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Investing Alternatives During Periods of Market Volatility

By Investing

During periods of market volatility, investors may look to alternative vehicles. Here are some options to consider.

 

2022 was a difficult year for investors, with all three major market indexes dipping simultaneously and taking their biggest hit since the housing crisis of 2008[1,2,3]. Now, even with all three up through the first five months of 2023, volatility and uncertainty are stuck in the back of investors’ minds, possibly pushing them to look elsewhere for more diverse vehicles that have the potential to provide growth and protection.

Though diversification of assets certainly doesn’t guarantee success, it can play a major role in mitigating risk and achieving sustained growth. That’s why it can be a good idea to consider alternative or unconventional methods of investing and saving. Here are a few options you may have when looking to diversify your investment portfolio and avoid the pitfalls of the market.

Real Estate

Traditionally, investing in real estate involves purchasing property with the explicit purpose of renting to tenants for extra income or in hope that the value of the investment property appreciates. This can be a great way to earn steady income or returns, but it can come with risk. For example, it can be difficult to find tenants to live or work in your rental property, potentially leaving you stuck making a mortgage payment without collecting the rental income. There’s also the risk that the housing market can temporarily go soft, as it traditionally does when mortgage interest rates are high, or crash as we saw in 2008, leaving you underwater with higher property costs than the property’s market value.

Additionally, managing your rental property can be strenuous, whether that’s because of difficult tenants, maintenance costs or other ancillary costs and challenges associated with owning and renting property. It’s important to thoroughly research your investment property and have a plan to cover traditional costs associated with real estate, as well as a plan in the event that it becomes more difficult to find a reliable tenant or liquidate if you want to sell.

There are vehicles for investing in real estate where you are not involved in day-to-day property management, but these options have other risks to consider and should be undertaken carefully working with trusted financial, tax and legal professionals.

Art and Collectibles

Art and collectibles have historically been the province of the wealthy, but they can be used by some investors looking for more fun and creative ways to achieve long-term gains in value. It is, however, extremely important to consider the market demand for art and collectibles. Oftentimes, value is built around rarity or hype, meaning that these types of items can fluctuate greatly in price. For example, a recently deceased artist may command a higher selling price for their art, however, that price may plummet if tastes and styles change after the hype has long subsided.

It’s crucial to have a strong grasp on the market for the art or collectibles you’re looking to invest in, and you may want to only purchase items that you’d feel comfortable keeping at their purchase price point. Then, were the value of the item to drop, you can still enjoy owning it without the fear of taking losses on it as an investment. Additionally, some collectibles, like collector cars, antiques, wine or high-end sports memorabilia, come at a premium price, excluding many retail investors. Modern companies like Collectable and Rally are now giving investors a chance to invest in a portion of classic cars, baseball cards, and comic books, so while you may not be able to drive a 1955 Porsche, you may be able to participate in a fraction of its market appreciation.

Bank CDs and Treasury Bonds

Often looked at as safer investments with low risk and low returns, CDs and Treasury bonds can be a great option for those looking to stay away from markets during volatile periods. The two are similar in that they essentially function as loans. The difference, however, is whom your money is being loaned to. Bank CDs, or certificates of deposit, are lump sum investments with a bank or credit union that are guaranteed up to $250,000 by the Federal Deposit Insurance Corporation, or the FDIC [4]. They then earn interest for the duration of a predetermined period of time. Treasury bonds, on the other hand, are a loan to the government with specified interest rates for durations of either 20 or 30 years [5].

It’s crucial to know that during times of high inflation, banks usually raise interest rates paid on CDs to make their products more attractive to investors. That means that during periods of high inflation and high interest rates, CDs can be a more attractive investment. At the moment, interest rates are the highest they’ve been since 2008, potentially signaling a good time to purchase CDs [6]. While Treasury bonds also pay a predetermined interest rate over a set period of time, they typically lose value when interest rates rise as newer bonds with higher rates of return become more valuable. Both CDs and Treasurys are seen as traditionally safe and conservative alternatives to the market, but it can be a great idea to speak to your financial professional prior to purchasing either.

Annuities

Annuities are insurance products and contracts rather than investments, and though they are traditionally intended for those on the cusp of retirement, they can function as a vehicle for growth and future income. In the terms of those contracts, the insurance company typically guarantees features like principal protection, a rate of return or income for life, and those guarantees are based on the strength of their claims-paying ability. This is different from a market investment that doesn’t offer principal protection, potentially meaning that the funds you invest could plummet.

At the same time, some annuities like fixed indexed annuities can offer index-linked growth, potentially giving you the chance to earn market upside or growth in correlation with the predetermined index. These growth levels, however, can come with caps or participation rates, meaning you won’t always realize market gains at their peak. Additionally, many annuities tie your money down for a surrender period, meaning that you won’t have access to it unless you’re ready to incur a notable penalty. This could be devastating, especially if large amounts of money are tied up in an annuity when you find another opportunity that potentially presents greater advantages.

It can be extremely helpful to discuss your annuity options with a financial professional who understands annuities and has access to multiple products and insurance carriers in order to find a product that suits your unique situation and your goals. It can also be beneficial to work with an advisor who can weigh the opportunity costs of purchasing an annuity.

Life Insurance

Similar to annuities, life insurance policies are contracts with issuing insurance companies that offer benefits in exchange for premiums; however, there are multiple types of life insurance policies that offer different features. Term life policies, for example, typically come with low premiums for young, healthy people, but they only pay out if the policyholder dies in the predetermined term. Modern permanent life insurance policies present a few more benefits, giving policyholders the chance to secure the death benefit as well as a cash value portion that is protected and grows at rates guaranteed by the issuing insurance companies.

The downsides of permanent life insurance policies are similar to those of an annuity. For example, the cash value portion may not experience lucrative growth, and while growth is never guaranteed with any product, some policies are especially weak investment vehicles if you plan on using them specifically for the growth component. Furthermore, life insurance policies also come with surrender periods, forcing you to pay major fees if you claim the value of your policy early. While one of the positives does include the principal protection, that level of protection is only as strong as the insurance company you work with. It’s always a good idea to speak with your financial professional to see if a life insurance policy fits your needs and goals. Each policy is different, and your unique circumstances will dictate the effectiveness of that policy in relation to your objectives.

These are just a few alternative investment options, and just a few of the potential pros and cons. If you’re looking to avoid market volatility and protect yourself from downturns, we can help you explore your options. Give us a call today! You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

 

 

Sources:

  1. https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart
  2. https://www.macrotrends.net/1320/nasdaq-historical-chart
  3. https://www.macrotrends.net/2324/sp-500-historical-chart-data
  4. https://www.fdic.gov/resources/deposit-insurance/faq/
  5. https://www.treasurydirect.gov/marketable-securities/treasury-bonds/
  6. https://www.macrotrends.net/2015/fed-funds-rate-historical-chart

 

This article is not to be construed as investment advice. It is provided for informational purposes only and it should not be relied upon. It is recommended that you check with your financial advisor, tax professional and legal professionals when making any investment or any change to your investment portfolio. Your investments, insurance and savings vehicles should match your risk tolerance and be suitable as well as what’s best for your personal financial situation.

Variable Annuity (*if IAR is also a registered rep with a Broker/Dealer, variable annuity advertising may need to be filed with FINRA through their Broker/Dealer)

Variable annuities are offered only by prospectus. Carefully consider the investment objectives, risks, charges, and expenses of variable annuities before investing. This and other information is contained in each fund’s prospectus, which can be obtained from your investment professional and should be read carefully before investing. Guarantees are based upon the claims-paying ability of the issuer.

Variable annuities are long-term, tax-deferred investments designed for retirement, involve investment risks, and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59† unless an exception to the tax is met.

Indexed Annuity

An indexed annuity is for retirement or other long-term financial needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. Guarantees provided by annuities are subject to the financial strength of the issuing company and are not guaranteed by any bank or the FDIC.

Indexed annuities do not directly participate in any stock or equity investment. Clients who purchase indexed annuities are not directly investing in the financial market. Market indices may not include dividends paid on the underlying stocks and therefore may not reflect the total return of the underlying stocks; neither a market index nor any indexed annuity is comparable to a direct investment in the financial markets.

Life Insurance: Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

7 Ways SECURE Act 2.0 Could Affect Your Retirement

By Legislation, Retirement Planning

SECURE Act 2.0 was signed into law at the end of 2022. Here are a few ways it could affect your retirement.

After consumers throughout America were forced to endure a harsh financial storm in 2022, the year came to a close with President Biden signing a bill intending to increase and enhance the capabilities of retirement accounts. The bill is commonly referred to as SECURE Act 2.0, and it is the follow up to the Setting Every Community Up for Retirement Enhancement Act of 2019. It is expected to assist retirees and pre-retirees even further in the pursuit of a comfortable and sustainable retirement. Let’s go over the biggest changes that have already taken effect as well as ones that will roll out over the course of the next decade.

  1. Pushed Back RMDs [1,2]

As of the beginning of 2023, the age at which retirees must begin taking required minimum distributions from their qualified retirement accounts is 73. Previously it was 72, meaning that retirees will now have an extra year to plan for the distribution of their accounts or enact a strategy to minimize taxes on tax-deferred accounts. Furthermore, the RMD age will move back to 75 in 2033; however, in all cases, if you have already begun taking RMDs, you must continue to take them.

Ed Slott, an American financial expert, a CPA and the president of Ed Slott & Co., looks to simplify dates a bit with a quick guide. He says those born in 1950 or earlier should use age 72 as their expected RMD age, while those born between 1951 and 1959 should use age 73, and those born in 1960 or later should use age 75.

  1. Lowered Penalties for RMD Failures [2]

Prior to SECURE Act 2.0, failure to take required minimum distributions 1) in the right amounts, 2) from the correct accounts 3) by the deadline of midnight, December 31st each year could cause you to incur an additional 50% penalty on the amount not withdrawn, a hefty price on what may be your most precious assets in retirement. Now, the penalty for not withdrawing the minimum amount has been reduced to just 25% with the potential to drop to 10% if corrected in a timely manner, which Ed Slott says typically means within a two-year timeframe.

  1. Increased Catch-Up Contributions [1,3,6]

Currently, those over the age of 50 can make catch-up contributions of $7,500—up from $6,500 in 2022—to employer-sponsored plans like 401(k)s, while catch-up contributions of $1,000 (above the total contribution limit of $6,500 for 2023) can be made to either traditional or Roth IRAs by those age 50-plus. It’s also important to know that individuals in higher income brackets may not be able to contribute to IRAs.

Beginning in 2025, those age 60 to 63 will be able to make catch-up contributions of $10,000 to employer-sponsored plans, and the limit will be indexed to inflation thereafter. Additionally, catch-up limits for individuals age 50 or older for both traditional and Roth IRAs will be indexed to inflation beginning in 2024. Ideally, this should give those nearing retirement a chance to grow their accounts as they close in on that important stage of their lives.

  1. Increased Options for Employer Matches [1]

Prior to SECURE Act 2.0, even if employers offered a Roth option for their 401(k) or similar plan, the employer match amount was required to be made on a pre-tax basis to a traditional account, meaning taxes would be owed when that portion of the money was withdrawn. The SECURE Act 2.0 allows employers to offer post-tax matches to Roth accounts, meaning employees pay taxes now but the match amounts can grow and distribute tax-free later.

Additionally, beginning in 2024, employers may match student loan payments with contributions into retirement accounts. For example, if a qualifying student makes a student loan payment of $500, that payment is able to be matched and contributed to a retirement account if it’s within the matching capabilities of the plan, allowing it to grow for the future. This allows students who may be buried deep in student debt to still achieve their employer match in a retirement account, meaning they won’t miss out on valuable contributions due to student loan obligations.

  1. Auto-Enrollment into Employer-Sponsored Plans [1]

Enrollment into new employer-sponsored plans, such as 401(k) and 403(b) plans, will be automatic beginning in 2025. Upon hiring or upon the inception of the 401(k) plan, employees will automatically be added at a rate of at least 3% but no higher than 10%. Despite automatic enrollment, employees will still have the ability to opt out of the plan.

Employers already have the right to remove former employees with low balances from their retirement plans by cutting them a check for the remaining amount if the employee has taken no action to move their money. Beginning in 2024, the definition of a low balance will be more than $1,000 but less than $7,000, and SECURE Act 2.0 portability provisions will allow employers to make a tax-free rollover distribution of a low balance account into an account in the former employee’s name at their new job without their permission.

Other SECURE 2.0 Act provisions include the establishment of the nation’s first lost-and-found database for retirement accounts which will be undertaken by the U.S. Labor Department at some point in the future.

Ideally, all of these changes could help people end up with higher savings when they retire.

  1. New Options for 529 Plans [4]

Beginning in 2024, unused funds from 529 plans, which are tax-advantaged accounts traditionally used by grandparents and parents to help a beneficiary pay for college, can now be rolled over into a Roth IRA on behalf of the plan’s beneficiary.

This could provide a small boost to an individual’s Roth IRA, but you may want to look out for a few distinct limitations to this new option. First and foremost, the 529 account must have been established and in place for at least 15 years. There is a $35,000 limit on funds able to be converted, and that is an overall total, not an annual total.

Furthermore, rollovers will be subject to the IRA contribution limit, which for 2023 is $6,500 (plus $1,000 if age 50 or older), and the beneficiary must have earned income of at least that amount in the year the rollover is completed.

There are still a lot of questions about this provision of SECURE Act 2.0 which must be clarified by lawmakers or the IRS, including the naming or changing of beneficiaries. Prior to SECURE Act 2.0, beneficiaries of 529 plans could easily be changed, and account owners could even name themselves as beneficiaries as long as funds were used for legitimate education expenses.

  1. Increased Flexibility in Annuities [1,5]

Annuities, which are a contract with an insurance company rather than a direct investment in the market, can offer principal protection and a rate of growth guaranteed by the issuing carrier. They have the potential to allow you to participate in stock market upside without experiencing market decline.

SECURE Act 2.0 offers a bit more flexibility in the purchase of qualified longevity annuity contracts, or QLACs, with funds held in qualified retirement accounts. Previous limits held premiums to 25% of an account’s balance and capped them at $145,000, but SECURE Act 2.0 has eliminated the 25% rule and increased the total cap to $200,000, giving retirees more options in the diversification of their portfolios.

If you have any questions about how SECURE Act 2.0 might affect your retirement, please give us a call. You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

 

Sources:

  1. https://www.fidelity.com/learning-center/personal-finance/secure-act-2
  2. https://www.thinkadvisor.com/2023/01/04/ed-slott-pay-attention-secure-2-0-dates-are-all-over-the-place/
  3. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions
  4. https://www.thinkadvisor.com/2023/01/30/ed-slott-529-to-roth-ira-rollover-is-no-planning-panacea/
  5. https://www.annuity.org/annuities/qlac/
  6. https://www.schwab.com/ira/roth-ira/contribution-limits

 

Variable annuities are long-term, tax-deferred investments designed for retirement, involve investment risks, and may lose value. Earnings are taxable as ordinary income when distributed. Individuals may be subject to a 10% additional tax for withdrawals before age 59† unless an exception to the tax is met.

Add-on benefits are available for an extra charge in addition to the ongoing fees and expenses of the annuity and may be subject to conditions and limitations. There is no guarantee that an annuity with an add-on living benefit will provide sufficient supplemental retirement income.

An indexed annuity is for retirement or other long-term financial needs.  It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. Guarantees provided by annuities are subject to the financial strength of the issuing company and not guaranteed by any bank or the FDIC.

This site may contain links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.

 

Your 2022 Year-End Financial To-Do List

By Financial Planning

The end of the year is upon us. Here are some tasks to check off before 2023 arrives!

 

As the year wraps up, it can be a great time to take financial inventory. Your circumstances are constantly changing and evolving, and the proper financial plan is not meant to be a set-it-and-forget-it thing. With the end of the year presenting the perfect chance to revisit your goals, here are a few areas you may want to check in on before we flip the calendar to 2023.

  1. Review Your Financial Plan

The proper holistic financial plan isn’t just about your investments or your retirement. It also accounts for budgeting to achieve long- and short-term goals, making sure you have adequate insurance to hedge against financial risks, planning for wealth transfer to your heirs and/or charities, looking ahead with a plan to mitigate taxes—really every aspect of your financial life. As the year comes to a close, it can be a great idea to reassess your financial circumstances and make necessary adjustments to your financial plan. Maybe your goals have changed. Maybe you’re on a fast-track toward goals you expected to take longer to reach, so you can move some dates up. Remember, it’s always important to make sure that your beneficiaries are up to date annually on all of your accounts, investments and insurance policies. This time of year, while it’s in the front of your mind, you can use the tools and resources at your disposal to update and to reinvent your financial plan to more closely match your situation.

  1. Adjust Your Monthly Budget

A budget is an important part of any financial plan, and having one can be a great way to keep track of where your money comes from and where it goes. Now that we’re in the final month of the year, you may be in a good position with a clear vision as you revisit your budget and adjust as needed. Maybe you received a nice annual bonus or raise, or maybe you’ve recently had a baby and haven’t had a chance to fine-tune your budget through the sleepless nights. No matter your circumstances or the new milestones and stages of life you reached in the past 12 months, it can be a really good idea to take a look at how your income keeps up with your expenditures and tweak accordingly.

  1. Review Your Investments

It’s important to understand that diversifying with different asset classes can help protect your portfolio from market volatility, which is especially important as you get closer to retirement. Most traditional retirement accounts like 401(k)s have funds invested in the market, so they are not protected from market risk. This may be perfectly fine when you’re young, but as we saw with the high inflation, higher interest rates and increased volatility of 2022, it can cause panic for retirees, pre-retirees and people who are risk averse. Be sure that your overall portfolio positions you with a level of risk you’re able to tolerate, and that your retirement is protected.

  1. Recalibrate Your Retirement Account Contributions [1,2,3]

Your retirement accounts may be your greatest assets when it comes to funding a comfortable and stable lifestyle in retirement. As you traverse your career and attempt to carve out a lifestyle that will be sustainable once you get the chance to quit working and chase your retirement dreams, it’s important to know how much you’re allowed to contribute to your various accounts. For example, in 2022, the contribution limit is $6,000 for traditional and Roth IRA accounts, and it is $20,500 for 401(k)s. In 2023, those limits will increase to $6,500 and $22,500, respectively. If you’re 50 or older, you’ll also be able to make catch-up contributions of up to $1,000 to your IRA and $7,500 to your 401(k) as soon as the new year hits.

  1. Take Your RMDs [4]

Unfortunately, your retirement accounts cannot be left to grow tax-deferred forever. If you turned 70 after July 1, 2019, you must begin taking annual required minimum distributions, or RMDs, starting at age 72. The amount you must withdraw is typically calculated using life expectancy as determined by the IRS. Failure to adequately withdraw funds will result in a 50% excise tax, which is considerably higher than even the highest federal income tax withholding rate. Luckily, accounts growing tax-free, such as Roth IRAs and Roth 401(k)s do not have RMDs, but the deadline to withdraw the minimum amount from tax-deferred accounts is Dec. 31. If you’ve reached the age at which you must take the distributions, it can be beneficial to ensure that you’ve withdrawn the proper minimum amount from the right accounts to avoid a hefty penalty.

  1. Spend Money Left in Your FSA [5]

Health savings accounts (HSAs) and flexible spending accounts (FSAs) offer a chance for those with employer benefits to cut medical costs by contributing pre-tax dollars that are allowed to be used for qualifying expenses. Unlike HSAs, however, FSAs do not typically allow you to roll your excess funds into the next year. You may have a grace period provided by your employer, but even the grace period often comes with a limit as to how much can roll over. Some ideas to avoid losing funds left in your FSA include booking general wellness appointments like visits to the eye doctor, annual physicals and dental cleanings.

  1. Talk to Your Financial Professional or Advisor

The job of a financial professional, planner or advisor is to offer complete and personalized service for your holistic plan. That means assisting you with your unique circumstances and goals, helping you set realistic and reachable objectives while inspiring you to stretch farther and drive harder toward your ideal portrait of a comfortable lifestyle. Whether you’re looking to check off all of these boxes as the year ends or start 2023 with fresh goals, we can help!

If you have any questions about your end-of-year financial checklist, please give us a call. You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

 

Sources:

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  2. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
  3. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions
  4. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds
  5. https://www.goodrx.com/insurance/fsa-hsa/hsa-fsa-roll-over

 

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

 

Life Insurance

Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Taxes

Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.

5 Common Mistakes to Avoid with Medicare

By Health Care Expenses, Retirement Planning

Medicare can be tricky. Here are some common mistakes to avoid!

The Medicare open enrollment period has begun, so we thought it would be a great time to discuss some of the most common mistakes retirees make when it comes to their healthcare. Along with your streams of income that you’ve created for yourself during your career, Medicare is one of your most important tools in retirement. It can protect you against medical emergencies that could be financially devastating, especially when you’re living on a fixed income.

It is, however, important to know that Medicare has its limitations, potentially making you susceptible to mistakes when signing up and choosing a plan. Far too often we visit with and hear about retirees who aren’t aware of how Medicare works or how to correctly utilize it as a tool for protection. We believe that many of the headaches could be avoided simply by knowing the obstacles that may present themselves along the way, thereby allowing you to prepare for what’s ahead. Let’s go over the five most common Medicare mistakes, as well as a few ways to avoid them.

  1. Not Understanding What It Is

In 2021, two-thirds of Americans were covered by a private insurance plan, meaning that they were either part of a group plan through their employer, or they sought out coverage from an insurance company on their own [1]. While private insurance plans may differ on a case-by-case basis, they generally function similarly with premiums, deductibles and various amounts of coverage in each plan. In comparison with the healthcare insurance you may have had during your career, Medicare has slight yet key differences.

For example, Medicare has four parts: A, B, C and D. Parts A and B are usually referred to as Original Medicare, with Part A covering visits to hospitals and skilled nursing facilities as well as hospice care and some home-based healthcare. It is free for those who qualify, which includes those age 65 and older who have contributed Medicare taxes for 10 years or longer.

There are, however, monthly premiums for Part B, the portion of Medicare that covers the cost of outpatient care, such as standard visits to a general practitioner.

Parts C and D can be a bit trickier for those first signing up for Medicare. Part C is commonly known as a Medicare Advantage or Medigap plan, and these plans generally replace Parts A and B (and often Part D) with a plan through a private insurance company which gets subsidized by the government. Part C Medicare Advantage or Medigap plans can also include extra coverage like dental, vision and hearing.

Part D is prescription drug coverage, which is not included in Original Medicare Parts A and B but can be added for an additional premium amount.

No matter which plans you choose, Medicare premiums typically come directly out of your Social Security benefit, and it is important to account for those deductions when figuring your Social Security benefit into your net income.

  1. Overestimating Its Capabilities

As we mentioned above, Part A of Medicare is free to those who qualify, potentially generating the common misconception that Medicare as a whole is free for those in retirement. In reality, only premiums for Part A come at no cost to the insured, which still doesn’t include 2023’s $1,600 deductible for hospital visits [2]. Part B comes with a standard monthly premium which will be $164.90 per month in 2023. Increasing and enhancing your coverage with a Medicare Advantage plan can also hike your rates, and the cost of Part D can increase with a penalty for missing your initial enrollment period.

When planning your retirement, it’s important to know that those with higher incomes pay more for Medicare, and there is a two-year look-back on your income per your tax returns when determining how much you will pay.

It’s also important to know that Medicare does not cover long-term care. While no one likes to think about the prospect of leaving their home, their possessions and their loved ones behind, 70% of today’s retirees will need some type of long-term care, and 20% will need it for longer than five years [3]. When the national annual median cost of a private room in a nursing home can top $100,000[4], it’s easy to see where the problem lies. It may be helpful to look elsewhere for long-term care coverage, including into a long-term care insurance policy or a life insurance hybrid policy that includes assistance to pay for long-term care if you need it or a death benefit for your beneficiaries if you don’t.

  1. Signing Up Outside the Initial Enrollment Period

You are not automatically enrolled when you qualify for Medicare at age 65, you must enroll yourself. There is a seven-month enrollment window which starts from the three months before your 65th birthday, the month of your 65th birthday and the three months following your 65th birthday.

Failure to enroll during that period could cause you to incur permanent surcharges.

For instance, with Part D prescription drug coverage, you may incur a penalty. That penalty is calculated by taking 1% of the “national base beneficiary premium,” which is $32.74 in 2023[5], and multiplying it by the total number of full months you’ve gone beyond your initial enrollment period. For example, with next year’s national base beneficiary premium, if you delayed enrollment for Part D by 12 months, your premium would be an additional $3.93 per month.

  1. Picking the Wrong Plan

In the same way that your healthcare plan during your career probably had limited coverage, Medicare Advantage plans and Medicare Part D plans cover different providers and prescription drugs [6].

That’s why when you’re considering Medicare options, it’s important to have a list of your doctors and medications in hand. Consider working with a Medicare specialist who can help you choose between multiple carriers rather than going it alone.

  1. Neglecting to Revisit the Plan During the Open Enrollment Period

Medicare open enrollment runs annually from Oct. 15 through Dec. 7, so now is the perfect time to review your options. And remember, as you get older, your needs will likely change. You may move. You may begin to see different specialists or healthcare providers. Almost certainly, your need for different prescription drugs will change. As those needs change, so can your Medicare plan.

The open enrollment period gives Medicare beneficiaries a plethora of options in changing their coverage to tailor it to their unique circumstances. For example, you can opt to change your Original Medicare plan to a Medicare Advantage plan, or vice versa. Furthermore, you can change your Medicare Advantage plan to a different one that offers more complete coverage for your care. Finally, it gives you the ability to customize your Part D coverage, whether you’re adding it to your current plan, removing it from your plan or changing it to accommodate your needs [7].

Too often, Medicare beneficiaries have improper coverage, leaving them scrambling to pay for their care. You can revisit your plan each year during the open enrollment period to help ensure that you aren’t stuck with medical bills you could have avoided.

If you have any questions about retirement issues like Medicare, please give us a call! You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

 

Sources:

  1. https://www.cdc.gov/nchs/data/nhis/earlyrelease/insur202205.pdf
  2. https://www.cms.gov/newsroom/fact-sheets/2023-medicare-parts-b-premiums-and-deductibles-2023-medicare-part-d-income-related-monthly
  3. https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
  4. https://health.usnews.com/best-nursing-homes/articles/how-to-pay-for-nursing-home-costs
  5. https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-coverage/part-d-late-enrollment-penalty
  6. https://www.aarp.org/health/medicare-insurance/info-2019/common-medicare-mistakes.html
  7. https://www.investopedia.com/medicare-open-enrollment-guide-5205470#toc-what-can-you-change-during-medicare-open-enrollment

The Importance of Having an Estate Plan

By Estate Planning

A proper estate plan can protect your assets and your family. Here are some answers to questions you may have!

October is National Estate Planning Awareness Month, so now is the perfect time to discuss the importance of having an estate plan. We get it. It’s something nobody wants to think about, especially your loved ones, who can’t imagine living without you. But estate planning is a necessary part of the financial planning process. It helps ensure that everything you’ve worked so hard to accumulate gets passed on according to your desires in the most tax-advantaged manner possible.

Moreover, no financial plan is truly complete without an estate plan. The ideal financial plan preserves and protects your assets throughout your life all the way through your retirement, helping ensure that you don’t outlive your resources, but it also accounts for your legacy and wealth transfer at the end of your life. Without an estate plan, your assets, whether that be money, real estate, possessions or even precious family heirlooms, could end up in the wrong hands.

Let’s go over some commonly asked questions to make the estate planning process more understandable and easier to approach.

What is an estate plan?

An estate plan is a detailed, documented plan for what will happen to your assets when you’re gone. It’s intended to ease the transition following death by directing the transfer of your things. The most commonly known document in an estate plan is your last will and testament, which specifically lists and designates all of your assets to your beneficiaries. It also names an executor who is in charge of making sure the beneficiaries listed in the last will and testament receive what they are entitled to and that all of your final affairs and financial matters are settled. In the case of minor children, your last will and testament also specifies who you wish to raise your children in the event that both you and your spouse have passed away.

Additionally, an estate plan can contain other documents like trusts, health care directives or living wills, and powers of attorney. Your comprehensive estate plan is essentially a plan for the worst, should you be unresponsive, unable to make a decision or deceased [1].

Why is it important for me to have one?

There are many reasons to have an estate plan, the most important of which likely being the bequeathing of your assets to specific beneficiaries. Without proper documentation, the best-case scenario sees the correct distribution left up to chance, the courts and your heirs. The worst-case scenario means all-out war inside your surviving family.

An estate plan can also save your family from unnecessary tax burden. Oftentimes estate plans and financial plans come together to determine the most tax-efficient distribution of your property and accounts. You’ve worked so hard your entire life, both for your family and for yourself. Chances are, you’d love to see that money in the hands of those you love rather than in the pockets of the IRS [2].

Aren’t estate plans only for the ultra-rich?

A common misconception is that estate plans are exclusively for those with multiple million-dollar estates, priceless artwork or valuable shares in major companies. But that just isn’t true. In fact, those with fewer assets may have an even greater need for tax-efficient estate planning so that their families are protected during a potentially financially devastating time.

But even the rich are often unprepared. The unfortunate truth is that 67% of Americans don’t have an estate plan [3], but anyone with a family or assets should plan for the future, whether you’re handing down the majority stake in a large corporation, a vacation home or the remaining balances of your retirement accounts.

No matter the amount of assets, an estate plan can save your family headaches, time and tears by predetermining ownership before they are thrust into one of the most stressful endeavors of their lives. It’s worth it to strategize in life so that when your time comes, your family can spend their time properly grieving instead of worrying—or fighting—about how to split your belongings.

Things will sort themselves out, even if I don’t have a plan, right?

Well, technically, yes. Things will sort themselves out. But you’ve spent your entire life in the driver’s seat, making decisions that matter for you and your family. If you pass away without an estate plan and legal documents, small decisions are left to your extremely emotional family, and major decisions are left to probate court in what is usually a very costly and lengthy process.

In distributing your assets, courts can often be more expensive and time-consuming than need be. Tack on the fact that the legal system doesn’t understand your family’s history or dynamic, and it becomes a recipe for trouble. As someone who does understand how your family operates, which members deserve which assets and which members are able to be responsible for what they inherit, you can simplify the process by organizing an estate plan while still alive and sound of mind.

How do I start the conversation?

Determining how your family proceeds when you’re gone is no easy task. It can be just as difficult, or maybe even more difficult, for your children who have never been forced to live without you and the support you offer.

In our experience, we’ve found that the earlier the conversation begins, the easier it is to have. It’s always simpler to plan out of luxury than necessity, and estate planning is no different.

Communication is key. Talk to your heirs and loved ones about what your desires are, and ask them about theirs. You may be surprised to find out that it’s the sentimental items they want rather than the expensive ones. By having a clear plan that’s communicated well beforehand, years prior to any eventuality, you can avoid permanent family rifts and resentments later.

How can I get started with my estate plan?

Once you’ve consulted your heirs, or your parents if you are the heir, it’s important to accept that you’ll need help to complete a legally-recognized estate plan.

Ideally, your financial professional and your estate attorney should work together. Your financial professional can bring an estate planning attorney to the table, or work in conjunction with yours. What the financial professional does is find tax-advantaged vehicles and efficient ways to transfer wealth that an attorney may not know about or have access to, while the attorney brings the legal expertise, knowledge of state laws, and ability to generate all the needed legal documents.

Remember that it’s equally important to revisit and review your estate plan periodically, preferably every year. Life continually evolves as you acquire new assets and your family grows and changes.

If you have any questions about your estate plan, please give us a call! You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

 

Sources:

  1. https://www.businessinsider.com/personal-finance/what-is-estate-planning#what-are-the-main-steps-in-estate-planning
  2. https://www.investopedia.com/articles/wealth-management/122915/4-reasons-estate-planning-so-important.asp
  3. https://www.cnbc.com/2022/04/11/67percent-of-americans-have-no-estate-plan-heres-how-to-get-started-on-one.html
Estate Planning

Christopher Drew Featured on The Balance to Discuss Estate Planning

By Estate Planning

Christopher Drew, the founder of Drew Capital Group, was recently featured in an article from The Balance to discuss the importance of early estate planning.

At Drew Capital Group, we understand that even opening the conversation about an estate plan can be a terrifying idea. It’s a plan for the inevitable, but that doesn’t make it any less vulnerable or unsettling. Nevertheless, an estate plan is extremely important, which is why The Balance turned to our founder, Christopher Drew, for insight, firsthand accounts and testimonials to their value.

As families age, caretaking responsibility often falls on children and other family members. While half of that responsibility includes acts of service, the other half relies on the emotional and mental part of the relationship. Chris Drew believes that family members with a grasp and understanding of their loved ones’ wishes can cut down on awkward discussions they may not be interested in having.

The process can also be simplified by starting the planning process early. First and foremost, as we age, we may experience some sort of physical and mental decline. A great deal of stress can be avoided by getting affairs in order while you or your parents are operating at peak efficiency.

It can also be tremendously helpful to avoid planning out of necessity. For example, a major life event can force some families to confront their problems before they’re mentally prepared to deal with them. “It’s a reality that can make financial futures more complicated, which is why it’s ideal to start discussing financial matters and wishes for after death early,” Drew said.

Other reasons to create and maintain a proper estate plan include the avoidance of court proceedings, the simplification of the process, the preservation of wealth and the closing of the racial wealth gap. A consistent, periodic updating of beneficiaries can ensure that your assets fall into the hands of exactly who you intend to pass them to, and the discussion shouldn’t be avoided out of fear or shame.

The article also notes that simply opening the conversation can be difficult, so it offers a few tips to those looking to get ahead of the curve. First, for adult children, it may be advantageous to consult siblings. Equal division of assets may sound ideal, but it can vary based on needs and desires. Additionally, initiating the discussion could be smoother with a united front.

Dialogue can also begin with simple questions with good intentions, as to show parents that you’re focused on alleviating stress and promoting their legacy. At the end of the day, estate planning is about them, and it should be focused on eliminating difficulty in the planning process as opposed to personal gains. Some strategies to keep the conversation focused include using relatable examples and focusing on tax benefits, assuring them that you’re looking to protect more of their hard-earned money.

To read the entire article and learn more tips about estate planning, click here.

If you have any questions about beginning the conversation or crafting the right estate plan for your situation, please give us a call. You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. Advisory services offered through Drew Capital Management, a Member of Advisory Services Network, LLC. Insurance products and services offered through Drew Capital Group. Advisory Services Network, LLC and Drew Capital Group are not affiliated.

Life Insurance

4 Recent Innovations in Life Insurance Policies

By Life Insurance

Life insurance is no longer constrained to the inflexible policies our parents held. Here are some of the latest additions and innovations to give you more options than ever.

Today’s life insurance policies are not the policies our parents and grandparents grew up with and purchased. They offer more features and more customization, at a price lower than many consumers expect to pay.

In fact, a recent study showed that more than 50% of people assume that the cost of life insurance is three times higher than it actually is [1]. Furthermore, 44% of millennials, a group whose net worth continues to rise more rapidly than any other generation [2], overestimate the cost of term life insurance by more than six times.

Price, however, isn’t the only barrier holding people back from looking at what life insurance has to offer. Lack of information, explanation and time to research options, combined with the fact that no one enjoys thinking about and planning ahead for their own death, can make life insurance a tough subject.

New life insurance policy features are designed to quell those worries, as insurance companies look for more ways to build client-oriented policies. Here are some of the latest innovations in the life insurance industry:

  1. Cash Value Component and Living Benefits

Life insurance used to be exactly what it might sound like: insurance for your life. In the event of their unexpected death, policyholders wanted to protect their families, usually by purchasing term life insurance. Term life insurance covers policyholders for a predetermined period of time, typically for a low monthly rate.

Now, carriers offer whole and universal life insurance, which are permanent policies with a tax-deferred cash value component that allows retirement planners to create another avenue to build a nest egg, or savers to save for other things, like college or self-funding a business startup venture. Though the cash value component often increases the monthly premium costs, with these types of policies, the cash value can grow at a rate guaranteed by the claims-paying ability of the insurance company.

One advantage of universal life as opposed to whole life is flexible premiums, allowing you to increase or decrease your premium and the amount that goes toward your cash value. Indexed universal life, a type of universal life insurance, can offer principal protection with market upside potential in correlation with a market index or indexes. (It’s important to understand that indexed universal life is a contract between a consumer and an insurance company, and unlike variable life insurance, isn’t actually subject to stock market risk.)

Permanent life insurance policies that can build cash value can be a good option for healthy younger investors with time and low likelihood of death in the near future. Depending on their situation, healthy retirees can also sometimes benefit from single-premium permanent life insurance which can provide tax-advantaged retirement income.

  1. Long-Term Care Hybrid Policies

Just as no one enjoys planning for their own death, no one likes to imagine needing long-term care. Unfortunately, 70% of people currently age 65 or older in America will need long-term care, with 20% needing support for longer than five years [3}. Additionally, Medicare does not cover long-term care, necessitating some sort of plan to pay for long-term care to avoid the accelerated depletion of funds in retirement.

One solution to the problem is a modern life insurance and long-term care hybrid plan. Obviously, the main sticking point and fear when it came to traditional long-term care insurance was the potential for not needing long-term care, and that fear was completely rational and well-founded. Older policies were “use-it-or-lose-it.” If you didn’t end up needing long-term care, all of those premiums you paid through the years were for nothing.

Now, hybrid policies provide flexibility. Policyholders have the ability to use their benefit to fund long-term care if they need it. If they don’t need it, it becomes a death benefit provided to their beneficiaries.

  1. Riders

One of the biggest expansions in life insurance is in the way you can customize a policy to your needs using a wide array of options available as riders that can be added to an insurance policy. A guaranteed insurability rider, for example, allows the policyholder to purchase more coverage without additional medical examination. It can be helpful to have a guaranteed insurability rider if you expect changes in circumstances that would have affected your original premiums.

Accidental death riders are also common, usually doubling the death benefit in the event that the policyholder dies in an accident. Additionally, accelerated death benefit riders can give the policyholder access to the death benefit if diagnosed with a terminal illness [4]. The amount accessed is typically subtracted from the death benefit, meaning that the policyholder’s beneficiaries receive a smaller death benefit, but it’s yet another example of a feature allowing access to funds during life.

  1. Better Support for Policyholders

Whether it be because of life insurance riders or enhanced operations, life insurance does not have to be difficult to obtain. Modern technology, increased access to better medical information and simplified underwriting have helped innovative companies that are always looking for ways to reach broader audiences with better products.

With an independent financial advisor who works with multiple insurance companies, you can find the insurance policy that suits your own unique situation and budget, with the most beneficial features and/or riders for your needs.

If you have any questions about life insurance and the latest advancements, please give us a call! You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

 

Sources:

  1. https://lifehappens.org/research/life-insurance-is-on-peoples-minds/
  2. https://www.cerulli.com/press-releases/millennials-want-more-advice-and-are-willing-to-pay-for-it
  3. https://www.annuity.org/retirement/planning/average-retirement-income/
  4. https://www.investopedia.com/articles/pf/07/life_insurance_rider.asp

 

Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

This site may contain links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.

Christopher Drew Featured on Yahoo! News

By News

Christopher Drew, the founder of Drew Capital Group, was recently quoted in an article discussing the pandemic’s effect on personal finances.

Among events like the pandemic, the Russian invasion of Ukraine and other world-shaking crises, the American economy has seen dramatic shifts over the past few years. It has many questioning how financial principles have been affected by the new state of reality.

Reporters turn to financial professionals like Chris Drew to answer questions about the state of the economy, personal finance and what you should do now. First and foremost, Drew believes it’s more important than ever to follow timeless money management principles, and to be cautious about spending at the moment. “Be more cautious about your spending habits due to the increase in inflation,” Drew said. Now may be the time to save for long-term goals and reassess priorities.

Other financial professionals and journalists agree, pointing out the importance of saving for the future rather than indulging in goods that only provide instant gratification.

The article also highlighted a change in life philosophy, with more Americans prioritizing family and experiences over possessions. That adjustment appears to have consumers managing their finances with more sentimental goals, focusing on making memories rather than the acquisition of material goods.

Drew outlined the importance of your relationship with your financial advisor. While advisors should always be reaching out and keeping clients in the loop like he does, it’s never a bad idea for clients to pick up the phone and inquire themselves, especially when markets are volatile.

“Because of economic factors affecting the market in today’s environment–such as interest rate hikes, the war between Russia and Ukraine, and a massive spike in inflation–we have had to make adjustments to portfolios along with asset allocation changes to help reduce the [impact of] overall volatility of the markets,” Drew said.

Picked up by multiple media outlets, you can read the entire article on Yahoo!, Yahoo! News, MSN, AOL and GoBankingRates.

 

If you have any questions about ways you can protect your finances from the impact of stock market volatility, please give us a call. You can reach Drew Capital Management in Tampa, Florida at (813) 820-0069.

 

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. Advisory services offered through Drew Capital Management, a Member of Advisory Services Network, LLC. Insurance products and services offered through Drew Capital Group. Advisory Services Network, LLC and Drew Capital Group are not affiliated.

As Featured In

What is COLA, and How Does it Affect Retirement?

By Retirement, Social Security

The COLA on Social Security is projected to increase benefits by more than 10%. How does that affect your retirement?

Inflation in the United States is at a 40-year high, and the entire country seems to be feeling the squeeze of rising prices, regardless of income level. Though the debate over the cause of current inflation rates rages on, one thing seems to be certain: the cost of everyday goods, like rent, gas and food, continues to rise [1].

Understandably, that leaves American consumers with questions and concerns. First, as the value of the dollar decreases, which lifestyle adjustments can be made to compensate for the loss in buying power? Second, won’t somebody do something?

This year, the Federal Reserve has taken action by raising interest rates several times in an effort to curb spending and cut demand, ideally forcing the price of goods down, or at the very least, leading them to stagnate [2]. But lately, the Fed has been criticized by experts worried that their actions may not be having the desired effect, but instead may be bringing on a recession [3].

So, what other actions does the government take to protect people from inflation? For retirees and those collecting Social Security benefits, the Social Security Administration began implementing an annual COLA almost five decades ago.

What is a COLA?

No, it’s not the tasty drink you order when you first sit down at a restaurant. COLA stands for “cost-of-living adjustment” and was first introduced by the Social Security Administration in 1975 in an effort to counter inflation for beneficiaries relying on those funds [4]. Beneficiaries of Social Security, which include individuals who have reached the age of 62 or have qualifying disabilities, can receive an increase in their benefit based on the Department of Labor’s Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W.

For example, at the beginning of this year, Social Security beneficiaries may have noticed their checks increasing by 5.9%. That increase didn’t happen by chance or because of a missed decimal point in the accounting department. It was a carefully constructed adjustment based on 2021’s inflation rate, ideally giving those living on fixed income a chance against rising costs.

And next year’s COLA for 2023 could be the highest we’ve seen since 1981.

How does this affect retirees?

Retiring isn’t easy, and there’s a reason workers open IRAs and employer-sponsored retirement accounts, like 401(k)s, early in their careers to begin building for the future. Retirement comes with a great deal of financial risk, and one of the biggest contributors to that risk is inflation.

Retirees often live on fixed incomes, withdrawing money from savings accounts, retirement accounts, pensions, annuities, investments and Social Security to cover their living expenses. Though a proper financial plan accounts for inflation, it can be difficult to foresee spikes like the one in 2022, potentially upsetting expectations of how long your money will last. Though imperfect, the COLA can offer retirees increases to one of their main sources of income in retirement, hopefully offsetting change that can occur over the course of decades.

What is the next COLA expected to be, and when can I expect it?

A recent COLA projection made headlines with an eye-popping number. The Senior Citizens League estimates that Social Security beneficiaries could see a 10.5% COLA, meaning that the average monthly benefit could increase by about $175[5].

That estimate has steadily climbed over the past few months, though it’s certainly not yet set in stone. The Social Security Administration will announce the next COLA in October, and it will go into effect in January of 2023.

Are there any problems with COLA?

Though an increase in your Social Security check might sound entirely positive, there are drawbacks to COLA and the problems it aims to correct. The COLA is intended to cover the difference between the current cost of living and the previous year’s cost of living, but it is possible that the extra money in your benefit will only partly cover your increased living expenses.

The COLA is not directly aligned with inflation, so it is possible for inflation to rise faster than Social Security’s adjustment. For example, in 2021, inflation climbed 7% [6] while the COLA only increased by 5.9% [7]. Similarly, the Social Security COLA can remain unchanged year over year, just as it did following 2009, 2010 and 2015 when inflation rose 2.7%, 1.5% and 0.7%, respectively [8].

While not completely reflective of each other, the COLA and inflation do correlate, and inflation is currently outpacing wages. In fact, in 2021, wages actually saw a 3.5% drop when living costs are accounted for [9]. Though this doesn’t directly affect Social Security beneficiaries, the Social Security trust funds are built by contributions from income taxes [10]. It stands to reason that inflation’s outpacing of wages would mean that the Social Security trust funds, which currently project to only be able to pay at their current rate until 2035, would deplete even quicker [11].

So, as someone who collects Social Security or hopes to in the future, what can I do?

First and foremost, we would always recommend speaking with your financial professional to assemble a proper plan for your retirement. The right financial plan can be the difference between having adequate funds for your desired lifestyle or running out of money. Social Security is only one income stream, and backup plans with alternative sources of funds are vital.

If you have any questions about your Social Security benefit, please give us a call! You can reach Drew Capital Group Private Wealth Management in Tampa, Florida by calling (813) 820-0069.

 

Sources:

  1. https://www.marketwatch.com/story/coming-up-consumer-price-index-for-may-11654862886
  2. https://www.forbes.com/advisor/investing/another-75-point-fed-rate-increase/
  3. https://www.forbes.com/sites/jonathanponciano/2022/07/27/fed-raises-interest-rates-by-75-basis-points-again-as-investors-brace-for-recession/
  4. https://www.ssa.gov/oact/cola/colasummary.html
  5. https://www.cnbc.com/2022/07/13/social-security-cost-of-living-adjustment-could-be-10point5percent-in-2023.html
  6. https://www.cnbc.com/2022/01/12/cpi-december-2021-.html
  7. https://www.ssa.gov/oact/cola/colaseries.html
  8. https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093
  9. https://www.cnn.com/2022/07/29/economy/worker-wages-inflation/index.html
  10. https://www.ssa.gov/news/press/factsheets/WhatAreTheTrust.htm
  11. https://www.thestreet.com/investing/social-security-2035

 

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

This blog may contain links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.

Inflation as a Risk in Retirement

By Inflation Risk, Retirement Planning

Inflation can be troubling, especially for those living on a fixed income. Here’s what you need to consider.

Exiting the work force and beginning the next chapter of your life can be infinitely exciting. After a long career, free time afforded by retirement offers a great opportunity to check off long-awaited bucket list items or develop those relationships with loved ones. You might also stop setting alarms in the morning, making sure that you get the right amount of sleep to propel you toward your dreams. There is, however, one area in which you might not want to hit the snooze button: your finances.

With improvements in science and medicine have come increases in life expectancy, extending the length of retirement for the modern worker. While it’s great to plan to be around longer to pursue passions and spend time with family, longer life expectancy does present a challenge. Retirees used to plan for 10 to 15 years of retirement, but it’s no longer strange for someone to live to 100, meaning that retirement could potentially last 30 years [1].

Prolonged retirement can bring about longevity risk, which is the risk of running out of money while still alive, and inflation provides zero relief when it comes to making your money last. Inflation decreases the purchasing power of the dollar, which can create a serious problem for retirees living on fixed incomes and retirement accounts they’ve built over the course of their careers. Now inflation is at a 40-year peak [2], which can cause headaches, especially for those entering retirement as they’re forced to deplete savings faster than they might have under lower inflation rates.

Luckily, there are a few ways to alleviate some of the pain points when it comes to inflation in retirement. First, it can be beneficial to contribute to your retirement accounts early in your career. You can begin planning for retirement too late, but you can never begin too early. Some investment vehicles designed to build retirement assets for your future include employer-sponsored 401(k) plans, 403(b) plans, traditional IRAs, Roth IRAs, SIMPLE IRAs and SEP plans.

Traditional 401(k) and IRA accounts grow tax-deferred, meaning that contributions will be made before taxes are taken from your paycheck then are taxed upon distribution. Roth accounts are distributed and grow tax-free if all IRS regulations are followed, but initial contributions are made with post-tax dollars. Both grow with compound interest; which Albert Einstein called the eighth wonder of the world. Compound interest means you will accrue more interest through time based on your growing account balance, so taking the time to feed those accounts when you’re younger can be extremely rewarding.

If you are getting close to retirement and don’t have decades of time on your side, there are a few more things about inflation that you should know.

Social Security considers inflation annually when calculating benefits, and some years it provides a cost-of-living adjustment, or COLA, based on one of the federal government’s consumer price indexes called the CPI-W. In 2021, Social Security beneficiaries received a 5.9% COLA, which was the highest increase since 1982, but it’s important to remember that COLA may not always cover increased costs. For example, beneficiaries received no increase in 2015[3] despite an incremental 0.12% inflation rate [4].

Some annuities are also specifically designed to combat inflation by offering a COLA. Annuities are contracts between buyers and issuing insurance companies which guarantee annuity payments based on the insurance carrier’s claims-paying ability [5] as well as the terms of the contract. With annuities that offer a COLA, the pre-determined payments may be adjusted to account for inflation.

Lastly, it’s always important to consult your financial professional to find solutions to suit your unique, individual situation. The proper guidance can assist you in determining whether or not you’re placing enough money into various retirement accounts for potential future inflation without disrupting your desired lifestyle.

If you have any questions about how inflation may affect your retirement, please give us a call! You can reach Drew Capital Group Private Wealth Management in Tampa, Florida by calling (813) 820-0069.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

 

Sources

  1. https://money.usnews.com/money/retirement/articles/how-living-longer-will-impact-your-retirement
  2. https://apnews.com/article/key-inflation-report-highest-level-in-four-decades-c0248c5b5705cd1523d3dab3771983b4
  3. https://www.ssa.gov/oact/cola/colaseries.html
  4. https://www.worlddata.info/america/usa/inflation-rates.php
  5. https://www.investopedia.com/terms/l/lifetime-payout-annuity.asp
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