retirement. Although it is very unlikely that either program will go away, benefits may be trimmed or payroll taxes increased to support them. Anyone saving for retirement—especially younger workers—may want to keep this in mind when deciding how much to contribute to an IRA or employer-sponsored retirement savings plan.

 

Sources:

1Social Security Administration, Fast Facts & Figures About Social Security, 2013.

2 Social Security Administration, Status of the Social Security and Medicare Programs, July 2014, http://www.ssa.gov/OACT/TRSUM/.

3The Center for Retirement Research at Boston College, Social Security’s Financial Outlook: The 2014 Update in Perspective, August 2014.

4The New York Times, Good News and Gloom for Medicare, Wrapped in a Mystery, July 28, 2014.

 

If you’d like to learn more, please contact Elizabeth Camp at 954-762-3045 or elizabeth.camp@ms.com.

 

Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.

 

The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

 

Morgan Stanley Financial Advisor(s) engaged Life Meisters to feature this article.

 

Elizabeth Camp may only transact business in states where she is registered or excluded or exempted from registration www.morganstanleyfa.com/camp  Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Elizabeth Camp is not registered or excluded or exempt from registration.

 

© 2014 Morgan Stanley Smith Barney LLC. Member SIPC.

 

CRC 1013269 [09/14]

 

 

 

Roth Conversions for Estate Planning

by Elizabeth Camp

One decision frequently faced by retirees planning their estate is which accounts to use and which to bequest to beneficiaries. Certain accounts or assets make more sense to leave to heirs than others. For instance, it is generally a good idea to include highly appreciated assets in an estate since estate-tax rules typically permit a step-up in tax basis, potentially avoiding capital gains taxes.

 

Roth IRAs are also good accounts to leave to heirs. Because you pay the taxes on the converted amount, future distributions are tax free if certain conditions are met and your designated beneficiaries can typically stretch distributions from a Roth over their lifetimes, allowing the investment to continue to grow tax free. Although distributions from traditional IRAs can also typically be stretched over the beneficiary’s lifetime, he or she must pay taxes on all distributions at ordinary income rates (except to the extent a distribution is treated as a return of after-tax amounts, e.g., nondeductible contributions) and there is no step-up in tax basis.1

 

Accordingly, if you have a traditional IRA, and you don’t need the money for living expenses, it may make sense to convert all or part of it to a Roth IRA to grow your retirement assets potentially tax-free and help benefit your heirs. Although converting will result in a one-time tax bill for all taxable amounts converted (taxed at ordinary income rates), the future tax benefits to you and your heirs may more than offset this payment.

 

The critical factor is time. For instance, if your designated beneficiaries plan to take large distributions quickly, there may be little or no benefit from converting. But if they will be stretching distributions out over a long period, the tax savings can be significant.

 

One common scenario is to convert a traditional IRA to a Roth, then name a younger relative as the account beneficiary. Although the beneficiary would generally be required to commence distributions by December 31 of the year after the IRA owner died,1 he or she may be able to stretch out such distributions over their lifetime, permitting a long period of potential tax-free growth.

 

Choosing and naming beneficiaries is critical if such a scenario is to save taxes. To give heirs maximum flexibility, it is a good idea to name both primary and alternate individual beneficiaries. Your primary beneficiary then has the option of “disclaiming,” or turning down, the account, enabling it to pass to the younger alternate. It is also wise to make sure your named beneficiary does not intend to take significant distributions up front, but will let the account grow over time. Otherwise, the tax benefits to the heir may not be sufficient to offset the tax you pay on conversion.

 

By contrast, if an estate is named as beneficiary, tax deferral is cut short. If it’s a Roth IRA, all funds must be withdrawn within five years. For a traditional IRA the same rule applies unless the former owner was already 70½ — the age at which a traditional IRA owner must begin taking required minimum distributions each year. In that case the distribution rate for the estate is based on the age of the person who died, but the estate may need to liquidate the account sooner in order to close the estate.2

 

Keep in mind that both traditional and Roth IRAs are counted as part of your taxable estate. If your total estate exceeds $5.34 million in 2014, estate taxes may be due, unless left to a spouse.

 

Tax rules governing inherited IRAs are complex, so make sure you work with a qualified estate planner and financial advisor, who can help you decide if converting to a Roth makes sense for your estate plan.

 

Sources:

1Internal Revenue Service, Publication 590, Individual Retirement Arrangements, http://www.irs.gov/pub/irs-pdf/p590.pdf.

2Forbes.com, Inherited IRA Rules: What You Need To Know, May 1, 2013.

http://www.forbes.com/sites/deborahljacobs/2013/05/01/inherited-ira-rules-what-you-need-to-know/

3Internal Revenue Service, Estate Taxes, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax.

 

 

If you’d like to learn more, please contact Elizabeth Camp at 954-762-3045 or elizabeth.camp@ms.com

 

Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.

 

A Roth Conversion may not be right for everyone. There are a number of factors taxpayers should consider before converting, including (but not limited to) whether or not the cost of paying taxes today outweighs the benefit of income tax-free Qualified Distributions in the future. Before converting, taxpayers should consult their tax and legal advisors based on their specific facts and circumstances.

 

Tax laws are complex and subject to change.  Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in a written agreement with Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors regarding any potential tax and related consequences of any investments made under an IRA.

 

The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

 

Morgan Stanley Financial Advisor(s) engaged LifeMeisters to feature this article.

 

Elizabeth Camp may only transact business in states where she  is registered or excluded or exempted from registration http://www.morganstanleyfa.com/camp  Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Elizabeth Camp is not registered or excluded or exempt from registration.

 

© 2014 Morgan Stanley Smith Barney LLC. Member SIPC.

 

CRC 974063 [08/14]

 

 

Bridging the Retirement Gap

by Elizabeth Camp

Early retirement can be a dream or a nightmare. It’s a dream if you’re healthy enough to enjoy the leisure pursuits you want and if you have the resources to fund them. It could be a nightmare if you’re forced out of the job market by ill health or disability, or you can no longer find meaningful employment. Either way, planning ahead will help you make the best of your situation.

 

Retiring Early by Choice?

You’ve worked hard, saved diligently, and your retirement fund is flush, so you want to enjoy the fruits of your lifelong labors. Here are some of the things you should think about as you embark on this journey:

 

  • Setting your withdrawal strategy should be a high-priority item. Do it correctly and you can be positioned to meet the financial needs of the future head on; take too much too quickly and you could find yourself without the tools to address unforeseen needs. You’ll want to lay out a blueprint for how much you can appropriately withdraw each year. You should also consider constructing a portfolio optimized to provide stable income flow and the flexibility to adapt to changing market conditions.
  • You will probaberly need to obtain individual health insurance to meet the terms of the Affordable Care Act (ACA), at least until you reach age 65 when Medicare takes over. HealthCare.gov can get you started and show you a range of options, or you can deal directly with insurance carriers.
  • The question of when to collect Social Security has no simple answer. You must wait until at least your 62nd birthday before you can begin collecting. But generally speaking, the longer you put off starting after that point, the more you’ll receive each month. You can use the Social Security Estimator to see how different scenarios might play out. Once you do take your first Social Security benefit check, the decision is effectively irrevocable except for certain limited circumstances. So consider your financial resources and your general health status carefully when you start weighing these possibilities.

 

When Retirement Is Thrust Upon You

There is a fair possibility that your last years of work life may not go as planned. In fact, 49% of retirees told the EBRI Retirement Confidence Survey that they had to retire sooner than they originally expected.1 When the U.S. General Accounting Office (GAO) examined census reports, they found that ill health, obsolete job skills and the death of a spouse were the biggest drivers of early retirement.2 If you are find yourself in this group, where does it leave you? With some difficult choices, certainly, but you are not without options:

 

  • Social Security says its payout formulas are set up so that someone living to the actuarially normal life expectancy would end up with the same total lifetime benefit amount regardless of what age he or she began collecting benefits.
  • Health insurance for individuals may be more widely available now than it ever has been, especially for people who’ve lost their employer-sponsored coverage but are still too young to qualify for Medicare. HealthCare.gov can show you a range of potentially subsidized options.
  • Consider ways to minimize your taxable income until you reach age 65 to help you qualify for health insurance subsidies under the ACA..

 

Remember, retiring early poses some unique challenges. I can help you focus on choices that might work well for you.

Sources:

 

1The 2014 Retirement Confidence Survey, Issue Brief 397, Employee Benefit Research Institute, March 2014.

2Retirement Security, U.S. Government Accountability Office, Report GAO-14-311, April 2014.

 

If you’d like to learn more, please contact Elizabeth Camp at 954-762-3045 or elizabeth.camp@ms.com

 

Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.

 

The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

 

Morgan Stanley Financial Advisor(s) engaged Life Meisters to feature this article.

 

Elizabeth Camp may only transact business in states where she  is registered or excluded or exempted from registration. http://www.morganstanleyfa.com/camp  Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Elizabeth Camp is not registered or excluded or exempt from registration.

 

© 2014 Morgan Stanley Smith Barney LLC. Member SIPC.

 

CRC 978401 [08/14]

 

 

Putting a Perspective on Inflation

by Elizabeth Camp

The term “inflation” figures importantly in discussions of finance and investment. But many kinds of numbers may be bandied about, and they don’t all mean the same thing. Here’s an overview of the principle measures of inflation:

 

  • The Consumer Price Index (CPI) measures the changes in price for fixed baskets of common consumer goods and is intended to show how changing prices impact consumer spending power from month to month.

 

The CPI assumes that the consumer would be buying the same quantities of identical goods each month. As a result, the CPI does not fully capture the impact of structural changes on individual buying behavior, such as purchasing a more fuel-efficient car in response to a spike in energy prices. Many consumers use changes in spending patterns to free up resources and lessen the impact of inflation on other priorities.

 

The CPI also assumes that each price change hits every consumer equally. However, some consumers may bear the brunt of some price changes disproportionately. For example, a sharp change in home prices would not have any immediate effect on most homeowners’ actual monthly spending priorities even though the change would impact reported CPI.

 

  • The GDP Implicit Price Deflator shows how changes in price levels impact the economy from quarter to quarter. It was developed by economists who wanted to see how much of any given change in GDP represented real growth in output, and how much was simply the result of changes in prices.

 

The deflator uses price comparisons for every element included in GDP and weights those comparisons according to the item’s weight in the latest economic snapshot. As a result, the deflator is instantly responsive to shifts in economic patterns, affording increased influence over the inflation tally to growing sectors and decreased influence to contracting sectors.

 

  • The Chained CPI is the newest inflation benchmark, existing in its current form for little more than a decade, compared with the century’s worth of history in the original CPI. Where the original relies on inflexible formulas and rigid weighting, the chained CPI is meant to capture the effects of consumer substitutions. For the years when the chained CPI has been calculated side by side with the original CPI, the chained CPI has generally shown lower inflation. Economists debate which metric better captures consumer experience.

 

Measured across the grand sweep of the economy’s ups and downs, average inflation has appeared moderate. Over the long term, there appears to be little practical distinction between measurements produced by the CPI and the GDP deflator. But narrow the focus and important distinctions can appear. For example, during crushing price volatility sparked by the OPEC oil price shocks, there were potentially significant differences in the amounts of inflation recorded by each of the metrics.

 

Annualized Inflation for Selected Time Periods by Three Different Metrics1

 

1947-2013(The post-
war era)
1974-1980(The oil
price shocks)
2009-2013(The past five years)
Headline measure:
The Consumer Price Index
3.63% 9.15% 2.05%
Alternative measure:
GDP Implicit Price Deflator
3.25% 7.59% 1.39%
Net difference (0.38%) (1.56%) (0.66%)

 

 

Inflation assessments are embedded in many financial decisions. In retirement planning, underestimating inflation can leave you short of income later in life; overestimating it can lead to unnecessary sacrifice. In the context of evaluating a potential investment, a proper assessment of inflation potential can help determine whether the proposed investment could compensate for the loss of purchasing power as well as the risk you’ve assumed.

 

Understanding inflation trends can be a key to financial and investing success. Using metrics properly is an essential part of that understanding. If you would like to discuss how inflation affects your financial strategies, please call me.

 

Source: 1Bureau of Labor Statistics (Consumer Price Index); Bureau of Economic Analysis (GDP Implicit Price Deflator).

 

The U.S> CPI Index is a measure of the average change in prices over time in a fixed market basket of goods and services.  The index is for all U.S. Urban Consumers, which covers approximately 80% of the non-institutionalized civilian population.  This index is seasonally adjusted.  Seasonal adjustment removes the effects of events that follow a more or less regular pattern each year.  These adjustments make it easier to observe the cyclical and other non-seasonal movements in a data series.  Due to availability this is an estimated return until the 15th business day of each month, which is then revised to the finalized return.

If you’d like to learn more, please contact Elizabeth Camp at 954-762-3045 or Elizabeth.Camp@ms.com

 

Article by Wealth Management Systems, Inc. and provided courtesy of Morgan Stanley Financial Advisor.

 

The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley.  The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

 

Morgan Stanley Financial Advisor(s) engaged Life Meisters to feature this article.

 

Elizabeth Camp may only transact business in states where she is registered or excluded or exempted from registration http://www.morganstanleyfa.com/camp  Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Elizabeth Camp is not registered or excluded or exempt from registration.

© 2014 Morgan Stanley Smith Barney LLC. Member SIPC.

 

CRC 931091 [05/14]

Protecting Your Retirement Investments During a Job Transition

by Elizabeth Camp

The current economic and market environment has prompted many Americans to rethink their retirement strategies. If you are experiencing a job transition—particularly if the transition is unplanned and unexpected—such a reassessment may be particularly important for you. While it may be tempting to focus more on your immediate needs, you should not lose sight of long-term goals, especially your retirement strategy.

Some Basic Decisions

Your employer-sponsored retirement plan is likely to be a key component of your retirement strategy. Because it represents a key source of future retirement income, it is important to carefully consider your alternatives for administering these assets. During a job transition, you will usually have three options: take a lump-sum distribution, leave your assets in the employer-sponsored plan or move your assets into a Rollover IRA.

Taking a direct, lump-sum distribution—With this option, the assets in your plan are distributed directly to you in a lump sum, which provides you with immediate access to your funds. Depending on your short-term needs, that may appear to be an attractive alternative. However, a distribution will likely result in substantial federal and state income taxes and, if you are under age 59½, a 10% IRS penalty tax, which can significantly reduce the amount of the distribution. Because you will be receiving the distribution directly, the plan administrator must withhold up to 20% of the value of the

distribution for federal income tax purposes. Moreover, you will lose the benefit of the tax-deferred status of these assets, which could reduce the amount ultimately available to you at retirement.

The status quo option—You can decide to do nothing, leaving your assets in your former employer’s plan. That will protect the tax-deferred status of your assets and allow you to transfer the account assets at a later time to a new employer’s retirement plan that accepts rollovers. But you may be limiting your investment choices and control because employer plans typically have a restricted investment menu and require the consent of your spouse before you can name someone else as a beneficiary.

Establishing a Rollover IRA—A Rollover IRA simultaneously addresses the issues of taxation, flexibility and control, and may hold significant benefits for you as a result:

  • If your distribution is transferred directly to a custodian, rather than to you, the Rollover IRA eliminates the withholding requirement and penalties that may result from a lump-sum distribution.
  • The entire rollover amount can be invested immediately, according to the strategy you specify.
  • Your assets and any earnings continue to have the potential to grow tax-deferred until you retire and begin taking withdrawals.
  • You may gain access to a wider range of investment options and more retirement planning and distribution flexibility.
  • You can name any beneficiary, including a trust, without needing the consent of your spouse (although special rules may apply in community property states).

For example, investment products in an employer plan are usually limited to mutual funds and company stock. With a self-directed Rollover IRA, you can work with your financial professional to structure a portfolio using stocks, bonds, annuities and other investments utilizing an asset allocation1 that is customized to help you meet your retirement investment objectives. And your retirement strategy can be further tailored with a wider range of beneficiary selection and distribution choices.

 

Keep in mind, leaving your assets in a former employer’s plan does have some benefits.  For example, many qualified retirement plans include loan provisions that are not available with an IRA, but may still be available to you.  And you should look at the costs associated with any investments you may be considering because it could be less expensive for you to leave your assets in the former employer’s plan.

Consider Consolidation

However, this may also be an excellent time to deal with multiple IRAs you may have opened over the years, and with account balances you may have left in the plans of former employers. Together, these assets may represent a significant sum. There are good reasons to consider consolidating them all in a Rollover IRA:

  • Comprehensive investment strategy—It can be difficult to maintain an effective investment strategy—one that accurately reflects your goals, timing and risk tolerance—when assets are spread among multiple financial institutions. When you consolidate, your financial professional can help you ensure that these assets are part of your overall asset allocation strategy that is reflective of your current financial situation and long-term retirement goals.

Greater investment flexibility—A self-directed IRA generally offers you the ability to

  • choose from a wide range of investment products, including stocks, bonds, mutual funds, annuities and more.

 

  • Simplified tracking—It is easier to monitor your progress and investment results when all your retirement savings are in one place, because you will receive one statement instead of several. That simplifies your life while protecting the environment.
  • Lower costs—Reducing the number of accounts may also reduce your account fees and other investment-related charges.

Dealing with one account rather than several also simplifies the distribution process—including complying with complex minimum distribution rules when you reach age 70½. And you avoid the risk of losing track of your retirement accounts or access to the account assets should your former employer merge with another company or go out of business. Your financial professional can help you assess your alternatives so you can make decisions based on what’s best for you. You may find that this time of transition holds benefits for your retirement assets.

 

Consolidate Your Retirement Savings and Qualify To Have the Annual Maintenance Fee  Waived for the Life of the Account

 

If you transfer, roll over or add $100,000 or more to an IRA at Morgan Stanley during 2014 we will waive your annual maintenance fee for the life of the account.²    Please note fees for other services such as account closing/transfer fees, fees associated with the investments in the account such as a fund’s internal fees and expenses, brokerage commissions or managed account fees may apply.

For more information, please contact Elizabeth Camp at 954-762-3045 or Elizabeth.camp@ms.com

Converting Your Assets to an IRA When You Retire

by Elizabeth Camp

If you’re about to retire–or have already recently retired–you have an important decision to make about the money in your 403(b) or 457 plan account: Do you take a lump-sum distribution, or roll it over?

If your plan allows it, rolling over your account into an IRA may prove beneficial to you for a number of reasons.

  • More investment options. 403(b) and 457 plans generally offer limited investment options. With an IRA, you have access to a greater range of investments, including mutual funds, ETFs, stocks, bonds and cash. This allows you to develop a more precise mixture of investments that best reflects your own personal risk tolerance, investment philosophy and financial goals.
  • Lower fees.The fees associated with an IRA can be lower than the expenses in your 403(b) or 457 plan. Fees have a direct impact on your returns. With a wider range of investments to choose from, you can include a fee comparison component as part of your decision-making process.
    • Greater flexibility. Some plans allow only lump-sum distributions, and others may limit the frequency of withdrawals. If you roll the money into an IRA, you can take it out on your own schedule, provided you are at least age 59½.1
    • More convenience. If you have worked at different jobs during your career and you roll all your previous employers’ plan balances into an IRA, you’ll have a single, consolidated account to track. This makes it easier to monitor your investments, rebalance as appropriate, and schedule required minimum distributions.

Tax Benefits

There are a number of tax benefits to consider, as well. A lump-sum distribution could potentially cost you thousands, as the table below illustrates. In this example, a 65-year-old teacher who is retiring with a $350,000 balance in her 403(b) account would lose more than $4,200 a year if she opted for a lump-sum distribution rather than a rollover.2

Lump-Sum Distribution

 

Rollover

Beginning balance

$350,000

$350,000

Federal tax liability @ 35 %

$122,500

$0

Net investable assets

$227,500

$350,000

Hypothetical Distribution rate of return

5%

5%

Estimated annual payments, pre-tax

$17,386

$26,748

Estimated average annual federal tax

$1,606

$6,687

Estimated annual after-tax distribution

$15,780

$20,061

*Hypothetical Illustration. Not representative of any specific investment

If you directly roll over to a traditional IRA, you don’t need to pay taxes until you start withdrawing money from your account. Note that if you roll over the money from a traditional plan to a Roth IRA, you will have to pay income taxes on the full balance converted in the year you make the conversion. Any withdrawals made after a conversion are tax free once you have attained age 59 ½ and it’s over five (5) years since the conversion date.

If you have after-tax contributions in your employer plan, you may opt to withdraw them without penalty when you roll over your assets. However, if you wish to leave those funds in your retirement account in order to continue tax deferral, you can include them in your rollover. When you begin regular distributions from your IRA, a prorated portion will be deemed nontaxable to reimburse you for the after-tax contributions.

Professional Support

Managing money in retirement can be complex. How should you invest? How much can you withdraw each year? What about your pension? When should you take Social Security? How do you compensate for inflation?

If you roll over your assets into an IRA, you can more easily access the guidance of a financial professional to help you determine a strategy suitable for you. A financial professional can also help you with your estate planning needs. For example, with 403(b) and 457 plans, heirs must take out all the assets after the account holder dies and face a potentially large tax bill. However, beneficiaries of IRAs may be able to stretch distributions out over their lifetimes.

Let me work with you to help make your decisions.

 

Footnotes/Disclaimers

 

1Withdrawals made prior to age 59½ may be subject to a 10% federal penalty.

2Source: S&P Capital IQ Financial Communications. Assumes a 35% marginal tax rate applies to the lump-sum distribution, that distributions are taken annually for 20 years, and that a 25% marginal tax rate applies to the annual distributions. Does not consider the potential impact of state taxes.

 

If you’d like to learn more, please contact Elizabeth Camp at 954-762-3045 or Elizabeth.camp@ms.com

 

Elizabeth Camp may only transact business in states where she  is registered or excluded or exempted from registration http://www.morganstanleyfa.com/camp Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Elizabeth Camp is not registered or excluded or exempt from registration.

Retiring Early? Mind the Gap!

by Elizabeth Camp

According to a recent Gallup poll, the average American retires at age 61.1 That’s at least five years away from collecting full Social Security retirement benefits, not to mention pensions, which typically begin at age 65, when available. Collectively, these programs can account for a significant share of retirement income. According to the Social Security Administration, Social Security and public and private pensions make up 54% of an average retiree’s income.2 What’s more, Medicare coverage does not begin until age 65, leaving early retirees with potentially hefty monthly premiums until Medicare kicks in.

Anyone contemplating an early retirement will want to plan carefully and ask himself several important questions.

How Will You Fund Health Care Costs?

One of the biggest obstacles to early retirement is health insurance. If you are working for a company that pays all or most of your health insurance, you could face an added monthly expense of $500 or more if you retire before age 65.3 What’s more, most companies no longer offer retiree health benefits, and if they do, the premiums can be high or coverage low.

A 2012 survey by the Employee Benefit Research Institute (EBRI) indicated that health care costs account for 10% of total spending for individuals between ages 50 and 64.4 In addition to health insurance premiums, there are also co-pays, annual out-of-pocket deductibles, uncovered procedures or out-of-network costs to consider–not to mention dental and vision costs.

On the positive side, the Affordable Care Act (ACA) works to the advantage of early retirees. It prohibits insurance companies from discriminating because of pre-existing illnesses, and beginning in 2014, limits how much they can charge based on age*. The recently opened national and state-run insurance exchanges may also bring down premiums over time. For those with lower incomes, government subsidies may be available. People earning less than 400% of the federal poverty level–about $46,000 for a single person or $94,000 for a family of four–will be eligible for a tax credit as long as they do not have access to affordable and comprehensive coverage through their employer and do not participate in government health programs like Medicaid.5

When Should You Begin Collecting Social Security?

You can begin collecting Social Security retirement benefits as early as age 62. But you will face a significant reduction if you start before your normal retirement age: 66 or 67, depending upon when you were born. Those choosing to collect before that age face a reduction in monthly payments by as much as 30%. What’s more, there is a stiff penalty for anyone who collects early and earns wages in excess of an annual earnings limit ($15,120 in 2013).6

What age is best for you will ultimately depend upon your financial situation as well as your anticipated life expectancy. For most people, waiting until normal retirement age is worth the wait. But you may want to consider taking your benefits earlier if:

  • You are in poor health.
  • You are no longer working and need the benefit to help make ends meet.
  • You earn less than your spouse and your spouse has decided to continue working to help earn a better benefit.

If you think you may qualify for a health care subsidy under ACA, you may want to delay collecting Social Security until at least age 65 (when Medicare kicks in), as Social Security benefits are fully counted as income in determining your eligibility for subsidies.

What Will Early Retirement Mean for Your Investing and Withdrawal Strategies?

Perhaps the most significant concern for early retirees–and one that is often overlooked–is how retiring early will impact their investing and withdrawal strategies. Retiring early means taking larger distributions from your retirement savings in the early years, until Social Security and pension payments begin. This can have a significant impact on how long your savings last, much more so than if larger distributions are taken later in retirement. Consider the following:

  • Delay withdrawals from taxable retirement accounts, such as IRAs or 401(k) plans. The longer this money can grow tax-deferred (or tax free for Roth accounts), the more you will save in taxes. Instead, tap into after-tax accounts first.
  • Adjust your withdrawal rate to assure your savings last throughout a lengthened retirement. Financial planners typically recommend a 4% annual withdrawal rate of principal at retirement, but you may want to lower this since you will need your savings to last longer.7
  • Structure your investments to include a significant growth element. Since your money will have to last longer, you will want to make sure to include stocks or other assets that carry high growth potential. Stocks are typically more volatile than bonds or other fixed-income investments, but have a better long-term record of outpacing inflation.

The first place to start early retirement planning is with a detailed plan that includes estimated income and expenses. Let me work with you to put in place a plan that factors in all the necessary elements you will want to consider.

 

Footnotes/Disclaimers

 

1Source: Gallup Economy, May 15, 2013; http://www.gallup.com/poll/162560/average-retirement-age.aspx.

2Source: Social Security Administration, Fast Facts and Figures About Social Security, 2013; http://www.ssa.gov/policy/docs/chartbooks/fast_facts/2013/fast_facts13.pdf.

3Source: AARP Public Policy Institute, Health Insurance Coverage for 50- to 64-Year-Olds, 2011, http://www.aarp.org/content/dam/aarp/research/public_policy_institute/health/Health-Insurance-Coverage-for-50-64-year-olds-insight-AARP-ppi-health.pdf.

 

4Source: Employee Benefit Research Institute, Expenditure Patterns of Older Americans, 2001-2009, February 2012; http://www.ebri.org/pdf/briefspdf/EBRI_IB_02-2012_No368_ExpPttns.pdf.

5Source: AARP Blog, Will You Get an Insurance Subsidy? How Much? August 2013;

http://blog.aarp.org/2013/08/15/will-you-get-an-insurance-subsidy-how-much/.

6Source: Social Security Administration, http://www.ssa.gov/oact/cola/rtea.html.

7Source: Wall Street Journal, March 4, 2013, Say Goodbye to the 4% Rule    http://online.wsj.com/news/articles/SB10001424127887324162304578304491492559684

 

*As of this writing revisions within the Affordable Care Act are pending

 

Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”) , its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise agreed to in writing by Morgan Stanley. This material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.

 

The strategies and/or investments discussed in this material may not be suitable for all investors.  Morgan Stanley Wealth Management recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor.  The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

 

Equity securities may fluctuate in response to news on companies, industries, market conditions and the general economic environment. Companies cannot assure or guarantee a certain rate of return or dividend yield; they can increase, decrease or totally eliminate their dividends without notice.

 

If you’d like to learn more, please contact Elizabeth Camp at 954-762-3045

 

Article by Wealth Management Systems, Inc. and provided courtesy of Morgan Stanley Financial Advisor.

 

The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley.  The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

 

Morgan Stanley Financial Advisor(s) engaged Life Meisters to feature this article.

 

Elizabeth Camp may only transact business in states where she is registered or excluded or exempted from registration- http://www.morganstanleyfa.com/camp  Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Elizabeth is not registered or excluded or exempt from registration.

 

© 2013 Morgan Stanley Smith Barney LLC. Member SIPC.

 

CRC 763117 [11/13]

 

 

Bequeath or Beneficiary: In Estate Planning, the Difference Is Crucial

by Elizabeth Camp

The scenario plays out over and over again in attorneys’ offices: A family brings a parent’s Last Will and Testament (the “Will”) to be probated. The Will is complete and well thought out, and it takes into consideration current tax law. But under closer examination, the attorney discovers that the deceased’s estate plan doesn’t work. Why? Because a substantial portion of the parent’s assets pass under a beneficiary designation.  Any asset that has a beneficiary designation is a non-probate assets and is not controlled by the Will.1

Increasingly, investors have the opportunity to name beneficiaries directly on a wide range of financial accounts, including employer-sponsored retirement savings plans, IRAs, brokerage and bank accounts, insurance policies, U.S. savings bonds, mutual funds and individual stocks and bonds.2

The upside of these arrangements is that when the account holder dies, the monies go directly to the beneficiary named on the account, bypassing the sometimes lengthy and costly probate process (although such assets are still included in the deceased’s estate for estate tax purposes). The downside, however, is that beneficiary-designated assets pass “under the radar screen” and without regard to the directions spelled out in a Will. This all too often leads to unintended consequences–individuals who you no longer wish to inherit property will receive property , and some individuals will receive more than intended and some will receive less; ultimately, there may not be enough money available to fund the bequests laid out in the Will.

Consider the following hypothetical scenario:

John has $600,000 in property that he intends to pass equally among his three children under his Will. John also has a life insurance policy for $150,000 that names only one of his children as the sole beneficiary. When John dies, that one child will inherit all of the life insurance money ($150,000) and one-third ($200,000) of the assets passing through John’s Will. So instead of each of John’s children receiving $250,000, one of them receives $350,000 and the other two each receive $200,000. John’s plan under this Will and his intent to treat all of his children equally  has been defeated because John never updated the beneficiary designation on the insurance policy make all of his children equal beneficiaries of the insurance policy.  The same result would occur even if John’s Will had specifically stated that the life insurance policy should be shared equally, because the Will is not an effective way to amend a beneficiary designation. A beneficiary designation always overrides any instructions included in a will.

Unnamed or Lapsed Beneficiaries
Not naming beneficiaries or failing to update forms if a beneficiary dies can have unintended repercussions. For instance, a recent case that came before the U.S. Supreme Court illustrated how a simple beneficiary form review could have prevented undue stress and bitter divisions for one family.

Specifically, in Hillman vs. Maretta, the Court ruled in 2013 that a decedent’s ex-spouse, who was still named as his beneficiary, was entitled to receive his federal life insurance benefits. The unanimous decision came despite the fact that an applicable state law specified that a divorce removes an ex-spouse as the beneficiary of a decedent’s various death benefits.3

While this case was centered on the proceeds of an insurance policy, similar, equally unfortunate scenarios caused by poor planning or benign negligence could affect IRA and other retirement account beneficiaries. For instance, if the beneficiary of an IRA is a spouse and he or she predeceases the account holder and no contingent (second in line) beneficiary(ies) are named, when the account holder dies, the IRA will then be paid pursuant to the default beneficiary provisions set forth in the IRA Agreement governing the IRA. The default beneficiaries will vary among IRA  providers and you should determine the default beneficiaries under your IRA  provider’s IRA Agreement.  If the default beneficiary of the IRA is you estate, this would prevent your children from stretching IRA distributions (and tax-deferral benefits) out over their lifetimes

Planning Priorities
Given these very real, very preventable consequences, it is important to take steps to assure consistency between your beneficiary-designated assets and the disposition of property as it is spelled out in your Will. First, make sure to communicate your plans and designations to family and beneficiaries, especially if you are making unequal distributions. This can help avoid potential conflicts between beneficiaries. Second, you should review your beneficiary designations on a regular basis–at least every few years–and/or when certain life events occur, such as the birth of a child, the death of a loved one, a divorce or a marriage, and update the designations , as necessary, in accordance with your wishes. Lastly, make sure to keep thorough records so that it is clear to the executor what assets have beneficiary designation and what assets should be disposed according to the terms of your Will.

Contact me for help in creating an estate plan or bringing your existing estate plan in line with your current wishes for the disposition of your assets.

Footnotes/disclaimers:

1Source: Financial Planning Association, “Don’t Forget to Audit Your Beneficiary Designations,” , May 23, 2011.

2Source: The CPA Journal, “Coordinating Wills with Beneficiary Designations,” November 1, 2002.

3Source: Financial-Planning.com, “Beneficiary Form Trumps Divorce in High Court Ruling,” November 1, 2013.

4Source: SeniorLaw.com, “Ten Biggest Mistakes You Can Make in Your Estate Plan,” November 1, 2013.

Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice.  This material was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.

 

If you’d like to learn more, please contact Elizabeth Camp at http://www.morganstanleyfa.com/camp or 954-762-3045.

 

Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.

 

The author(s) are not employees of Morgan Stanley Smith Barney LLC (“Morgan Stanley”). The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.

 

Morgan Stanley Financial Advisor(s) engaged Life Meisters to feature this article.

 

Elizabeth Camp may only transact business in states where she is registered or excluded or exempted from registration http://www.morganstanleyfa.com/camp  Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Elizabeth Camp is not registered or excluded or exempt from registration.

 

© 2013 Morgan Stanley Smith Barney LLC. Member SIPC.

 

CRC 776049 [12/13]