Articles for September 2016

Retirees Are Racking Up Credit Card Debt

credit-cards

New statistics point out an alarming financial problem

$6,876. That is the average amount of credit card debt owed by an American household headed up by an individual aged 65-69.1

If you are newly retired or close to retiring, that figure may alarm you. It is more than twice the amount of Social Security’s maximum monthly income payment.2

Credit card use is surging, and seniors are taking on more revolving debt as part of the trend. That $6,876 figure comes from personal finance website ValuePenguin, which just published its latest yearly study on U.S. credit card debt. As ValuePenguin found, revolving debt shrinks little with age: in households headed up by those 75 and older, the mean credit card balance was $5,638.1

In the second quarter of 2016, Americans charged $34.4 billion to their credit cards. According to research from WalletHub, that was the biggest second-quarter jump seen in 30 years. Undoubtedly, this was a byproduct of the quarter’s 4.4% boost in consumer spending. All this recently added consumer debt would seem less troubling were it not for two other statistics. One, Americans paid down just $27.5 billion in revolving debt in Q1 2016, the least in any first quarter since 2008. Two, U.S. consumers piled on $71 billion in credit card debt during 2015, representing the greatest annual increase since 2007.3,4

It seems Americans are returning to their pre-recession credit card habits. The question is: to what degree are households paying with plastic by choice? Retiree households saddled with mortgages and education debt may feel pressured to use their credit cards. The National Council on Aging recently identified credit card debt as a major financial worry among seniors.2

How can your household counter the trend? Here are some steps that might help you ease your debt burden.

Try the snowball approach. This is the approach where you pay down the balance on the highest-interest card first, then the next highest-interest card, and so forth. You should always make the largest payment you can on your highest-interest debt.

Pay on time. Late fees are like an Achilles heel for many cardholders. They not only hurt your bank account, they hurt your credit score. (Conversely, improving your credit score may make your debt cheaper to pay off, and make it easier to refinance or arrange a consumer loan.)

Establish a budget. Most households do not live by a budget. Even retiree households can forget about the importance of budgeting. If you can rein in parts of your spending, you may find yourself a) using cash more often, and b) having cash left over to save, invest or pay down debt.

Use certain cards for certain things. If you have a large recurring debt, why not put it on your lowest-interest card for some savings? In fact, assigning as much debt as you can to a low-interest or zero-interest card positions you to pay down debt sooner, with smaller monthly payments.

Finally, consider ways to create more income. If you just cannot use credit cards less or live on less, then you must offset your credit card debt by a) earning more or b) selling assets or possessions to give you more cash, which can be used to attack the debt.

While you may always have some revolving debt, it is a potential strain on a comfortable retirement. See if you can buck the current trend in credit card use that seems to be driving mean credit card balances higher.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Citations.
1 – valuepenguin.com/average-credit-card-debt [9/15/16]
2 – cnbc.com/2016/09/15/3-simple-ways-retirees-can-control-their-credit-card-debt.html [9/15/16]
3 – wallethub.com/edu/credit-card-debt-study/24400/ [9/12/16]
4 – reuters.com/article/us-usa-economy-idUSKCN1111FM [8/26/16]

Characteristics of the Millionaires Next Door

The habits and values of wealthy Americans.

Just how many millionaires does America have? By the latest estimation of Spectrem Group, a research firm studying affluent and high net worth investors, it has more than ever before. In 2015, the U.S. had 10.4 million households with assets of $1 million or greater, aside from their homes. That represents a 3% increase from 2014. Impressively, 1.2 million of those households were worth between $5 million and $25 million.1

How did these people become rich? Did they come from money? In most cases, the answer is no. The 2016 edition of U.S. Trust’s Insights on Wealth and Worth survey shares characteristics of nearly 700 Americans with $3 million or more in investable assets. Seventy-seven percent of the survey respondents reported growing up in middle class or working class households. A slight majority (52%) said that the bulk of their wealth came from earned income; 32% credited investing.2

It appears most of these individuals benefited not from silver spoons in their mouths, but from taking a particular outlook on life and following sound financial principles. U.S. Trust asked these multi-millionaires to state the three values that were most emphasized to them by their parents. The top answers? Educational achievement, financial discipline, and the importance of working.2

Is education the first step toward wealth? There may be a strong correlation. Ninety percent of those polled in a recent BMO Private Bank millionaire survey said that they had earned college degrees. (The National Center for Education Statistics notes that in 2015, only 36% of Americans aged 25-29 were college graduates.)3

Interestingly, a lasting marriage may also help. Studies from Ohio State University and the National Bureau of Economic Research (NBER) both conclude that married people end up economically better off by the time they retire than singles who have never married. In fact, NBER finds that, on average, married people will have ten times the assets of single people by the start of retirement. Divorce, on the other hand, often wrecks finances. The OSU study found that the average divorced person loses 77% of the wealth he or she had while married.3

Many of the multi-millionaires in the U.S. Trust study got off to an early start. On average, they began saving money at 14; held their first job at 15; and invested in equities by the time they were 25.2

Many of them have invested conventionally. Eighty-three percent of those polled by U.S. Trust credited buy-and-hold investment strategies for part of their wealth. Eighty-nine percent reported that equities and debt instruments had generated most of their portfolio gains.2

Many of these millionaires keep a close eye on taxes & risk. Fifty-five percent agreed with the statement that it is “more important to minimize the impact of taxes when making investment decisions than it is to pursue the highest possible returns regardless of the tax consequences.” In a similar vein, 60% said that lessening their risk exposure is important, even if they end up with less yield as a consequence.2

Are these people mostly entrepreneurs? No. The aforementioned Spectrem Group survey found that millionaires and multi-millionaires come from all kinds of career fields. The most commonly cited occupations? Manager (16%), professional (15%), and educator (13%).4 

Here is one last detail that is certainly worth noting. According to Spectrem Group, 78% of millionaires turn to financial professionals for help managing their investments.4

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com

Website:  www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.chess  

Citations.

1 – cnbc.com/2016/03/07/record-number-of-millionaires-living-in-the-us.html [3/7/16]

2 – forbes.com/sites/maggiemcgrath/2016/05/23/the-6-most-important-wealth-building-lessons-from-multi-millionaires/ [5/23/16]

3 – businessinsider.com/ap-liz-weston-secrets-of-next-door-millionaires-2016-8 [8/22/16]

4 – cnbc.com/2016/05/05/are-you-a-millionaire-in-the-making.html [5/5/16]

When Is Social Security Income Taxable?

The answer depends on your income.

Your Social Security income could be taxed. That may seem unfair, or unfathomable. Regardless of how you feel about it, it is a possibility.

Seniors have had to contend with this possibility since 1984. Social Security benefits became taxable above certain yearly income thresholds in that year. Frustratingly for retirees, these income thresholds have been left at the same levels for 32 years.1

Those frozen income limits have exposed many more people to the tax over time. In 1984, just 8% of Social Security recipients had total incomes high enough to trigger the tax. In contrast, the Social Security Administration estimates that 52% of households receiving benefits in 2015 had to claim some of those benefits as taxable income.1

Only part of your Social Security income may be taxable, not all of it. Two factors come into play here: your filing status and your combined income.

Social Security defines your combined income as the sum of your adjusted gross income, any non-taxable interest earned, and 50% of your Social Security benefit income. (Your combined income is actually a form of modified adjusted gross income, or MAGI.)2

Single filers with a combined income from $25,000-$34,000 and joint filers with combined incomes from $32,000-$44,000 may have up to 50% of their Social Security benefits taxed.2

Single filers whose combined income tops $34,000 and joint filers with combined incomes above $44,000 may see up to 85% of their Social Security benefits taxed.2

What if you are married and file separately? No income threshold applies. Your benefits will likely be taxed no matter how much you earn or how much Social Security you receive.2

You may be able to estimate these taxes in advance. You can use an online calculator (a Google search will lead you to a few such tools), or the worksheet in IRS Publication 915.2

You can even have these taxes withheld from your Social Security income. You can choose either 7%, 10%, 15%, or 25% withholding per payment. Another alternative is to make estimated tax payments per quarter, like a business owner does.2

Did you know that 13 states also tax Social Security payments? North Dakota, Minnesota, West Virginia, and Vermont use the exact same formula as the federal government to calculate the degree to which your Social Security benefits may be taxable. Nine other states use more lenient formulas: Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, and Utah.2

What can you do if it appears your benefits will be taxed? You could explore a few options to try and lessen or avoid the tax hit, but keep in mind that if your combined income is far greater than the $34,000 single filer and $44,000 joint filer thresholds, your chances of averting tax on Social Security income are slim. If your combined income is reasonably near the respective upper threshold, though, some moves might help.

If you have a number of income-generating investments, you could opt to try and revise your portfolio, so that less income and tax-exempt interest are produced annually.

A charitable IRA gift may be a good idea. You can make one if you are 70½ or older in the year of the donation. You can endow a qualified charity with as much as $100,000 in a single year this way. The amount of the gift may be used to fully or partly satisfy your Required Minimum Distribution (RMD), and the amount will not be counted in your adjusted gross income.3

You could withdraw more retirement income from Roth accounts. Distributions from Roth IRAs and Roth workplace retirement plan accounts are tax-exempt as long as you are age 59½ or older and have held the account for at least five tax years.4

Will the income limits linked to taxation of Social Security benefits ever be raised?
social-security Retirees can only hope so, but with more baby boomers becoming eligible for Social Security, the IRS and the Treasury stand to receive greater tax revenue with the current limits in place.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Citations.
1 – ssa.gov/policy/docs/issuepapers/ip2015-02.html [12/15]
2 – fool.com/retirement/general/2016/04/30/is-social-security-taxable.aspx [4/30/16]
3 – kiplinger.com/article/retirement/T051-C001-S003-how-to-limit-taxes-on-social-security-benefits.html [7/16]
4 – irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts [1/26/16]

Are There Really Tax-Free Retirement Plan Distributions?

A look at some popular & obscure options for receiving money with little or no tax.

US Coins

US Coins


Will you receive tax-free money in retirement? Some retirees do. You should know about some of your options for tax-free retirement distributions, some of which are less publicized than others.

Qualified distributions from Roth accounts are tax-free. If you own a Roth IRA or have a Roth retirement account at work, you can take a tax-free distribution from that IRA or workplace retirement plan once you are older than 59½ and have held the account for at least five tax years. One other nice perk: original owners of Roth IRAs never have to take Required Minimum Distributions (RMDs) during their lifetimes. (Owners of employer-sponsored Roth retirement accounts are required to take RMDs.)1,2

Trustee-to-trustee transfers of retirement plan money occur without being taxed. In a rollover of this kind, the custodian financial firm that hosts your workplace retirement plan account makes a payment directly out of the account to an IRA you have waiting, with not a penny in taxes levied or withheld. Trustee-to-trustee transfers of IRAs work the same way.3

If you are older than 80, you might get a tax break on a lump-sum withdrawal. If you were born prior to January 2, 1936, you could be entitled to a tax reduction on a lump-sum distribution out of a qualified retirement plan in certain cases. Unfortunately, this is never the case with an IRA RMD.4

Your heirs could receive tax-free dollars resulting from life insurance. Payouts on permanent life insurance policies are normally exempt from federal income tax. (The payout may be included in the value of your taxable estate, though.) A life insurance death benefit paid out from a qualified retirement plan is also tax-exempt provided the death benefit is greater than the policy’s pre-death cash surrender value. Even if an employee takes a distribution from a corporate-owned life insurance policy on his or her life while still alive, that distribution may not be fully taxable as it may constitute a return of the principal invested in the life insurance contract.4,5

Sometimes the basis in a workplace retirement account can be withdrawn tax-free. If you have made non-deductible contributions through the years to an IRA or an employer-sponsored retirement plan account, these contributions are not taxable when they are distributed to the original account owner, accountholder, or an account beneficiary – it is considered return of principal, a recovery of the original account owner or accountholder’s cost of investment.4

IRA contributions can optionally be withdrawn tax-free before their due date. As an example, your 2016 IRA contribution can be withdrawn tax-free by the due date of your federal tax return – April 15 or thereabouts. If you file Form 4868, you have until October 15 (or thereabouts) to do this.6

Withdrawals such as these can only happen, however, if you meet two tests set forth by the IRS. First, you must not have taken a deduction for your contribution. Second, you must, additionally, withdraw any interest or income those invested dollars earned. You can also take investment losses into account. (There is a worksheet in IRS Publication 590 you can use to calculate applicable gains or losses.)6

These common and obscure paths toward tax-free retirement income may be worth exploring. Who knows? Perhaps, this year, your retirement will be less taxing than you think.

Mike Moffitt may be reached at 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Citations.
1 – irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts [1/26/16]
2 – irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions [7/28/16]
3 – irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions [2/19/16]
4 – news.morningstar.com/articlenet/article.aspx?id=764726 [8/13/16]
5 – doughroller.net/personal-finance/life-insurance-proceeds-tax/ [8/18/16]
6 – tinyurl.com/gwoxed8 [8/18/16]

Managing Drug Costs

Rx pills

How can households meet the challenge?

Are prescription drug costs burdening your finances? This problem is far too common today. Consider the price tag of some of the drugs used to treat arthritis, hepatitis C, cancer, and multiple sclerosis. A Kaiser Family Foundation study notes that the cost of medications such as Zytiga, Humira, Gleevec, and Revlimid may run anywhere from $4,000-12,000 a year. For the record, Medicare Part D’s catastrophic coverage threshold for prescription medications is currently $4,850 per year (up from $4,700 in 2015).1,2

How can a household try to manage drug costs? There are some approaches that may help.

Shop around & compare Part D plans annually. This year, the Part D recipients who were automatically re-enrolled in their plans faced monthly premiums averaging $41.46, a 13% rise from $36.38 in 2015. As you shop, keep in mind that plans with smaller premiums may have higher out-of-pocket costs. Some plans also limit monthly doses of certain drugs in their coverage, or request patients to try less costly drugs before branded drugs can be prescribed.3

Consider generics. Generic drugs represent nearly 90% of prescriptions written today and can cost 80-90% less than branded therapies. Sometimes generic alternatives are not available, but often they are.3

Stay within the plan network. If you do, you’ll discover that 85% of Part D plans offer preferred in-network pharmacies. If you go out of the network for non-preferred medications, your cost for those medications may rise. That said, shopping around at different pharmacies may yield some savings. Pharmacies located inside big-box retailers sometimes provide amazing savings on commonly prescribed medications.3

Ask a compounding pharmacy if it can make a medication for you. In such an instance, the savings could be substantial.

Ask your doctor if you can reduce your dose. If that is doable, it could mean monthly savings.

Use a pill cutter. Typically, you pay for drugs by the pill rather than the pill strength. A pill cutter (which you can usually pick up for less than $10) can be an avenue to savings. This is true for many prescription drugs.4

Try GoodRx.
This app is free for your phone, and you can also visit GoodRx.com on your PC. GoodRx will give you a coupon so you can buy a prescription drug at the price it has negotiated with particular pharmacies in your area. In some cases, the discounts can be as large as 90%.4

Health Savings Accounts (HSAs) & Roth IRAs may also be useful. If you do not yet qualify for Medicare coverage, you may have the option to create an HSA, which must be used in conjunction with a high-deductible health plan (the current IRS definition of a high-deductible is $1,300 for individuals and $2,600 for families). In 2016, individuals can put up to $3,350 into an HSA, families up to $6,750; those 55 or older may make an extra $1,000 catch-up contribution to their accounts. HSAs are funded with pre-tax dollars, so the contributions reduce your taxable income. HSA funds may be partly or wholly invested, and they can be withdrawn tax-free as long as they pay for qualified medical expenses. Accumulated HSA funds may be withdrawn and spent for any purpose once the accountholder turns 65; although, withdrawals will be taxed as regular income at that point if not used to pay for qualified health care costs.5

IRS Publication 502 defines the cost of prescription drugs (and insulin) as a qualified medical expense. Qualified medical expenses also include lab fees and the costs of eyeglasses and contact lenses, psychiatric care, and drug and alcohol rehab programs.5,6

If you are already a Medicare recipient, one unheralded approach is to use Roth IRA funds to help meet drug costs. Roth IRA withdrawals are voluntary if you are the original owner of the IRA, and they may be made tax-free if you follow IRS rules. Required Minimum Distributions (RMDs) from traditional IRAs represent taxable income, and those RMDs could put you in a higher tax bracket and even prompt a Medicare surcharge.3

Lastly, see your doctor on a regular basis. A routine checkup could alert you and your primary care physician to what could become a chronic ailment. If treated early, that ailment could possibly be allayed, even overcome. Undetected or untreated, it could result in a long-term health problem with long-run financial impact.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

Citations.
1 – benefitspro.com/2015/12/09/seniors-face-enormous-out-of-pocket-prescription-c [12/9/15]
2 – medicare.gov/part-d/costs/catastrophic-coverage/drug-plan-catastrophic-coverage.html [8/8/16]
3 – fool.com/retirement/2016/08/07/7-strategies-to-lower-your-medicare-prescription-d.aspx [8/7/16]
4 – vitality101.com/health-a-z/8-ways-to-slash-the-price-of-your-meds [6/8/16]
5 – investopedia.com/articles/personal-finance/010516/how-effectively-utilize-health-saving-accounts.asp [1/5/16]
6 – tinyurl.com/zr2fmo7 [8/8/16]