Medicare Advantage Plans May Come With Unpleasant Surprises.

Maybe you should think twice before buying from a celebrity endorser.

Jim Lorenzen, CFP®, AIF®

Let’s start with this:  I’m not a Medicare expert.  My basic knowledge as a CFP® professional certainly helps when it comes to integrating health care into a financial plan, but make no mistake about it:  Health insurance is a highly complex area; so, when it comes to selecting plans, including Medicare, it pays to consult an expert – someone who does nothing but.

That’s why I was intrigued by an article I read last April by Joanne Giardini-Russell* entitled, “Should You Buy a Medicare Plan from Joe Namath?

A few points about Medicare Advantage plans (also called “Part C” plans) that caught my eye:

  • The reason private insurers can offer these plans for zero dollars per month is because the federal government actually pays them to offer Advantage plans to the public – about $1,000 per month, or more, per enrollee.  In exchange, the plans administer and manage the coverage for those who sign up.
  • When enrolling for a Medicare Advantage plan, you still have to pay your Medicare Part B premium.  Most pay around $144 monthly for Part B coverage.   
  • If you see a specialist (like a cardiologist or dermatologist) you still have to pay co-pays
  • Your plan can change mid-year and your physician or facility may no longer be in your network.
  • Many people do not expect out-of-pocket costs – they only remember the “free” parts that were advertised in the commercials.
  • Should you receive a bad diagnosis – cancer, for example – you may be surprised to find that co-pays come with chemo/radiation which can add up to $6,700 annually, and…
  • If you get that bad diagnosis, you may find that if you want to return to original Medicare paired with a Medigap plan – these cost more but can provide more comprehensive coverage – you will have to go through medical underwriting and can be denied coverage.

In other words, these Advantage plans are good if you’re healthy and stay healthy.   But, a bad diagnosis could leave you trapped.

Good to know, ya think?

Jim

*Joanne Giardini-Russell is a Medicare expert with Giardini Medicare.

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Systematic Roth Conversion Strategies Can Be Powerful….

… especially when they’re tied to a plan.

 

Jim Lorenzen, CFP®, AIF®

Do you know what a systematic Roth conversion is?  It’s worth knowing!

Even at modest growth rates, the results of a systematic Roth conversion can be surprisingly impressive over time.   Take a look at this example from Debra Taylor, a tax attorney and advisor in Franklin Lakes, New Jersey, comparing no conversion to systematic conversion.  What would the traditional IRA and the Roth IRA (funded with systematic conversions) look like?

Using a modest growth rate of 5% per year over a ten-year period, here are the results beginning with a $500,000 IRA and converting just $17,500 per year.

With no conversion, the traditional IRA has grown to $1,026,744.  Not bad, except that all that money doesn’t belong to the IRA owner.  Some of it belongs to Uncle Sam – it’s his IRA, too.  How much, of course, depends on what tax rates are in effect when withdrawals occur.

Using a ten-year systematic conversion plan instead, that $500,000 IRA ends-up with only $336,158 at the end of 10-years.   That means lower required minimum distributions (which impact how much your Social Security is taxable and your Medicare premium amounts) and lower taxes, too.  How much lower?  Pick a bracket and do the math on both – you’ll likely be surprised.

Instead, using a systematic Roth conversion strategy, those ten annual $17,500 conversions resulted in a tax-free Roth IRA value of $1,405,285!   Combined with the traditional IRA, results in two retirement accounts now worth a total of $1,741,443 – that’s $714,699 (70%) more!   And, 81% of the owner’s retirement money – the money in the Roth IRA – is tax free!

The best time to begin a strategy like this is after age 59-1/2  and the age when required minimum distributions (RMDs) begin.  That age depends on your birth date under the SECURE Act.  The age is 72 if born on or after July 1, 1949.  It’s 70-1/2 for all others.  Once RMDs begin, you can’t use RMDs to fund Roth conversions; you’ll have to take your RMD first, then take the conversion amount.  Secondly, the strategy works only if you convert the entire amount and pay any tax due from other funds.

It goes without saying – or maybe it doesn’t – that any strategy should be tied to a solid financial plan that can ‘stress-test’ outcomes and probabilities.   Nothing beats experienced and informed guidance.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

When A Loved One Dies

It’s a confusing time; there’s a lot of emotion. Unfortunately, few people have developed a roadmap. Now, you can have one.

Jim Lorenzen, CFP®, AIF®

When  a loved one dies, it can be a bit chaotic. I remember when my parents passed away, they had lived a very long and happy life.   When the time came, it wasn’t unexpected and we had plenty of time to prepare, both emotionally and financially.  This end-of-life timing scenario was predictable.

Unfortunately, that isn’t always the case.  Sometimes it can happen unpredictably.  When that happens, often there’s no plan in place – not even a roadmap.  It can wait.  We’ll do it later.

Not a good idea.

I want you to have something to work with.  You don’t have to fill-out any forms; just click on the form links and you can download them immediately.

These should provide you with the roadmap you need – you may want to print these out or save them to your hard drive – and don’t forget to get help.

Nothing beats experienced guidance.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Stock Market Volatility Can Wreak Havoc on 4% Withdrawal Rates.

Financial planning is often more about what we don’t know than what we think we know.

Jim Lorenzen, CFP®, AIF®

Often financial planning and wealth management is more about the unknowns in life than the knowns.

After years of supporting roles on the Flintstones, Barney and Betty decided to retire from acting in cartoons (it’s hard to be a cartoon character!) and enjoy life.  Using a 4% withdrawal rate, they planned to take $40,000 a year from their $1 million retirement account which, with their Social Security, would provide them with everything they needed for life.  Growth of investments would give them their inflation hedge.

“Security is mostly a superstition: it doesn’t exist in nature”  –  Helen Keller

They retired in 1999.  Unfortunately, after three years his inflation-adjusted withdrawals and the market’s poor performance had eroded his portfolio to less than $540,000.  At this point, his withdrawals now represented almost 8% of his portfolio value.   Bad problem.  Inflation made those withdrawals necessary but the 8% withdrawal rate simply wasn’t sustainable.

The market was good to him for the next five years; but, by the end of 2007, their portfolio was still less than $670,000, meaning withdrawals still amounted to more than 7% of portfolio value.

Then came 2008-9 – the melt-down.  Their nest-egg plummeted to less than $400,000 and withdrawals now represented more than 12% of account value (cost of living still going up!)

4% didn’t work too well for Barney and Betty.  Fred and Wilma (actually, more Wilma that Fred) had told them they needed a real plan that would be stress-tested for all the unknowns in life. 

Planning isn’t about what we know; sometimes it’s knowing what we don’t know – and recognizing that often there are things we don’t know we don’t know.   It’s more about managing risk than money; and planning for the unknowns. 

Nothing beats experienced guidance.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Like the S&P 500 Index?

Maybe you should look under the hood.

Jim Lorenzen, CFP®, AIF®

Like indexing?  Like the S&P?  You can get an index fund!  Sounds good.  Let’s face it, most (virtually all) investment management companies fail to beat the S&P index on a consistent basis.  We all know that.

There’s a good reason for it:  An index doesn’t have expenses while, in the real world, all assets have a cost of ownership – expenses – attached.

If your home is worth $500,000 and your local housing market, including your home, increased by 10%, your home and the market would become worth $550,000.  Did you tie the housing index?  Of course not.  You had to pay property taxes, homeowner’s insurance, maintenance and repair costs, mortgage interest, maybe even HOA and other costs that are required.   Sometime, just for fun, add up all your annual costs and see what your annual expense ratio is (total costs of ownership divided by your home’s current value).  You might be surprised, but I digress.

Expenses aside, how about using a fund replicating the S&P index (that’s as close as you’ll get)?  Let’s look under the hood.

According to Craig L. Israelsen, PhD, an Executive-in-Residence in the Personal Financial Planning program in the Woodbury School of Business at Utah Valley University, if all holdings in the index were weighted equally, each company holding would have a fixed weight of about 0.20% in the index.  However, the holdings aren’t weighted equally; their weighted according to their market capitalization.  This means that roughly 42% of the assets in a market cap-weighted S&P index are held in just 25 of the 500 stocks – another way of saying that the largest 5% of stocks represent over 40% of the allocation.

The practical implication of all this:  half the stocks in the market cap-weighted S&P index have very little impact on performance.

When tech goes up, the cap-weighted S&P index looks good.  When tech takes a nose-dive, not so good.

Is that good for baby-boomers now guarding their serious money for retirement?  Saving a point or two on investment expenses may not be the key issue for this group.  Wealth preservation and maintaining purchasing power for the long term may be more important.

Maybe there’s a better way to achieve long-term goals than riding the index roller coaster.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Does “Bucket Investing” Achieve Goals or Destroy Wealth?

Many investors, and advisors, like it; but there are some experts who apparently aren’t too sure.

iStock Images

Jim Lorenzen, CFP®, AIF®

Does the ‘bucket’ approach to allocating assets to life goals make sense—or does it actually destroy wealth?   Mentally, bucket investing is simply assigning money to ‘buckets’, i.e. goals.  Advisors utilizing this  approach use a variety of buckets.  Even some celebrated elite advisors have used this method.  One uses a two bucket approach:  Bucket #1 contains a five-year cash reserve and  bucket #2 is then free to invest in longer-term investments, typically stocks, stock funds or exchange-traded funds (ETFs).

Many people find the approach appealing for several reasons:

  • No need to  wrestle with sequence-of-returns risk 
  • No need to worry about liquidating assets during a  down market
  • Comfort:  It comports comfortably with the well-know behavioral bias of mental  accounting.  It’s easy to understand having a withdrawal account and a long-term investment account.

Javier Estrada, a professor of financial management at the IESE Business School in Barcelona, Spain conducted a research study, some time back, on the merits of the ‘bucket approach’ to investing for achieving long-term financial goals.  His study included highly-detailed back-testing of both Monte Carlo and  bucket strategies, back-tested over a variety of time periods and methodologies.    His study uses\d a risk-adjusted success (RAS) measurement—it’s defined as the ratio between the mean-expected value of outcomes  and the standard deviation of outcomes

Are you asleep, yet?

Basically, he’s measuring downside risk-adjusted success—measuring only downside volatility—the dispersion of only failed outcomes as opposed to simply looking at the disparity of upside to downside outcomes.  

Okay, enough of the weeds.  His extensive research shows that while the bucket approach may have psychological  benefits, it doesn’t perform so well when tested  for the highest  likelihood of success.   It failed in all performance tests to provide enough money to cover the needed  withdrawals.  Estrada found that as he extended  the number of years for withdrawals to occur, the worse the strategy became.

Reasons for the failure?  Estrada explained:  “Most implementations of the bucket approach… distribute funds from more aggressive buckets into more conservative buckets, but not the other way around.  Put differently, although bucket strategies avoid selling low by withdrawing from bucket #1 after stocks performed badly, they do not take advantage of also buying low as static strategies do with rebalancing.”

The bucket approach is popular due chiefly to a lack of knowledge.  Surrendering to the mental  accounting bias allows investors to conveniently stop worrying.  While increasing the amount of money allocated to bucket #1 might allow them to sleep better, it also increases the odds of running out of money.

Oops.  Not good.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Hidden Surrender Charges

You could be paying them without knowing it. It pays to do some math.

Jim Lorenzen, CFP®, AIF®

I don’t know anyone, certified financial planner professionals included, who is a fan of surrender charges; but, economically they are a fact of life for many products simply to make the offering available and viable for the investment or financial product provider.

For consumers, the surrender charge represents an obstacle that stands between them and having total liquidity—and the charge itself reduces the value of the product should that liquidity be required at some future date.   Sometimes, however, consumers are already paying for the liquidity they desire even if they never need or use it!

Hypothetical example:   Mary and John have $150,000 “just in case”  money set-aside in savings.  They have no particular purpose for it but they like knowing it’s there if they should need it.  They’re not making much interest, of course, probably less than 2% – but they like the liquidity.   They’ve heard about another investment that in all likelihood could help them achieve a 5% return, but it has a surrender charge—something they would like to avoid—so they’re staying with their savings account.    In effect, due to the return difference, they’re paying 3% per year for their liquidity right now.  In three years, they will have paid 9% – $13,500!   In five years the liquidity/opportunity cost will be 15% – $22,500—even without growth. 

Maybe the alternative might be a better bet—especially if other questions result in favorable  answers:  Is the tax treatment different?  How much of the money is even subject to surrender charges and how much might be liquid without surrender charges?   Does it make sense to pay 3% in opportunity cost up front for liquidity they may not even use—or does it make more sense to pay for it when it’s needed?  And how much would it even be?

It pays  to do the math and examine all alternatives.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

17 Unexpected Retirement Expenses

checkbook-penJim Lorenzen, CFP®, AIF®

The Society of Actuaries outlined 17 unexpected or shocking expenses during retirement in its 2015 Risks and Process of Retirement Survey.  I’ve put those into a small report that explains why two in particular happen to too many retirees.

I hope you enjoy it.  You can get yours by simply clicking on the button below.
Click Here for your report

 

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® providing private client wealth management services since 1991.

The Independent Financial Group is a registered investment advisor with clients located across the U.S.  He is also licensed for insurance as an independent agent under California license 0C00742. Jim can be reached at 805.265.5416 or (from outside California) at 800.257.6659.

Interested in becoming an IFG client?  Why play phone-tag?  You can easily schedule your 15-minute introductory phone call!

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.