Monday, August 31, 2015

A Good Idea—Developing a Spending Budget That Meets Your (or Your Client’s) Unique Needs

As one who frequently advocates developing a spending budget that best meets your (or if you are a financial advisor, your client’s) needs, I was pleasantly surprised to read the August 29 article by Kenn Tacchino entitled, “Are your retirement drawdown strategies meeting your needs?”

I generally agreed with Mr. Tacchino when he said,

“Rather than just accept the financial planning decumulation strategies as gospel, you will need to customize them to your specific goals (e.g. your desire to travel or take up a new hobby), your individual need to protect against unwanted retirement shocks (e.g., the need to pay for extraordinary health care), and your unique level of tolerance for risk.”


“Your chosen strategy needs to be personalized so that it meets your idea of the proper balance between unnecessarily restricting current consumption and hoarding assets for future needs.”

Of course I think it is easier and more effective to use the Actuarial Approach set forth in this website rather than customize some or all of the decumulation strategies discussed by Mr. Tacchino.  See my post of June 7 of this year for an example.

Thursday, August 27, 2015

Wait, What? No 2016 Cost of Living Increase for Social Security Means My Medicare Part B Premium Could Increase by Over $650 Next Year?

Michael Kitces has recently blessed us with two fine blog posts (August 19 and August 26) describing how interaction of Medicare’s “Hold-Harmless” provision and a projected 0% cost of living increase for Social Security benefits for 2016 could increase 2016 Medicare Part B premiums by over $650 for some individuals.  I encourage readers of this website who do not fall into one of the three categories described below to read Michael’s posts for a very thorough discussion of how this situation developed, its implications and potential strategies.  I will attempt to provide below a very brief summary of the implications.  

Assuming there is no cost-of-living increase for Social Security, the current law remains unchanged and the Health and Human Secretary does not set a lower Part B premium for affected individuals, for everyone who is subject to the Hold Harmless provision, the 2016 Part B monthly premium will be the same as the 2015 Part B monthly premium ($104.90).  For individuals not subject to the Hold Harmless provision, their monthly 2016 Part B premium is estimated to increase by approximately $55 per month to pay for freezing the 2016 Part B premium for individuals subject to the Hold Harmless provision.  This extra premium is in addition to the extra premiums that may be required for individuals with relatively higher incomes under the Income-Related Monthly Adjustment Amount provisions of the law (IRMAA).

There are generally three types of individuals who are not subject to the Hold Harmless provisions of the law for 2016 (and therefore potentially subject to this additional $55 per month premium):

  1. Individuals subject to extra premiums because of higher income (IRMAA):  You can fall into this category if your modified adjusted gross income for 2014 as reported on your tax return exceeded $85,000 for an individual filer or $170,000 for a married filer.  For this purpose, adjusted gross income is “modified” by adding any tax exempt interest.  Note that you can fall into this category for 2016 even though your income is not normally this high as a result of unusual realized capital gains, conversion of an IRA to a Roth IRA, etc. 
  2. Individuals who are eligible for and participate in Medicare but do not receive a Social Security benefit.  For example, an individual who has decided to defer commencement of her Social Security benefits but has commenced participation in Medicare.  Note that this category would apply even if you could have commenced your Social Security benefit in an earlier year and you would otherwise have been eligible for the Hold Harmless provision for 2016. 
  3. Individuals who commence participation in Medicare in 2016 with or without a Social Security benefit.
Of the three categories of individuals potentially being socked to pay for the costs not paid by the individuals benefiting from the Hold Harmless provision, perhaps the most surprising (to me) is category 2.  These are the good folk who listened to all the financial experts who told them that it was a “no-brainer” financially to defer commencement of their Social Security benefit to age 70.  If you fall into this category, you should read Michael Kitces’ analysis concluding that if you are planning to commence your Social Security benefit at the beginning of 2016 (and you otherwise meet the Hold Harmless requirements), you might want to consider accelerating commencement of your Social Security benefits so they start this November.  Note that relatively quick action would be required to commence Social Security benefits in November of this year in order to avoid this extra $650-ish premium for 2016.

Saturday, July 25, 2015

Combining Investments with Insurance in Retirement

This post is a follow-up to our post of June 18 entitled, “Managing Risks in Retirement through Diversification of Retirement Income Sources.”  The impetus for this post is another excellent article by Dr. Wade Pfau entitled, Evaluating Investments versus Insurance in Retirement, featured in the June 30, 2015 edition of Advisor Perspectives.  And while Dr. Pfau does a fine job of presenting the advantages and disadvantages of exclusively using either investments or insurance to fund retirement, his primary purpose is to advocate combining the two approaches in retirement.  He concludes that “retirement income planning is not an either/or proposition” and “the risk pooling features of insurance and the upside potential of stocks make for an effective combination for retirement income.”  As this combining of retirement income sources has been a pretty consistent theme of this website for quite a while, I will take this opportunity to once again point out how intelligent Dr. Pfau is. 

Of course it would have been nice if Dr. Pfau had been a bit more specific with regard to his recommendations regarding 1) proportions of each type of investment 2) timing of annuity purchases or 3) types of annuity purchases (immediate annuities or deferred income annuities, QLACs).  But perhaps these recommendations will be forthcoming soon from the eminent retirement researcher. 

As emphasized on our June 18 post, the Actuarial Approach advocated in this website is one a very few approaches that actually attempts to coordinate fixed dollar insurance annuities (or pensions) with withdrawals from investments when developing a retiree’s spending budget.  Most other approaches assume a 100% investment approach (and/or simply ignore the existence of annuities/pensions).   If a combined fixed immediate annuity (or pension)/investment approach is used, the withdrawal strategy needs to do double duty.  Withdrawals from investments must not only provide supplementary lifetime income with desired cost-of-living increases on such income, but must also provide for desired cost-of-living increases on the fixed dollar annuity.   If a combined deferred income annuity (QLAC)/investment approach is used, withdrawals from investments must work even harder.  Such withdrawals will be the sole source of income prior to commencement of the deferred annuity (together with desired cost-of-living increases).  After commencement of the deferred annuity, withdrawals from investments need to provide supplementary income (together with desired cost-of-living increases on such income) as well as desired cost-of-living increases on the fixed dollar deferred annuity income.  But don’t worry.  Unlike the many other commonly-advocated withdrawal strategies, the Actuarial Approach does all this coordination for you automatically.