Retirement Plan Limits for 2012

by Richard F. O'Boyle, Jr., LUTCF, MBA

The Internal Revenue Service is boosting the maximum contribution that workers can make to their 401(k), 403(b) and most 457 retirement plans without paying upfront taxes. The limit will rise by $500 to $17,000 for 2012. Workers over 50 can add another $5,500 to that. Individuals may still contribute $5,000 to traditional IRAs or Roth IRAs, or $6,000 if older than 50.

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.

The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

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Should I Replace My Life Insurance or Annuity Policy?

by Richard F. O'Boyle, Jr., LUTCF, MBA

Life insurance and annuity contracts are intended to be medium- to long-term agreements. Term life insurance policies often have 20-year durations, and many annuity contracts have 8-year surrender periods. But in some cases, it makes sense to cancel or replace a contract with a new one. When should you cancel or replace your life insurance or annuity policy?

You may consider making the change if:
- The term is expiring on your old policy and the rate is sky-rocketing;
- Your health has improved from the time when you originally applied for your policy, for example, you may have quit smoking, lost a lot of weight, controlled diabetes, or passed five years after cancer. Many companies will allow you to take a new medical and keep the existing policy with a new lower rate;
- The rate on a permanent policy may have become unaffordable and it is at risk of lapse. Consider reducing the death benefit (and thus the premium) or using cash values and dividends to pay the premium over the short term;
- Companies change the contract terms on newer policies for Universal Life from time to time. Consider switching to a different UL policy if the crediting interest rate or guaranteed minimum are better or if the monthly costs of insurance are lower. Keep in mind that as you get older your underlying costs get higher;
- A 1035 exchange allows you to transfer the cash values of a life insurance policy or annuity contract directly into a new contract without exposing the cash to taxation. Again, make sure that the terms of the new contract are more favorable. With an annuity, you should check the guaranteed minimum interest rate, since on older contracts it may be much higher.

New York requires a lengthy process to replace a life insurance or annuity contract. This is designed to ensure that both you and your agent “do the math” to make sure the new policy costs are fully disclosed, that the new policy is suitable for your needs and you both quantify the costs and benefits before changing plans.

When considering replacing or cancelling your life insurance policy, keep in mind that by starting a new policy, you have a new two-year “contestability” period where there might be limits on the payout of the death benefit. Never cancel a policy until the new policy is in force, even if it means paying premiums for both policies for one month.

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Book Review: “Buckets of Money: How to Retire in Comfort and Safety,” by Raymond J. Lucia, CFP

Book Review: “Buckets of Money: How to Retire in Comfort and Safety,” by Raymond J. Lucia, CFP (John Wiley & Sons, Inc., 2004)
by Richard F. O’Boyle, Jr., LUTCF, MBA
“The Insider’s Guide to Retirement and Insurance Planning”
http://www.retirementandinsurance.com


We’re taught to save throughout our working years to fund our retirement – diligently socking money into our 401(k)s and paying down our debt. But once we flip the switch and settle into a presumably worry-free retirement, how do we effectively and efficiently spend down our assets in those golden years? Ray Lucia, a Certified Financial Planner with a celebrity’s flair, helps us to answer this tough question with his “buckets of money” planning strategy.

The gist of “Buckets of Money” is that our nest eggs should be separated into three “buckets” of ultra-safe income streams, conservative medium-term assets and aggressive stock funds. Over seven-year cycles, the funds are depleted and shifted into the next immediate bucket to be used for current income. The buckets strategy leaps the key retirement planning hurdle by providing safety, growth, diversification, tax-efficiency and lifetime income. The book identifies which investments are appropriate for which buckets, along with guidelines for the proportions of each.

The book reads like a infomercial, but don’t let that turn you off. The general discussion of asset classes and products (stocks, bonds, annuities, etc.) is valuable for the novice and experienced investor alike. His comprehensive perspective honestly allows him to cover all potential investment classes. Mr. Lucia isn’t trying to sell you on anything other than his planning strategy (and he does that well).

Mr. Lucia’s website contains some notes on changes, but I’d like to see a fully updated edition of the book. For example, the buckets strategy recommends real estate holdings of as much as 20% of a portfolio in the form of real estate investment trusts. Given the 2008 mortgage meltdown, perhaps that should be reconsidered. Mr. Lucia only skims past the important backstop that life, disability and long-term care insurance provide as we switch our retirement portfolio from accumulation mode to distribution mode. Fortunately, the author takes into account the complexities of the tax code since intelligent tax planning can make or break a retirement plan. The book’s numerous statistical examples remain useful today.

The worksheets included in the book are quite easy to use. While the potential to “do it yourself” is there for the experienced investor who has a trusted advisor, I wouldn’t recommend that an individual adjust her portfolio without consulting a professional. I’m not sure if the buckets strategy is an “all or nothing” approach to investing. Any retirement plan can benefit from the non-controversial concepts presented here.

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Fee-based vs. Commission-based Financial Planners: The Pros and Cons

by Richard F. O’Boyle, Jr., LUTCF, MBA
“The Insider’s Guide to Retirement and Insurance Planning”
http://www.retirementandinsurance.com

Throughout this article, I have referred to “financial planner” in the general sense to indicate advisors who work with life insurance, annuities, disability coverage and retirement planning. A “Certified Financial Planner” is a specific professional designation.

It’s common knowledge that you have to spend money to make money and having a professional financial planner in your court is a smart investment, but should you go with an advisor who charges you a flat fee or one who works on commission?

There are certainly pros and cons to each type and it may boil down to the financial planner you feel most comfortable with, regardless of how they make their living. When looking for any type of professional help, it’s always a good idea to seek out recommendations. Ask friends, family or co-workers what their experiences have been with financial planners and see if they think highly enough of theirs to give a good review. Reputation is everything in this field, so try to avoid inexperienced, poorly reviewed investment advisors.

Fee-based financial planners work by the hour, which may sound simple enough. They charge a set hourly fee or, in some cases, a flat fee for their services. The catch is, most fee-based planners also earn commission based on the financial products they sell. This can cause a conflict between your interests and theirs and your portfolio may end up suffering for it.

There are several different ways that fee-based planners charge:
- A percentage of assets under management
- Flat fees in the form of an annual retainer
- Hourly fees with a cap on the total amount
- Any combination of the above

It should be noted that “fee-based” is not the same thing as “fee-only.” Investment advisors who only charge a fee may be more impartial because they only work for the fees charged to clients, whether that is an hourly fee or an a la carte rate. Generally, fee-only financial planners focus on analyzing portfolios as a whole, so they have to be well versed in all areas. These include college financial aid, real estate, retirement and much more. With no commission to worry about, they might not pressure you into any products or investments. It’s in their best interest to grow your assets, since they may be paid more over time.

Commission-based financial planners are the opposite of fee-only advisors in that they earn money solely on the investments they sell. Most life insurance agents are paid commissions by the insurance company when they place a case. Remember, the insurance company pays the advisor the commission, not the client. When working with a commission-based advisor, you need to be sure that they respect your choices and share with you the available options. If it feels like the advisor is being overly forceful with a certain type of investment, especially one that you are not comfortable with, that’s a sure sign that they are thinking more of themselves than your portfolio.

New York requires life insurance agents to disclose when they are paid by commission. Commission rates on fixed annuities, term life insurance or whole life insurance are generally consistent across all insurance companies. It’s rare to have a company pay much higher than average commissions, unless it’s a product like a variable annuity, indexed annuity or life insurance contract.

Some investors may be best suited to having a good commission-based advisor:
- Investors with small portfolios that require much less management
- Clients who needs a basic review or analysis of their portfolio
- People looking for a specific product such as life insurance

Commission-based advisors may have access to better facilities and other financial professionals such as analysts and traders etc. They may also have the backing of a respected and renowned firm. Most fee-based advisors work independently, although they may have past experience as a commission-based advisor.

Regardless of how your advisor gets paid, remember that they are the financial professional and have the experience, education and drive to see your investments succeed, so take any advice to heart, even if you don’t act on it. If your commission-based advisor pressures you into active trading, because this is one way they receive bigger commissions, remind them that they are working for you, not the other way around. Always clarify how your advisor is being paid, if they don’t come right out and tell you at the outset.

No matter how you pay your financial planner, saving money and increasing your investments should be their top priority. The commission vs. fees debate is a hot topic in the world of financial planning, but it’s always best to work with someone you can personally trust, regardless of how they come by their paycheck.

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