If you do purchase health insurance on your own, further information on the timeline and process are included below.

• October 1, 2013 -  open enrollment starts
• January 1, 2014  – coverage starts
• March 31, 2014 – open enrollment for 2014 ends

As a reminder, beginning next year those that do not obtain health insurance could pay a tax penalty of 1% of their family income, or at least $95.  Those penalties increase in 2015 and 2016.  If you buy through the exchanges, tax credits are available for incomes up to 400% of the poverty level.

Details are still coming out, but in summary you are likely to see four different levels of plans.

• Bronze – should cover 60% of the average person’s health care costs
• Silver – should cover 70% of the average person’s  health care costs
• Gold – should cover 80% of the average person’s health care costs
• Platinum – should cover 90% of the average person’s health care costs

Bronze plans should have the lowest premiums and platinum the highest, but prices can vary widely.  Under the law, the maximum annual out-of-pocket expenses are capped at $6,350 for a single person and $12,700 for a family.  Another important point is the best rates and co-pays will apply to in-network providers, so it will be important that you are comfortable with the choices of doctors and specialists.

Furthermore, if you and your family are relatively healthy and have a “rainy day fund” available, it may make sense to look at the lower premium, higher deductible plans (i.e. Bronze).  If it meets the right deductible requirements, you’ll be able to open a Healthcare Savings Account (HSA).  HSAs have annual contribution limits of $6,550 in 2014 and these contributions are tax-deductible with no income limit.  We’ll be discussing further information about Healthcare Savings Accounts in an upcoming post.

One additional important point worth mentioning is the potential flexibility the exchanges provide for those individuals looking to switch jobs, start a business or retire early.  That is because insurers will be required to offer coverage to anyone and everyone, without any exclusions for pre-existing conditions and without any underwriting based on individual health issues.

In summary, if you purchase your own health insurance, speak to a financial planner to make sure you understand all your options with The Affordable Care Act, and ways to potentially save money.

Photo credit: Alan Cleaver

“Say no to hidden fees!”

“It’s YOUR money, why are you losing it to fees?”

Do these messages sound familiar?

They are common rhetoric in ad campaigns being used by many of the large retail brokerage firms, in a pitch to rollover your old 401k to an IRA with their institution.  It is a powerful message, since most 401k investors have been largely unaware that they are even paying fees.  We recently posted about new 401k disclosure requirements and the fees to be aware of.

While it is important to be aware of the fees associated with any investment, it is even more important to look before you leap when considering rolling over your 401k or other company sponsored retirement plans.  As financial planners, this is something we routinely advise our clients on and we do recommend rolling over old plans on a regular basis.

However, we also see some very good 401k plans that offer great funds at lower expense ratios than are available to retail investors.  In these cases we recommend clients leave those plans in place to take advantage of the low expenses and solid investment choices.

It is important to remember that retirement plans have plan representatives that negotiate the funds offered in your plan and their costs.  If you worked for a large employer, in many cases they are able to offer share classes of funds at lower expense ratios than those available to retail investors.

Fees are definitely a large factor to consider when rolling over your 401k, but there are also other considerations such as investment quality and tax issues.  Market volatility through the rollover process also plays a role.  Rollovers can take weeks to process, potentially leaving your money out of the market during that time.  It is important to evaluate what effect that might have on your overall portfolio and investment strategy.  Please contact us if you would like to take a closer look at if a rollover is right for you.

Photo credit: RambergMediaImages

The article below from the Financial Planning Association® discusses this issue in more detail and breaks down the fees inherent in employer sponsored retirement accounts.

While being aware of and keeping investment costs low is an important factor in your long term financial health, there are many other important factors to consider such as expected rate of return, employer match, and mutual fund management.

In most cases fees alone are neither a reason to accept or reject an investment.  For example, small cap and emerging market funds will typically have higher expense ratios than large cap US funds; however, their long term rates of return are typically higher as well.

As financial planners, these are things we take into account when incorporating employer sponsored plans into a comprehensive investment strategy.  Please contact us if you have questions about the costs associated with your plan.

Understanding the Fees Associated With Your Retirement Plan

There’s a little secret associated with your workplace-sponsored retirement plan. Most participants think their plan is free – that it doesn’t cost them anything to join, contribute, and invest. Unfortunately, that’s not entirely true.

While employees typically aren’t charged any out-of-pocket costs to participate in their plans, participants do pay expenses, many of which are difficult to find and even more difficult to calculate. New regulations from the Department of Labor (DOL), which oversees qualified workplace retirement plans, should make it easier for participants to locate and comprehend how much they are paying for the services and benefits they receive.

Here’s a summary of the information you should receive.

Investment-related information, including information on each investment’s performance, expense ratios, and fees charged directly to participant accounts. These fees and expenses are typically deducted from your investment returns before the returns (loss or gain) are posted to your account. Previously, they were not itemized on your statement.

Plan administrative expenses, including an explanation of fees or expenses not included in the investment fees charged to the participant. These charges can include legal, recordkeeping, or consulting expenses.

Individual participant expenses, which details fees charged for services such as loans and investment advice. The new disclosure would also alert participants to charges for any redemption or transfer fees.

General plan information, including information regarding the investments in the plan and the participant’s ability to manage their investments. Most of this information is already included in a document called the Summary Plan Description (SPD). Your plan was required to send you an SPD once every five years, now they must send one annually.

These regulations have been hailed by many industry experts as a much-needed step toward helping participants better understand investing in their company-sponsored retirement plans. Why should you take the time to learn more about fees? One very important reason: Understanding expenses could save you thousands of dollars over the long term.

Calculating Fees and Their Impact on Your Account

While fees shouldn’t be your only determinant when selecting investments, costs should be a key consideration of any potential investment opportunity. For example, consider two similar mutual funds. Fund A has an expense ratio of 0.99%, while Fund B has an expense ratio of 1.34%. At first look, a difference of 0.35% doesn’t seem like a big deal. Over time, however, that small sum can add up, as the table below demonstrates.

Over this 20-year time period, Fund B was $11,161 more expensive than Fund A. You can perform actual fund-to-fund comparisons for your investments using the FINRA Fund Analyzer.

If you have questions about the fees charged by the investments available through your workplace retirement plan, speak to your plan administrator or your financial professional.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

Source/Disclaimer
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so you may lose money. Past performance is no guarantee of future results. For more complete information about any mutual fund, including risk, charges, and expenses, please obtain a prospectus. Please read the prospectus carefully before you invest. Call the appropriate mutual fund company for the most recent month-end performance results. Current performance may be lower or higher than the hypothetical performance data quoted. The hypothetical data quoted is for illustrative purposes only and is not indicative of the performance of any actual investments. Investment return and principal value will fluctuate; and shares, when redeemed, may be worth more or less than their original cost.

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

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While these “filial responsibility” laws have rarely been enforced in the past, there’s a recent case where a court sided with an assisted living facility.  John Pittas, a restaurant owner, from Pennsylvania was sued in 2008 by his mother’s retirement home for over $92,000 of costs not paid.

According to the court, the nursing home could still sue Mr. Pittas even though his mother’s Medicaid application was pending at the time.  In addition, the facility chose not to sue the mother’s husband or John’s other siblings.

After several appeals, the Pennsylvania Supreme Court again ruled for the facility in March 2013.  Just last week, Mr. Pittas filed another appeal of this case claiming he did not have the funds to cover his mother’s costs.

There are 29 states with similar filial support laws that obligate adult children to foot the bill for their parents care, including North Carolina.  With 77 million baby boomers about to retire over the next two decades, chances are we will hear about more of these situations.

What can you do?

Elder law attorneys recommend that if you expect a parent to run short on resources to pay for assisted living costs, then to file the Medicaid application quickly.  Medicaid laws are complicated and require ample amounts of documentation to qualify for assistance.

More importantly, completing a financial plan will help you understand the current resources along with the potential cost of the long-term impact for both you and your parent’s financial situation.  Long-term care insurance could be another option depending on the overall cost and family history.

We’ll be discussing our thoughts and experiences in dealing with the decision making surrounding long-term care insurance in an upcoming post.

Photo credit: Ulrich Joho

Heather Gudac

Gudac states, “I am proud to join the firm as a partner and look forward to contributing to our high-level client service model as our company continues to grow. I am excited to share ownership in a company that is built on a strong foundation, with an emphasis on team work and service.”

Heather began her career with the firm as a financial planning intern in late 2006.  This transitioned into a full-time position as Operations Specialist and Office Manager in 2008, and was followed by promotion to Operations Manager in 2011.  Heather is a graduate of North Carolina State University, with a BS in Business Management.

“Heather’s talent and skill have been a great asset to FSI.  She has been integral in not only keeping our company operating smoothly, but also advancing our processes so we can continue to improve services and manage our growth.  We’re delighted to welcome her as a shareholder and officer of the company,” says Financial Symmetry founder Bill Ramsay, CFP®.

In addition to her responsibilities of overseeing the daily operations of the firm, Heather assists with portfolio administration and growth management, and manages a growing operations team.  Working closely with FSI’s advisors, Heather coordinates new account transitions, supervises account maintenance and guides our clients though qualified account rollovers and distributions processes.

It was one of the most exciting Durham Bulls game in memory.  We got to witness a grand slam, a triple play (that even made Sports Center’s Top 10!), and topped everything off with Friday Night Fireworks.

Thank you again to all of our clients who came out for the game.  If you could not make it this time, we look forward to seeing you next year! (Be sure to RSVP early!)

With over half of the year left, you still have a chance to edit your withholding preferences in order to avoid any surprises next tax season. The IRS offers a simple tool to help determine the best withholding option for your level of income: IRS Withholding Calculator.

All you need to complete this tool is your most recent paystub and about 5 minutes. The calculator will then tell you how much income tax you are projected to owe this year and how much will be withheld from your paystub. The difference being the amount you owe or are refunded during next tax season. The calculator will recommend the number of allowances to choose on your W-4 form for the year, showing you how close to ‘breaking-even’ you may be for your 2013 taxes.

Adjusting your withholding may help you avoid having to write such as large check every April, or you can enjoy receiving more each pay period instead of waiting until April for a tax refund.

Instead of receiving a large refund once a year, have you considered increasing your 401k contribution each month? This way your “refund” will increase as the earnings compound over time while also lowering your current taxable income. For information on contribution limits for 2013 please visit our blog post on this topic.

While it is a good idea for everyone to check their withholding status at the beginning of each year, there are also a few other times that could cause changes in your withholding choices:

1. Getting married
2. Getting divorced
3. Having a baby
4. Starting a new job with a change in salary
5. Losing your job and therefore decreasing your yearly earnings

Please contact one of our Certified Financial Planners for help with savings strategies and tax planning as you experience these financial altering events listed.

Photo credit: Tax Credits

Morningstar, the mutual fund research company, annually calculates the difference between mutual fund returns (time-weighted) and investor returns (dollar-weighted).  A mutual fund’s published total return reflects a “buy and hold strategy.”  (This information is widely available on fund family web sites and Morningstar.)

Reality check

But, very few investors actually buy and hold.  Investors move their money in and out of funds as they search for the best return.  As a result, a mutual fund receives a great inflow of assets right after a period of good performance and right before a period of poor performance.  The gap between investor return and total return indicates how well investors timed their fund purchases and sales.  Unfortunately, this return gap is negative.

Big surges and big declines in the market spur greed and envy, then fear and anger.  Typically, the more emotional an investor, the worse his/her decisions will be.  This is noted in the chart below as 10-year annualized return differences between mutual funds and individual investors range from 0.87% to 3.11%.  These are materially different as they are compounded over 10 years and significantly reduce long-term investment performance.

We did the research

In additional research done by Financial Symmetry (“FSI”), we calculated the mutual fund vs. investor returns for Vanguard investors over this this same 10 year time period.

Vanguard emphasizes buy and hold, which should result in a smaller return gap, but the results were similar to the Morningstar study.  Weighted by mutual fund asset size, the mutual fund returns exceeded investor returns by 1.17% from 2002-2012.  Since we weighted returns by fund size, it is heavily allocated towards US stocks, but saw similar differences in the asset classes included in the chart above.

The research shows that individual investors often suffer from poor timing and planning.  Investors know they should hold diversified portfolios, but many chase past performance and end up buying funds too late or selling too soon.

Recommendation

Therefore, we recommended investors work with a qualified financial planner on an ongoing basis to help steer them to make rational investing decisions and avoid these mistakes.

Please contact us for further details regarding historical FSI returns.

The research notes that “the purpose of the portfolio is to pay for an ongoing liability, which in the case of a retiree is to provide retirement income.” The “liability” of retirement income is obviously heavily influenced by inflation as one of the greatest risks in retirement is losing purchasing power over time.

How it works

To illustrate this concept Morningstar compares the performance of 3 test portfolios under various inflation conditions. Their “Liability-Relative Portfolio” performs the best under medium to high inflation, most notably because of the high allocation to US TIPS at nearly 50%.

While this is a constructive point, you want your portfolio composition to be reflective of your overall cash flow needs; using the Liability Relative asset allocation they describe places a heavy bet on high inflation in retirement.

This seems a bit presumptive to put such a heavy allocation on inflation protected securities throughout retirement. We would like to see this allocation adjusted throughout the retirement period based on market conditions and the economic environment, rather than a fixed assumption that inflation will be high.

Risk Capacity

This strategy relates closely back to asset allocation and using a risk level compatible with your goals. We feel that using a guide like our risk capacity model for portfolio construction and continuously monitoring those investments is more critical to long term success than making a particular bet on inflation conditions. The Morningstar analysis seems to reflect this as Liability Relative Optimization is the least impactful of the five factors, estimated to add only $.02 on every $1 of retirement income.

A Step in the Right Direction

Overall, the Gamma research is a step in the right direction toward measuring money managers by a metric other than investment performance. While producing alpha over long periods of time is achievable with a consistent strategy, it is impossible to deliver over every time period. The benefit of making good financial planning decisions also extends far beyond the annual return on your investment portfolio.

This research identifies five factors that add to retirement income. However, we feel this is just the tip of the iceberg to what solid planning can achieve. In the context of retirement this is very powerful, but it also begs the question, how much value can be added if prudent strategies are applied throughout your career?

However, Congress did allow the payroll tax holiday that was enacted in 2010 to expire, which adds 2% to the amount that workers pay into Social Security.

Higher income taxpayers are facing a larger tax bill with top rates on income and capital gains increasing.  Additional surtaxes for Medicare plus reductions in allowable deductions will be felt by affluent taxpayers.

Here are a few tips for the 2013 tax year:

Adjust your withholding

With the increase in Social Security withholding, a taxpayer who earns $50k per year will see $1k less in take home pay.

One way to lessen the pinch is to have your withholding adjusted so that you keep more of your money throughout the year.  This is particularly helpful if you typically get a big refund with your tax return.

Take a look at a tool that the IRS offers to estimate the number of exemptions to claim for the remainder of the year.

Fund your 401k and other employer sponsored benefits

This may seem obvious, but there are a lot of tax triggers that are tied to adjusted gross income.  Contributions to employer sponsored plans such as 401ks and cafeteria plans are one of the easiest ways to reduce the amount of income that gets counted toward AGI.

Some key AGI thresholds determine if you are eligible to take the child tax credit, fund a Roth IRA, deduct student loan interest or take an education credit.  Also this year the itemized deduction and personal exemption phase-outs are back for high income taxpayers.

Watch out for the Medicare surcharge

As part of the healthcare legislation commonly known as “Obamacare” a 3.8% Medicare surcharge on investment income for wealthier taxpayers was added.  Beginning in 2013 single taxpayers with incomes in excess of $200k and joint filers in excess of $250k will be hit with this tax based on their investment earnings.

This includes dividends, interest capital gains, annuities, royalties and rental income.  Portfolio construction needs to be considered in order to mitigate income from taxable accounts.  Also this is another area where funding 401ks and other employee benefit plans can have a big impact.

Gift appreciated stock

This isn’t a new strategy for 2013, although it has become even more attractive for those in the top income tax bracket as their long term capital gains rates have increased to 20%.  The annual exclusion for 2013 allows up to $14k to be given away to an unlimited number of people free of gift tax.  For a relative in the lower tax brackets the most they will pay in capital gains tax is 15%, and there is a potential for 0% if they are below the 25% income tax bracket.

Watch out for the “kiddie tax” as this strategy will not work for kids under the age of 19 or full time students under the age of 24.  Also, gifting appreciated stock to qualified charities allows for a full deduction of the value of the stock, and the charity, of course, does not recognize any gain based on their tax exempt status.

Plan ahead!

As financial planners, we believe that tax planning is one area that can pay off immediately and it is often the easiest place to start.

Photo credit: 401(K) 2013