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Five Financial Lessons from 2012

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You made it through 2012 – the good, the bad, the ugly. Exhale, reflect. What financial lessons did 2012 offer about retirement and saving? Plenty. The experts weigh in on what you should think long and hard about and use to your advantage in 2013.

Tune out the noise

One of the biggest mistakes of 2012 was to panic and listen too much to the media. “People thought the world was going to end, consequently why save? Why worry? Too many retirees depend on the market for their retirement income and they are the ones who get hurt the most. Having a plan is the biggest key,” says Annalee Leonard, president of Mainstay Financial Group. Avoid the temptation to react to market gyrations, insulate yourself from the talking heads. “Many headlines contribute to negative investor behaviors. Don't let your emotions get the best of you,” said Jeremy Welther, a principal and senior financial advisor with wealth management firm Brinton Eaton in a prepared statement.

Manage risks

Stock market volatility isn't likely to go away any time soon, with so much uncertainty still in the global economy. “If any lesson was to be learned from 2012, it was to expect more of the same when it comes to the market,” says Roy Laux, president of Synergy Financial Services.

Instead of panicking, focus on managing risks. Diversification and re-balancing remain the cornerstones of asset allocation, a time-tested portfolio management tool, points out Welther. Over time, your portfolio will become unbalanced as some asset classes grow faster than others. Periodically trim winners and add to your losers to stay on target, he says. “It's counter-intuitive, but it works. Systematically buying low and selling high allows you to reduce your overall risk and can actually help improve your returns over time.”

“Despite all the warnings of doom and gloom all year long, the doomsayers didn't get it right. The stock markets had a good year, despite all the warnings to the contrary. The Dow, the S&P 500 and NASDAQ were all up nicely, year over year, on December 31st,” says James Poe, founder of Texas Retirement Specialists.

Stuff happens

Whether it's Hurricane Sandy, tornadoes, or floods, the unusual happens, and seemingly with increasing frequency. Prepare for the unexpected. Review your insurance portfolio. “Ensure that you are neither over insured and paying more than you have to, nor under insured with not enough financial protection in the event of an emergency. Examine your coverage in property and casualty, disability, liability and long-term care,” says Welther.

Save more

Despite whatever priorities you have, there's no getting around making saving for the short and long-term top that list. Survey, after survey last year showed that while many Americans are paying down their debt, many aren't prepared for emergencies. A survey from Creditdonkey.com revealed that in 2012, close to half of those polled had no more than $500 in savings for emergencies. “Make 2013 the year you start saving more,” says Charles Tran, founder of the credit card comparison site. Many however, are thinking otherwise. A new survey from American Consumer Credit Counseling found that less than 5 percent of those polled said retirement savings will be an important goal for 2013.

Housing isn't dead

While residential real estate has been mostly, a sad, sad story since 2008, 2012 showed signs of life in the real estate market. With interest rates still low and prices slowly ticking upward, “the market is a great opportunity to invest in a second home that ultimately can be used as a permanent residence upon retirement,” says Jordan Hoefar, a spokesperson for HomeAway, a vacation rental site. By taking a buy-and-rent approach before you're ready to retire, a new home will have partly paid for itself by the time you're ready to move into it, says Hoefar. Among those owners who have a mortgage on their vacation rental home, nearly half are able to cover nearly 75 percent of their mortgage payment by renting it on websites. Says Hoefar, “On average, owners who advertise on HomeAway rent their home 19 weeks per year and generate more than $26,000 in rental income.”

Whatever financial mistakes you may have made or saw others make last year, what's done is done. Learn the lesson and make it work for you in 2013.



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Comments
39 Comments.
Comment #1 by Anonymous posted on
Anonymous
I usually enjoy reading these articles but I think it might work out better if we had articles for "Retirees" and others for "Pre-retirees".  This is because when it states in a general manner we should save more, as a retiree, my first thought is "from what?"  If one is a pre-retiree, it makes good sense to save more and one has choices available to them.  What are the choices for those of us who want to stay risk-free and protect what we have?  Save more??  At this point in our particular lives, we just need to make sure we keep having enough funds for all the yes, "unforeseen" bills that come upon us.  However, this is the reason that "save MORE" is so important for those who are not retired and still have income they can use to save as much as possible.  Thanks for sharing the article, Sheryl.

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Comment #2 by Anonymous posted on
Anonymous
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Dear Ms Nance-Nash,

>> Over time, your portfolio will become unbalanced as some asset classes grow faster than others.

Is it possible (in theory and in practice) that over time your portfolio will become unbalanced, as some asset classes shrink faster than others?


>> Periodically trim winners and add to your losers to stay on target

Err ... Seriously? ... Whatever happened to "let your winners run long" and "cut your losses short"?

Now then if you are finding that your portfolio has shrunk over period (or say 3 months, or 6 months, or 9 months, or 12 months), and by chance every asset class you have, other than money market has shruk, then what would you recommend?  Cut the smaller loser and add to the bigger loser?

Yours Truly,

Anonymous

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Comment #3 by Anonymous posted on
Anonymous
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Dear Ms Nance-Nash,

Within the same article your messages seem to be in conficlt with each other!

Message 1 >> Avoid the temptation to react to market gyrations,
Message 2 >> the market is a great opportunity to invest in a second home

Are you recommending (by quoting others, rather putting the message in your own words) that one should avoid temptation of market gyration of low interest rates, or one should give-in to this gyration and time the market by purchasing second home?  ... Well?

Yours Truly,
Anonymous

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Comment #4 by Anonymous posted on
Anonymous
For pre-65 retirees, it might be wise to learn all they can on what the affordable health care act might bring in year 2014. There are several things that will occur (One will be guaranteed health insurance coverage regardless of preexisting conditions and 2014 will also be the year the government unleashes the exchange health insurance plans). My company retiree health insurance premiums continues to increase each year.  It increased 22% for year 2013.  

If the plans are as good or better with lower premiums, it might incline me to drop my company plan and switch to the better plan.  Once you leave the company plan though, you cannot go back.  This makes me question what happens if some of the politicians are successful in later years to repeal Obamacare, where would that leave me as far as health insurance coverage?  Would I be considered grandfathered in Obamacare or would I be left out in the cold? 

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Comment #6 by Anonymous posted on
Anonymous
#4  You should cross your fingers and hope you will be Medicare age by then and be able to just go on Medicare.  They will probably increase the age for Medicare tho so pre-retirees are going to be ****ed one way or the other especially when it comes to healthcare.  Too bad you can't ask your Obamacare question and concern to your senator just to see what he/she replies.  I think a lot of pre-retirees would like to know the real answer.

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Comment #5 by scottj posted on
scottj
We have had the Exchange for a couple years here in MA and I have found it to be cheaper to go direct to insurance company, but that will change in 2014 since with tax credit wont matter what I pay. Since I retired I can control my income, so lets say I show it at $60k, Most I would have to pay for insurance would be 8.05% of that, so $4,830, Right now my family plan is $18,504, so Government will send me a check for $13,674. Best part is no more worrying about yearly premium increases since I never have to pay more than a certain percent. 

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Comment #7 by scottj posted on
scottj
I'm 51 and have been retired for a few years, with these tax credits on Healthcare it wont matter to me if they raise age for Medicare, this has really made things more simple for me

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Comment #8 by Anonymous posted on
Anonymous
What might be bad news for medicare recipients is the Independent Advisory Board (IPAB).  Under the affordable health care act starting January 2015, the IPAB can begin making recommendations to cut Medicare spending and in January 2018 the IPAB's recommendations about Medicare's budget can be implemented.

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Comment #9 by Anonymous posted on
Anonymous
Since the subject is on health insurance, my company changed the payment method and requires that I now mail them a check for my monthly retiree health insurance premium.  They no longer simply take the premium payment out of my pension check every month.  They said the reason for the change was due to Obama Care? Can anyone shed any light on this?  I cannot imagine why it matters with Obamcare on how my premium is paid.

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Comment #10 by Anonymous posted on
Anonymous
Does anyone know where we can find an article with a simplified method of understanding Obamacare for "all" people who may need healthcare insurance?  I am very confused as to how it really works.  Our government has such a high deficet already, I cannot understand how they can afford to give people all these huge tax credit checks for premiums they have to pay.  At this rate, the deficet will never go down!

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Comment #11 by Anonymous posted on
Anonymous
One good place to look is healthcare.gov.  for information on obamacare.  I can also recommend a book if you want me to.

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Comment #13 by Anonymous posted on
Anonymous
#11   Wow!  You just gave me the "motherload" as they say with just the Healthcare.gov site.  I bookmarked it so I can really get into it tomorrow.  I just skimmed over what it contains and it seems to have anything and everything one needs to know about Obamacare for all ages.  I sure wish I had seen your post earlier but I will get into it tomorrow.  Thanks so much for sharing.

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Comment #12 by Anonymous posted on
Anonymous
Thanks #11.  I'll check out healthcare.gov first and if I need more I'll get the name of the book from you.   Appreciate the help.

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Comment #14 by Anonymous posted on
Anonymous
To summarize Obamacare for healthy single people, if you make up to 4x the federal poverty line (4 x $11K = $44K) then you get help paying for health insurance. Otherwise you're basically no better off with obamacare (the state marketplaces might make it easier to shop around but TBD if this will improve rates) and you're now taxed if you don't have insurance. I'm still waiting to see if tax-free muni bonds will be a way to hide income and get subsidized healthcare regardless of how much tax-free income you make.

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Comment #16 by Anonymous posted on
Anonymous
No. 14 - You have a great idea about using tax free income to keep you in the threshold income limits for the health insurance subsidies.  I have not been able to find any information on this but unfortunately I have a good hunch that tax free income will be included as part of your total income when figuring the amount of your subsidies.  Tax free income is included when figuring your taxable amount on your social security, so I would have to believe tht the IRS is going to add the tax free earnings to your income when figuring how much subsidies you are due also.  Tax defered investments might be a way around this though.  By the way, I found a good health reform subsidy at this website- http://healthreform.kff.org/SubsidyCalculator.aspx

 

2
Comment #17 by Anonymous posted on
Anonymous
I went to the above website calculator and it is hard to believe what the government subsidies for healthcare insurance exchanges are going to be.  If this calculator is correct, here is just one of the unusual financial circumstances of the plan.  A single 60 year old individual that has a $46K income in a medium regional cost area will only have to pay 9.5% of his income for his yearly insurance premium ($10,172).  This individual would pay 9.5% ($4,370) and the government subsidies, in the form of tax credits, would pay the remaining ($5,802).  However; if another individual made $1K more in income ($47K), that individual would pay for the total cost of the premium and would not receive the $5,802 of government subsidies like the individual that made only $1K less on his income.  This calculator is therefore telling me that the person making $1K less in income will actually be the one in the cat bird seat.  After receiving the $5.8K in subsidies, he will have effectively earned $51,802 ($46K income $5.8K subsidies = $51.8K effective earnings).  On the other hand, the person that earned $1K more in income, does not get the $5.8K subsidy, so his effective yearly earnings is $41.2K ($47K income - $5.8K subsidies that he did not get = $41.2K in effective earnings). If he was in the 25% tax bracket, the very most he could possibly count as a deductible amount would be about $1.5K(.25 * $5.8K = $1.5K).  So the individual that made $1K loses and he loses very badly.  If this seems hard to believe, I totally understand, but go to the above website and plug in these numbers and see if you get the same answers.

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Comment #18 by scottj posted on
scottj
I was and still am against Obamacare but getting a check back for $14k a year sure will be nice. This is another thing along with the other tax hikes on high earners that will push more of them, many being small business owners like I was to call it quits. If you have enough to live on why kill yourself just to get ****ed over? This will also keep unemployment high and a smaller base of workers to get taxes from, yep the future does not look to promising. 

Here is a calculater for healthcare that I found to be better.

http://laborcenter.berkeley.edu/healthpolicy/calculator/

5
Comment #19 by Anonymous posted on
Anonymous
I like the berekeley calculator better too.  The health insurance premiums are a lot lower.

1
Comment #21 by Anonymous posted on
Anonymous
According to the article, tax free income will be included in modified adjusted income for determining if you qualify for the tax subsidy for the health exchanges that begin in 2014.  Below link contains the article that I am referring to:

www.zanebenefits.com/blog/bid/271272/navigator.zanebenefits.com

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Comment #22 by lou posted on
lou
#21  I am not sure about this. The law refers to modified adjusted income which is a defined term under our present system. MAGI generally does not include tax exempt interest.  Under ACA, you're suppose to use the line 9 worksheet from Form 8815 to determine MAGI. This does not include municipal bond interest. So far there seems to be conflicting information as to whether tax-free interest is included.

Scott, how would you control your income in order to receive the premium credits? Don't you own CDs in taxable accounts?

1
Comment #31 by Anonymous posted on
Anonymous
#21 again,

Lou,

Thanks for the information.  Page 11 refers to section 1004.  I located the contents of that law on healthcare.gov website. Below is the link on section 1004 details.  If I am interpreting it correctly, tax exempt income will be included in MAGI.

http://www.healthcare.gov/law/full/section/1004-income-definitions.pdf

 

Do you or scottj know if it is your 2013 or your 2014 MAGI that will be the actual determining factor if you are in the FPL level to qualify for the tax subsidies.  I was thinking it would have to be your 2014 MAGI since that would be the year you would be paying the premiums on the insurance.  If that is the case, if you qualify, do you know if you get the tax refund when it has be determined on your 2014 1040 tax return?

 

 

1
Comment #32 by lou posted on
lou
#21 My hat is off to you for untangling section 1004. It would appear that you have to include tax exempt interest but the Form 8815 definition of MAGI does not include it. So at this point I still wonder.

Interesting question regarding timing. If you have to wait until the filing of the 2014 return, it seems like it would be too late.

1
Comment #38 by Anonymous posted on
Anonymous
#21 again,

I now remember somewhere that you must enroll in the SilverPlan to be eligible to receive the subsidies.  Scottj, do you know it the 4 different plans (bronze - silver - gold - platinum) are going to cover all the exact same quality medical and prescription drug needs but the lower grade plans possibly will have higher copays, coinsurance, and deductible amounts? 

1
Comment #23 by scottj posted on
scottj
With deposit rates so low it's making it easier to control my income, also have started putting more in bonds and some funds that don't show yearly income. I will never get the full credit but just need to stay under 400 percent FPL. So with my family of 3 if I show $70k MAGI the most I would have to pay is 9.5% of my income for healthcare, so that would be $6,650. This year just my premiums are $18,505, so that would get me a check back from Government for about $12,000. The great thing is I will no longer have to worry about the yearly premium hikes since my part stays the same and just get bigger checks back. Also FPL will adjust higher over time so even when rates come back I will be okay

1
Comment #24 by lou posted on
lou
"Bonds and funds that don't show income."

Sounds like stock mutual funds with little or no dividends. I am not sure what bonds will show no income unless they are in retirement accounts or they are municipals. At this point I am not sure we will be able to exclude tax exempt interest from the calculation.

Understand your point regarding low deposit rates and, consequently, reduced income. However, unless you are putting your money in zero percent money market funds/checking accounts or stocks, not sure how to control income. Although to save $12,000 a year that might a wise course of action. 

1
Comment #25 by scottj posted on
scottj
On 2% return I can stay around $70k which gets me that $12k check if rates go back to 4%-5% the additional  income would make that $12k look like peanuts. So it's pretty much a win-win

1
Comment #26 by scottj posted on
scottj
Also the great thing by no longer working is the return is acutally better since I keep more of that money. This year after deductions I paid about $800 in Fed taxes on that $70k. If I had w2 income probably would be closer to $25k in Fed tax on it. Great job Obama is doing pushing people like me out of working to avoid getting raped in taxes

1
Comment #27 by lou posted on
lou
That's true - less income, less taxes. In Ca., between state and fed, the marginal rates are close to 50%. It almost doesn't pay to maximize income if you get to keep so little of it.

You would have to have taxable income of around $8,000 to have only $800 in Fed taxes. On $70,000 of income, you're generating sizeable deductions.

1
Comment #28 by Anonymous posted on
Anonymous
From previous #21:

Lou,

Can you reference a "federal government level" source that specifies to use Form 8815 to calculate your MAGI for determining qualification for the tax subsidies for the health insurance exchanges?  For now, I am uncertain if tax exempt income will be included or not included in the calculation for MAGI.  With the information that I currently have, I can only assume that it would.  I know that when you calculate MAGI to determine the taxable amount of your Social Security, tax exempt income is included.   I also noticed that scottj did not mention having any tax exempt investments to help him stay in the FPL threshold.

 

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Comment #29 by scottj posted on
scottj
I do have some MA Bonds that are free of State and Federal tax. Do get quite a bit of deductions between Healthcare and property taxes. From what I read here is taxfree income will not be counted, biggest thing for most in figuring out MAGI is just adding back in the deduction you took on IRA contribution.

"How to Calculate Your Modified Adjusted Gross Income (MAGI) Once you have adjusted gross income, you "modify" it to calculate your MAGI. 

Specifically, Modified Adjusted Gross Income (MAGI) is calculated by adding back certain items to your Adjusted Gross Income including:

  • Deductions for IRA contributions.

  • Deductions for student loan interest or tuition.

  • Excluded foreign income.

  • Interest from EE (employee) savings bonds used to pay higher education expenses.

  • Employer-paid adoption expenses.

  • For most people, MAGI is the same as AGI."


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Comment #30 by lou posted on
lou
http://www.ldi.state.la.us/Health/LHCC/2011_HealthCare%20Conference/Presentation%20DOI%20Health%20Care%20Conference%204%2026%202011.pdf

On page 12, it specifies that you use Form 8815 to calculate MAGI to determine your premium insurance credits. However, on page 11 it says you need to add tax-exempt interest to adjusted gross income to calculate MAGI.

Only one can be right, not both. That's why I am confused.

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Comment #33 by scottj posted on
scottj
My tax free income is only a few thousand so will not make any difference for me. The 2013  or 2014 question is interesting also since from what I read is you don't have to wait for tax time to get the subsidies, they will pay it monthly right to your provider. So would think they would use 2013 numbers so that they could start in Jan 2014, then maybe at end of that year when you file they would make adjustments?

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Comment #34 by Anonymous posted on
Anonymous
Anonymous #21,

Thanks for the information.

I think the smoke will clear on the questions that we have just prior to or when open enrollment on the health insurance exchange plans begin in October'2013.  Until then, I am going to attempt to be flexible enough to make the needed adjustments to my investments so that I might still qualify for the 9.5% threshold bracket.  By the way, remember that the taxable amount of your social security is also part of your adjusted gross income.  In my case, this possibly could mean that I might decide not to draw mine early at age 62.

 

 

1
Comment #40 by Anonymous posted on
Anonymous
After my company sent me a dear John letter telling me that my retiree insurance was being cancelled at the end of year 2013.  I am 60, but have not historically had any major health issues, so I decided to go with BCBSTX health exchange (High Deductible) PPO Bronze Plan.  This plan cost me $287.10 per month ($453.10 minus $166 in subsidy).  My company plan was $935 per month.  So this will be a net savings of $7,775 in premium savings.  I still have the same network of doctors and hospitals as I did with my company plan.  So this to me is a win win!!

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Comment #35 by lou posted on
lou
Scott got me to thinking about managing income to qualify for the subsidies, and I realized it can get pretty absurd. Take someone who has $50 million but no earned income. He takes the entire $50 million and buys 3-month treasury bills. He would qualify for 100% of the premium credits. The law is moronic.

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Comment #36 by scottj posted on
scottj
But I doubt someone who has $50 million really cares about what he pays for healthcare, they would want the best and you must use the 2nd cheapest Silver plan offered for subsidies. Another thing that is going to be a mess is will all states have an exchange set up in time? some states who are against Obamacare say they don't plan on setting them up. Here in MA we already have the exchange because of Romneycare, but I don't buy through it now because prices are much higher than I'm getting right now from Blue Cross/ Blue Shield. But I will start buying through exchange since who cares what it costs since I only have to pay X amount. Yep this thing is a freaking joke 

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Comment #37 by lou posted on
lou
Yeah, too bad the fed govt didn't learn anything from the universal healthcare system in Ma before setting one up for the entire country. A while back, I got quotes for individual health insurance in Ma. on ehealthinsurance.com and they were the highest in the country, even higher than Ca. if you can believe that. Just wait to see what happens to premiums next year. It is going to shock a lot of people. What a mess!

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Comment #39 by Anonymous posted on
Anonymous
After reading on healthcare.gov website, it states that even the tax exempt portion of your social security is included in your income to determine if you qualify for tax subsidies for the health exchange plans.

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Comment #41 by Anonymous posted on
Anonymous
I was getting prepared to pay my next month's health insurance premium and I just learned that plans under the ACA have a 90 day grace period before the payment is required; thereafter, the policy is cancelled. 

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