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Helping Heroes Retire

Helping Heroes Retire

The talk of 2022 has been about the spike in inflation and its trickle-down effect on the financial markets. Considering the recent uptick in inflation, the IRS announced the changes to Social Security, Medicare, Retirement Accounts, and Taxes.

Social Security:

The Social Security Administration announced the annual Cost of Living adjustment of 8.7%, or an average of $140 per month, to go into effect on January 1st, 2023. This is the largest increase since 1981 for the approximately 70 million Americans who collect benefits. While a large increase is needed, and much appreciated, by retirees to keep up with inflation, this could spell bad news for the longevity of the Social Security Trust Fund. We previously wrote about the solvency of the trust fund and the latest projection was for the fund to be fully depleted by 2033. This payment increase could shorten that timeframe even further.

The Social Security Administration did not change how much workers are paying into the program, but they did increase the wage base (the maximum earnings that are subject to the social security tax) from $147,000 to $160,200. This should help offset some of the additional outflows but, as we stated before, the entire system needs to be revamped to ensure the longevity of the program.  

Social Security and SSI beneficiaries are normally notified by mail starting in early December about their new benefit amount. Most people who receive Social Security payments will be able to view their COLA notice online through their personal my Social Security account. People may create or access their Social Security account online at www.socialsecurity.gov/myaccount.


Annual premiums for Medicare are going down for 2023. After the 14.5% jump from 2021 to 2022, the cost for Part B will decrease by approximately 3% for 2023. This will help keep more of the Social Security increase mentioned above in retirees’ pockets – the opposite of what happened last year.

Retirement Accounts:

The IRS also announced an almost 10% increase in the maximum contributions that can be made to retirement accounts. Employees can now contribute up to $22,500 (increased from 20,500 in 2022) to employer plans (401(k), 457(b), 403(b), etc.) if they are under the age of 50, or $30,000 (increased from $27,000 in 2022) if they are age 50 or older.

IRA account contributions increased to $6,500 (from 6,000 in 2022) if under 50, or $7,500 (from $7,000 in 2022) if 50 or older.


Finally, the tax brackets have all been adjusted to account for the recent spike in inflation. The brackets all remain the same but the income bands all increased by 7%. Additionally, the standard deduction increased to $13,850 (from $12,950 in 2022) for single filers, and $27,700 (from $25,900 in 2022) for married filers.

The Investment Company Act of 1940 created what is known as Mutual Funds. These funds pool together client capital to invest in companies through stocks and/or bonds. Individual investors own shares of the mutual fund instead of the underlying shares of the stocks/bonds that the fund owns. Mutual funds allow investors to have broad diversification without having to select individual positions themselves. Mutual funds have some pitfalls though and below we highlight the main concerns that we see with them.

Not Transparent:

Mutual funds do not have to disclose their daily/weekly/monthly trades to the public. The underlying holdings are only disclosed once a quarter, and the fund has up to 60 days after the quarter-end to disclose this information. Investors in the mutual fund technically do not know what exactly they are buying or redeeming since there is no daily transparency.

Can be Expensive:

Mutual funds are managed by professions and each fund has an “expense ratio” which is the fee you pay the fund company to manage their mutual fund for you. According to the research conducted by The Investment Company Institute, the average expense ratio for equity mutual funds was 1.16% in 2020 and the average was 0.86% for bond mutual funds. . To break it down even further, U.S. equity mutual funds averaged 0.96% while world funds averaged 1.22%. If you are paying a financial advisor a fee to manage your money, and they invest your money into mutual funds you are getting hit with a second layer of fees.

Limited Trading Availability:

Mutual funds are redeemed at their Net Asset Value (NAV) at 4:00 pm EST every day the stock market is open. You cannot buy or sell mutual funds mid-day. This can be particularly concerning in highly volatile markets if you need access to your capital – you simply don’t know the price at which you are selling and the value that you will receive until the end of the day.

Not Tax Efficient:

With mutual funds, you don’t have much control over when or if you pay taxes. That’s because when an investor sells their shares of the mutual fund, the fund company potentially has to sell some of the underlying holdings (the stocks/bonds) to supply the investor with their requested cash. The fund manager, not you, decides which of its investments will be sold and when they will be sold. If sales during the year result in an overall gain for the fund, you’ll receive a taxable dividend distribution (assuming you hold the shares in an after-tax account), whether you want it or not. To combat this, some mutual funds hold a larger portion of cash to make redemptions easier, but the larger cash holding drags down fund performance in a bull market.

In fact, you can wind up owing taxes even though your fund shares have declined in value. This happens when the fund sells shares that appreciated during the fund’s holding period, but the fund’s overall value went down after you bought in.

Of course, the unwanted taxable distribution problem is of less concern with index funds and tax-efficient funds. For the most part, index funds buy and hold, which tends to minimize taxable distributions. Tax-efficient funds also lean towards a buy and hold philosophy, and when they do sell securities for gains, they try to offset the gains by selling some losers in the same year. This approach also minimizes taxable distributions.

In contrast, funds that actively churn their stock portfolios will usually generate hefty annual distributions in a rising market. Distributions that arise from short-term gains are taxed at your regular federal rate, which can be as high as 37%, assuming no retroactive tax rate hike for this year. In addition, you may owe the 3.8% net investment income tax (NIIT) if you’re a single tax-filer earning more than $200,000 per year, or a married tax-filer earning more than $250,000 per year. Additionally, you may also owe state income tax depending on where you live.  On the other hand, funds that generally buy and hold stocks for over one year will pass out distributions that are mainly taxed at no more than the 20% capital gains tax rate, assuming no tax rate hike, although the 3.8% NIIT and state income tax can increase the tax bite considerably.

Starting in 2022, the proposed Biden tax plan would raise the top federal income tax rate on net short-term capital gains recognized by individuals, including those from mutual fund distributions, back to 39.6%, the top rate that was in effect before the Tax Cuts and Jobs Act lowered it to the current 37%. This proposed rate increase would affect singles with taxable income above $452,700, married joint-filing couples with taxable income above $509,300, and heads of households with taxable income above $481,000. After tacking on the 3.8% NIIT, the maximum effective rate would be 43.4% (39.6% + 3.8%) versus the current maximum effective rate of 40.8% (37% + 3.8%).

The proposed rate increase would only apply to taxpayers with adjusted gross income (AGI) above $1 million, or above $500,000 if you use married filing separate status. You would be subject to the higher maximum rate only to the extent your AGI exceeds the applicable threshold. For example, a married joint-filing couple with an AGI of $1.2 million, including a $300,000 net long-term capital gain, would pay the 39.6%/43.4% maximum rate only on the last $200,000 of net long-term capital gain.

Assuming you are not among those who would like to pay higher taxes and you are investing via a taxable brokerage account, you should really be looking at what kind of after-tax returns various funds have been earning. Use those figures in choosing between competing funds.

Thankfully, the SEC requires mutual funds to disclose both pretax and after-tax rates of return information. In figuring after-tax returns, short-term gains distributed by the fund are assumed to be taxed at the highest federal ordinary income rate (currently 37%). Long-term capital gain distributions and long-term gains from selling fund shares are assumed to be taxed at 20%, for now. The same methodology must be used to compute any after-tax return information presented in advertisements and sales literature. This SEC rule makes it easier for investors to make informed comparisons of fund performance data.

What is an alternative?

If you want to invest in a fund to provide broad diversification without the pitfalls mentioned above, you should consider looking into Exchange Traded Funds (ETFs). An ETF combats the above-mentioned pitfalls of a mutual fund by:

Are Mutual Funds or ETFs right for my portfolio?

There is not a blanket statement to cover all situations as to whether mutual funds or ETFs are the right fit for your unique situation or not.  The best course of action would be to consult with a comprehensive financial planner to help you determine if they are the right fit for your portfolio and your retirement strategy.



Social Security and Supplemental Security Income (SSI) benefits for approximately 70 million Americans will increase 5.9 percent in 2022, the Social Security Administration announced today.

The 5.9 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 64 million Social Security beneficiaries in January 2022. Increased payments to approximately 8 million SSI beneficiaries will begin on December 30, 2021. (Note: some people receive both Social Security and SSI benefits). The Social Security Act ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics.

Some other adjustments that take effect in January of each year are based on the increase in average wages. Based on that increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $147,000 from $142,800.

Social Security and SSI beneficiaries are normally notified by mail starting in early December about their new benefit amount. Most people who receive Social Security payments will be able to view their COLA notice online through their personal my Social Security account. People may create or access their my Social Security account online at www.socialsecurity.gov/myaccount.

Information about Medicare changes for 2022, when announced, will be available at www.medicare.gov. For Social Security beneficiaries receiving Medicare, Social Security will not be able to compute their new benefit amount until after the Medicare premium amounts for 2022 are announced. Final 2022 benefit amounts will be communicated to beneficiaries in December through the mailed COLA notice and my Social Security’s Message Center.

The Social Security Act provides for how the COLA is calculated. To read more, please visit www.socialsecurity.gov/cola.

The market for cryptocurrencies has ballooned to an estimated $1.8 trillion. Cryptocurrencies are essentially lines of computer code that are digitally signed each time they travel from one holder to the next. Not tied to banks or governments, they allow users to send or receive money anonymously, which has appeal to international criminals, money launderers, drug dealers, and ransomware hackers.

The most widely traded cryptocurrency is Bitcoin, as of October 13, 2021 it is trading around $54,000 each, down from a high in April of about $64,800. It’s notoriously volatile, in some instances spiking or plunging on public pronouncements by Elon Musk, the provocative Tesla Inc. CEO. Some businesses now accept Bitcoin as payment. Other well-known cryptocurrencies include Ethereum, Dogecoin, Ripple, and Litecoin. All told, there are thousands. Bitcoin and others can be bought and sold on exchanges with U.S. dollars or other national currencies.

So where do government officials stand on the issue on both sides of the coin? Some lawmakers see cryptocurrency as a birth of technological innovation, especially in the development of blockchain, the digital ledger that records transactions.  Top U.S. regulators, on the other hand, are flashing danger signs. Gary Gensler, the chairman of the Securities and Exchange Commission appointed by President Biden, said last week that investors need more protection in the cryptocurrency market, which he called “the Wild West.” While the SEC has won dozens of cases against crypto fraudsters, Gensler said the agency needs more authority from Congress — and more funding — to regulate the market.

The Federal Reserve, meanwhile, is considering developing its own digital currency pegged to the U.S. dollar. A so-called digital dollar could enable faster payments among banks, consumers, and businesses.

In August, the Senate passed, with overwhelming bipartisan support, a $1 trillion infrastructure bill to rebuild the nation’s deteriorating roads and bridges, expand high-speed internet access, and improve airports and railways.  Before this bill becomes law, it will need to pass the house as well; however, it is the language inside the bill that is interesting as it pertains directly to the digital currency landscape.

To partially fund this, Congress is imposing tax-reporting requirements for cryptocurrency brokers, much like the way your stockbroker, investment custodian, broker, or investment advisor would report their customers’ sales to the IRS.

For example, if you own shares of ABC Company stock and sell your shares, the price you originally purchased the stock as well as the gross proceeds when you sell are automatically reported to the IRS by the different brokerage firms and clearinghouses. The provisions of this bill are pushing to require third-party reporting for cryptocurrencies – reporting that does not exist today in the space.

This is the first step in tighter regulation of cryptocurrencies, something the Biden administration has been pushing for tax compliance purposes. The plan would raise $28 billion in revenue over the next 10 years by estimates. This isn’t going to be the last time the crypto world will have to worry about Congress and taxes. There will still be plenty of concerns about tax compliance, and some lawmakers said the debate over the definition of brokers showed them how much other work still needs to be done in this area.

What’s more, the Democrats will be hungry for cash to pay for their next big spending package. Some were heartened by the Joint Committee on Taxation’s $28 billion revenue-raising estimates for the reporting requirements, taking it as a sign there is a lot more money to be had in this area.

One issue that’s on the administration’s radar: wash-sale rules, and the lack thereof with cryptocurrencies. When people trade stocks, there’s a long-standing rule restricting their ability to use losses to offset gains when they buy and sell the same stock within 30 days. That’s designed to prevent people from manufacturing losses to cut down their tax bills. There’s no such rule with cryptocurrencies, though, and a senior administration official says it is now thinking through how to go about changing that.

The crypto market is evolving rapidly and there is still a lot that needs to be figured out when it pertains to cryptocurrencies. Not only does U.S. law affect the market, but international law affects the price and outlook of these digital currencies as well. Cryptocurrencies are extremely volatile and are only suitable, if at all, for the most aggressive investors.

On August 14, 2020 we wrote an article titled “Social Security: Can You Count on It?” and discussed the problems facing the Social Security system. At the time that article was written, the Social Security Trust Fund was on pace to run out of money in 2035.

On August 31, 2021 Social Security’s trustees issued another somber annual report that warned of the pending depletion of reserves. The current projection is that the trust fund backing retirement benefits will run out of money by 2033, a year earlier than estimated in the 2020 report, and 2 years earlier than the 2019 report. It’s another wake-up call that Congress needs to do something — and the sooner the better. It’s also a reminder that individuals may want to prepare more on their own.

Media reports have focused on the pending depletion of the trust fund supporting Social Security retirement benefits. This OASI fund, for Old-Age & Survivors Insurance, is now projected to run out of money in 2033. If including disability benefits, the DI fund, the system could be insolvent by 2034.

In the context of Social Security, insolvency means the trust-fund financial cushion is expected to be exhausted by 2033. It doesn’t mean the system will stop paying benefits entirely around that time. Even without this cushion, Social Security will still collect payroll and self-employment taxes and even income taxes (some higher earners face taxes on a portion of their benefits). A cut in benefits, an increase in taxes or other actions will be required to get the system’s cash flow back to equilibrium (see alternative funding strategies mentioned in our previous article).

Think of Social Security’s retirement system as having a checking account and a savings account. The checking account receives all that payroll tax and other income and is constantly doling out benefits and paying other expenses. In years when income is comparatively low, it taps into the savings account (the trust fund) to pay benefits in full. Unfortunately, the Social Security system, like many Americans, has leaned heavily on savings withdrawals lately, and this cushion could run dry by 2033.  For nearly the past decade, Social Security’s trustees have warned that the retirement trust fund would be depleted in either 2034 or 2035 (the years bounce around). In the 1997 trustee’s report, the depletion year was as early as 2031. In certain other reports, it was projected to come much later, after 2050.  Still, the current trend is worrisome, especially as the baby boomer generation is retiring in large numbers and only 2.7 workers now support each beneficiary, and that ratio continues to decrease.

Can Social Security be saved?  Yes, as it has done several times in the past. Most of these remedies involve higher payroll taxes, benefit cuts, or a combination of both. Higher taxes could be spread across the board or focus on higher earners. Benefit cuts also could be applied across the board or target high earners or recipients who also have a government/state pension. There are options, but time is running out.  Yet in today’s highly politicized environment, Congressional action doesn’t seem imminent.

The current estimate is for a reduction of about $1 for every $4 or so in benefits starting in 2033. At that time, the fund’s reserves will become depleted and recurring tax income will be sufficient to pay 76% of scheduled benefits, according to the report. Another way to look at it is by examining how much of a typical retiree’s income will be paid or replaced by Social Security benefits. Pensions, personal savings, perhaps housing equity, and other assets make up the rest. Lower-income people who are more dependent on the program could get hurt worse. On average, they currently rely on Social Security to replace about 56% of what their pre-retirement income was. That might fall to around 44% with across-the-board cuts, according to a Congressional Research Service analysis. Higher-income earners rely on Social Security to replace 35% of income, and that might fall to around 27%.

What Should You Do?

The most important thing you can do is have a plan in place, so you are prepared. Individuals have many options to shore up their personal finances to make them less reliant on Social Security. The whole field of retirement planning is based on, at least partly, generating enough income to support a standard of living beyond what Social Security provides. Social Security was never intended to cover all your retirement needs. The typical payment to retirees is on average $1,500 a month.

Start saving more, now. Utilize tax-sheltered retirement accounts such as workplace 401(k) plans, deferred comp, and Individual Retirement Accounts. Reduce debt, especially that with high-interest rates (i.e., credit cards). If you have access to a Health Savings Account at work, start contributing money to this. These accounts offer a tax deduction upfront, while withdrawals can be taken tax-free for healthcare expenses in retirement.

If you are concerned that Social Security might not be there for you when you retire consider saving now.  Below we created a table to better help you understand how much you would need to save in order to generate the same sustainable monthly benefit. 

Years Until RetirementRequired Monthly SavingsMonthly Retirement Income
10 Years$2,745$1,500
20 Years$975$1,500
30 Years$450$1,500
40 Years$225$1,500

*This assumes a 6% average annual rate of return

The above table assumes that you withdrawal 4% of your accumulated savings balance annually, which is considered a sustainable withdrawal rate. The longer you wait to begin these contributions, the more you will have to save. A prudent approach would be to begin saving today to self-fund your social security benefits. If you end up receiving benefits when it is time for you to start collecting, anything that you saved along the way is an added benefit to supplement your retirement lifestyle. It’s better to be prepared and not need it, than to not be prepared and end up with a shortfall.  



Finding the right education savings vehicle can be daunting. There are many choices, and it can be difficult to determine what is best given your financial situation and goals. We have outlined a few features of some of the most common education-savings vehicles, detailing the tax treatment for each, how much you can contribute, who can contribute, and the rules governing distributions. Your unique financial goals and situation will ultimately determine the best vehicle for you and your child(ren).  

529 College-Savings Plan 

One of the most common education savings vehicles is a 529 Plan.  

With a 529 Plan, contributions are not deductible on federal income tax, but if you live in a state with state income taxes, contributions may receive a state tax break (either a deduction or a credit).  

Your contributions to the 529 plan compound on a tax-deferred basis, and any withdrawals to pay for qualified education expenses are tax-free. An individual can contribute up to $15,000 annually, or up to $30,000 per married couple. Conversely, you can front-load a 529 Plan with 5 years of your annual gift exemption amount (up to $75,000 per person, or $150,000 per married couple).  

Investors can withdraw contributions without taxes or penalties, but withdrawals must be made on a pro-rata basis consisting of both contributions and investment earnings. If the distribution is classified as a non-qualified withdrawal, the portion of the withdrawal from the investment earnings will incur taxes and a 10% penalty. Those withdrawing funds for nonqualified expenses may also be required to pay back any state tax deduction they have received on contributions if they live in a state with state income taxes. As an alternative to taking non-qualified withdrawals, you are permitted to change the beneficiary of a plan, as long as the new beneficiary is a family member of the former beneficiary. 

Investors in 529 plans must choose their investments from a preset ‘menu’ offered by the plan.  The preset options will vary widely by state and by plan, and investors are typically heavily limited in the investment options that they can utilize. 

Coverdell Education Savings Account 

Another common education savings vehicle is a Coverdell Education Savings Account (ESA).  

With an ESA, contributions are not deductible on federal or state income tax.   

Your contributions to the ESA compound on a tax-deferred basis, and withdrawals to pay for qualified educational expenses are tax-free, too. There is a contribution limit of $2,000 per beneficiary per year. All contributions must be made by the time beneficiary is age 18. Any amount exceeding $2,000 per year per beneficiary is subject to a 6% excise tax penalty. 

There are income limitations for who can contribute to an ESA. Single income tax filers with modified adjusted gross incomes of more than $110,000 and married couples filing jointly with incomes greater than $220,000 cannot make contributions to an ESA. Contributions do not have to be made with earned income, meaning grandparents can contribute even if parents are ineligible due to income limits. 

Withdrawals of contributions are tax-free and penalty-free. You can also change the beneficiary of a plan, as long as the new beneficiary is a family member of the former beneficiary. 

Funds must generally be distributed from an account by the time the beneficiary reaches age 30 (unless he or she has special needs), though they may be rolled over into a Coverdell ESA for another eligible family member. 

ESA accounts can usually be held with any investment custodian, which means that investment options are much more abundant than the investment options offered through a 529 plan. 

Roth IRA 

Most investors have heard of a Roth IRA, but they are not aware of the education savings benefits utilizing a Roth IRA account.  

Roth IRAs are typically used for retirement planning. All contributions to a Roth IRA are made with after-tax dollars (you receive no initial tax deduction) and all investment growth in the Roth IRA is tax-free as long as a distribution is considered to be a qualified withdrawal (most commonly considered reaching age 59.5).  

If you withdraw earnings from a Roth IRA before you’re 59 1/2 (or even if you are 59 1/2 or older, but you haven’t held the account for five years including conversions), you will pay taxes at your ordinary income tax rate and you will pay a 10% early withdrawal penalty on any growth of the investments that are withdrawn.  

Roth IRA Contribution Limits are set at up to $6,000 (for individuals under 50); or up to $7,000 (for individuals over 50). You have to have earned income to contribute to a Roth IRA.  

Just like ESAs, Roth IRAs have income contribution limits. Single filers with modified adjusted gross incomes below $140,000 can make at least a partial contribution. Married couples filing jointly can make at least a partial contribution if their modified adjusted gross incomes are less than $208,000. Investors of all income levels can contribute to a Roth IRA with the “backdoor” Roth IRA Contribution technique – click here for more details

Roth IRA contributions can be withdrawn tax-free for any purpose. And while you will typically face taxes and a 10% early withdrawal penalty if you take out investment earnings from your Roth before age 59 1/2, the 10% penalty usually assessed for early withdrawals is waived if funds are used to pay for qualified education expenses (college tuition, books, fees, and other qualified expenses). While qualified education expenses are an exception to the 10% early withdrawal penalty, you will still pay income tax on the earnings portion when you make a withdrawal prior to age 59 ½.   

Roth IRAs have the widest investment flexibility of the three options listed, only limited to the individual’s investment risk tolerance and time horizon.  There is not a preset list of options like you would have with a 529 plan.  The money that sits inside the Roth IRA is not counted for financial aid purposes, however, the withdrawals are counted and could impact any financial aid you might be applying for. 

Summary Comparison Table: 

Savings Vehicle Maximum Annual Contributions Are Contributions Deductible? Income Limits to Contribute? Are Qualified Distributions tax-free? 
529 Plan $15,000 per person (or $75,000 front-loaded for 5 years) Not federally, potentially for states with state income taxes No Yes 
Coverdell ESA $2,000 per beneficiary Not federally or at the state level Yes  ($110,000 for single filers or $220,000 for married joint filers) Yes 
Roth IRA $6,000 (if under age 50) $7,000 (if over age 50) No Yes  ($140,000 for single filers or $208,000 for married filers) Only contributions. Growth is taxable. 

Other Options: 

In addition to the above-mentioned savings vehicles, below are other options to pay for education expenses. 

  1. You can take a distribution from an IRA or potentially your employer-sponsored 401(k)/403(b)/457(b) (depending on what is permitted by the plan), but the increase in your taxable income can reduce or eliminate any financial aid received. You still pay federal income tax on any distribution but there is no 10% early withdrawal penalty if used for qualified education expenses for you, your spouse, or your child(ren).  
  2. Another option is Florida Prepaid. For a newborn child, the cost of the 4-Year Florida University Plan is $28,405.35 if you choose the lump sum, or $38,997.02 if you choose the monthly installments without room & board. Conversely, the cost of the most expensive Florida public university in 2021 is $6,916 per year ($27,664 for 4 years). Florida has not raised the tuition for public state universities since 2013 (that increase was only 1.7%).  

If you were to instead invest the $185/month payment for Florida prepaid into a 529 or another investment account for your child’s college education for 18 years, you would have approximately $89,000 by the time they begin college, assuming an 8% average rate of return.  

In addition, with Florida prepaid, if your child does not go to a public University in Florida, you only receive a return of your contributions with no interest, unless they go to a state school in another state that offers reciprocity.  

Which is Right for Me? 

Determining which option is the best for you depends on several different factors unique to your situation.  The best course of action is to consult with a comprehensive financial planner to discuss your unique situation and help you to determine which is the right fit for you and your family. 

52% of people turning 65 will need some type of long-term care services during the remainder of their lifetimes and just 11% percent of the population has any form of Long-Term Care Coverage. 

As people continue to live longer, many will likely need assistance caring for themselves. The decision of whether to buy long-term care insurance vs. self-insuring is an important one. If you can afford to self-insure based on realistic assumptions in your planning, then the choice comes down to whether you would like to retain the risk or share the risk with an insurance company – and the level of risk that you’re comfortable with. Insurance is there only to minimize your risk/exposure of loss and provide peace of mind. There are many trade-offs to consider, and it does not have to be one or the other, it very well could be a combination of the two.  The decision to remain insured throughout your lifetime will likely change depending on your life circumstances (income needs, asset growth, children and spouse’s needs, legislative changes, etc.).  It’s all about adjusting your risk to a level you’re comfortable with – and LTC insurance should be viewed no different than Homeowner’s, Auto, Life or Umbrella Insurance (just with a statistically higher likelihood that you’ll need to use it!). Determining the proper Long-Term Care (LTC) funding method depends on your unique circumstances.  There are four basic ways to fund an LTC situation: Self-Funding, a stand-alone LTC policy, a hybrid plan utilizing life insurance with an LTC rider, or a linked benefit plan utilizing an annuity with an LTC rider.  


Self-funding or self-insuring is when you cover 100% of the LTC costs out of your own individual accounts/funds.  A common question we receive from clients is “Do I have enough to self-insure?”  Our answer really depends on the client’s situation, looking deeper at investments, cashflows, age, expenses, family health history, etc.   

Per the 2020 Genworth Cost of Care Study, the median annual cost for assisted-living facilities with a private room in Florida was roughly $117,800. This amount can greatly vary based on the level of care that you need. For example, the median annual cost for 24 hour at home health care was roughly $196,500. Memory care facilities are renowned as one of the most expensive types of care. It is estimated that individuals with dementia will pay approximately $350,000 for the cost of their care over their lifetime. This amount could be substantially higher if you were to have an extended stay in a memory care facility. 

As a very general rule of thumb, an individual with $3 million or more in investible assets can self-insure, for married couples, it’s $5 million. At this level of wealth, it is highly unlikely that you will ever qualify for Medicaid, even with advanced Medicaid planning, and any care that you will need will come out of pocket, depleting any potential inheritance that you wish to leave your heirs. Just because you can self-insure does not mean that you should.  We find that our high-net-worth and ultra-high-net-worth clients who can easily afford to self-insure often leverage their assets and purchase a policy to cover themselves for peace of mind. 

Stand-Alone LTC/Traditional LTC 

The sole purpose of a traditional plan is to provide the payments necessary to cover the LTC costs.  These plans require premium payments to be made annually but can be paid monthly, if necessary.  Most of today’s policies are reimbursement plans, with very few offering cash/indemnity payout options.  These plans are tied to a specific daily, weekly, or monthly benefit and for a set period, typically 3-5 years, but can last longer.  Benefit payments are income-tax-free and a portion of the premium payments that are made may be deductible if the qualified LTC policies premium payments, along with other unreimbursed medical expenses exceed 7.5% of your adjusted gross income. Traditional plans should be designed for the client and based on several factors: age, marital status, local cost of care (both for facilities and at-home care), health history individually and for the family, and the client’s risk-tolerance surrounding the choice of self-insuring or deferring the liability to an insurance company. Traditional plans do not normally offer any type of death benefit, income benefit, or return of premium benefit to a beneficiary if the policy goes unused.  This could end up being an expensive decision that benefits the insurance company only.  The costs of traditional plans have continued to increase over the years and the number of carriers that offer them has significantly declined.  Currently, in Florida, there are only two carriers that offer Traditional LTC. This is down from 9 carriers in 2010 and 125 carriers in 2000. 

Hybrid Plans 

Hybrid plans combine a life insurance policy with an LTC rider, or a chronic illness rider to provide an LTC benefit to the client.  These riders are commonly referred to as Accelerated Death Benefit riders.  The rider attached to the policy accelerates the death benefit paid to the insured during their lifetime to cover LTC expenses.  Depending on the carrier and the product, the benefit is 2% – 4% of the death benefit accelerated each month.  This allows the insured to draw down the death benefit to use it for expenses while they are living and when they pass the remaining balance would pass onto the beneficiaries, tax-free.  These hybrid plans normally have limited benefit periods of 2 – 4 years depending on the rate that the death benefit is accelerated.  These plans are typically funded by cash in either a lump sum, periodic payments, or with an IRS code 1035 exchange from one life insurance policy to another life insurance policy without paying any taxes. 

Linked Benefit Plans 

This is a combination of a life insurance policy, or annuity, with an LTC benefit that focuses more exclusively on the LTC coverage.  Like the hybrid plans, the benefits remaining upon the insured’s passing will be inherited by the beneficiaries tax-free in a life insurance policy (there could be taxes owed if an annuity is purchased instead).  The policy benefits are first paid from the death benefit of the life insurance or taken from the contract value of the annuity.  Once those funds have been exhausted it then taps into the LTC benefit portion of the contract.  Then the “extension of benefits” or “continuation of benefits” kicks in.  The LTC extension or continuation of benefits riders typically provide for an additional two to five years of LTC coverage past the base policy’s accelerated death benefit which equals a total LTC benefit of five or six years. Beware though, every product may be different. Premiums are typically paid as a single lump sum or spread out over 5 to 15 years.   

Example for a 60-year-old married woman with standard health: 

A $70,000 single premium creates a $114,795 death benefit and a $229,590 total LTC benefit.  With a 4-year and 2-month LTC benefit, the policy provides $4,592 per month for long-term care expenses with no increase for inflation.  

Which is the Best Fit 

The answer depends on numerous factors for the client such as age, family health history, financial position, preference of care, etc. There is no one-size-fits-all approach for long-term care insurance. We recommend sitting down with a knowledgeable, comprehensive financial planner, not a salesperson) to discuss which strategy is most appropriate for your situation. We emphasize comprehensive because an insurance salesperson who calls themselves a financial advisor will always try to sell you a product, even if it’s not the most appropriate solution for you.  

Many clients come to us not knowing that they CANNOT contribute to an Individual Retirement Account (IRA) and receive a tax deduction because they participate in an employer-sponsored retirement plan (yes, that means all of you with defined benefit pensions and FRS Investment are included). If you participate in your employer’s plan or if you are above the income threshold (presently $66,000 for single filers and $105,000 for married couples), then you are ineligible to make DEDUCTIBLE IRA contributions. You are still permitted to make nondeductible IRA contributions.  

Does it really make sense to fund an IRA with nondeductible contributions?  

Nondeductible vs. Deductible Contributions: 

Nondeductible contributions to a traditional IRA are subject to the same contribution limits as deductible IRA contributions. You can contribute up to $6,000 in 2021, or $7,000 if you are over the age of 50. 

Contributions to deductible traditional IRAs are made with before-tax (pre-tax) dollars. You can claim a tax deduction for the current calendar year or the prior calendar year through April 15th (tax filing deadline. These contributions grow tax-deferred, and you do not pay taxes on that money until you withdraw the funds. All withdrawals or distributions are treated as ordinary income for tax purposes when you make a withdrawal. 

Nondeductible IRA contributions use after-tax dollars. You cannot deduct them on your tax return. They are not taxed when you withdraw the money, provided you do not withdraw more than your original basis (what you put into the IRA) and that the basis is tracked annually on Form 8606 (yes, that means if you made a nondeductible contribution 20 years ago, you would have to track it each year to receive this benefit). Note: The Basis also does not grow as your investments grow. Any additional withdrawals are taxed at your marginal tax rate. 

Roth IRA contributions are also made with after-tax dollars. You do not get a tax deduction for them, but you can take qualified distributions from these accounts without paying any further income taxes. All growth of these assets is tax-free. Roth IRA accounts must be open for 5 years to take a qualified withdrawal which can include your basis in the IRA prior to age 59 1/2 (allowing it to serve as both a savings account and retirement savings vehicle).  

So, you are given the option of having all your money grow tax-free in a Roth-IRA vs. Making Non-Deductible IRA contributions and only receiving a return of your basis or the principal you contributed, which do you think is better? 

How to Report on Your Taxes: 

You must file Form 8606 to report nondeductible IRA contributions. This form creates your “basis” in the IRA. You can make both deductible and nondeductible contributions to a traditional IRA, but only your basis can be withdrawn tax-free (not the growth). You are required to file this form each year you contribute to your IRA.  The most common mistake we find is clients forgetting to complete Form 8606 along with the tax return, but you could report the contributions in arrears if you made the nondeductible contributions and failed to report your basis information. 

Correcting Non-Deductible Contributions: 

You can make a nondeductible IRA contribution each year, then convert it to a Roth IRA using the backdoor Roth IRA approach. You will pay taxes on any converted amount that is above your basis at the time you convert. You also will only pay the 10% early distribution penalty on any tax withheld from the amount converted. For example, if you invest $6,000 into your nondeductible IRA and it grows to $10,000 and then you convert the full amount from your IRA to your Roth IRA, you will only pay taxes on the $4,000 of growth. If you withhold 20% from the amount converted ($2,000) to cover the tax liability, you will be hit with a $200 early distribution penalty (10% of the $2,000 withheld). It is almost always advisable to pay the taxes from another source (your bank savings or earnings) to maximize the value of the Roth conversion amount. 

Your basis for your Roth conversion must be calculated using a pro-rata formula if you have other IRA accounts.  For example, suppose you have $12,000 in a traditional IRA. You make a $6,000 nondeductible contribution to a separate IRA account. You now have a total of $18,000 in two IRAs. One-third of that amount is nondeductible, and the other two-thirds are deductible or taxable. You cannot convert just the nondeductible IRA portion. The IRS looks at all your IRA accounts combined. So, one-third of the converted amount (about $2,000) would be considered the basis, and the other two-thirds (about $4,000) would be considered taxable income in the year of the conversion if you were to convert just $6,000. The IRS does not include any pre-tax investments in employer-sponsored retirement vehicles (401(k) or 457(b) plans) to determine the nondeductible portion; only IRA accounts are taken into consideration. 

In most cases, we highly recommend converting all non-deductible IRA contributions to a Roth IRA so that all future growth is tax-free. Doing so also makes tracking basis much easier, as all qualified distributions from your Roth IRA will be tax-free (even the growth of the assets) – so you benefit more from the tax-free compound growth of your assets AND do not have to file an extra tax form each year! 

This strategy can help maximize your retirement income and assets while minimizing your future tax liabilities 

Please contact our office if you would like assistance reviewing your non-deductible IRA contributions and correcting them – or if you would like a review to ensure that you are maximizing the tax efficiency of your retirement plan! 

As you approach retirement, a question you might be asking yourself is “Should I put my retirement assets in an annuity”. There are three main types of annuities: variable, fixed-indexed and fixed. In this article we are going to explain what makes variable annuities unique and their pros and cons.

A variable annuity is typically setup by depositing a lump sum from another retirement account, like a 401(k) or 457(b), or by funding the account with after-tax dollars, such as money in your checking account and are usually structured as a deferred annuity where you delay receiving income payments from your contract until some point in the future, allowing time for your balance to grow. They can also be setup as an immediate annuity where you start collecting payments immediately after funding the conract.

Annuities are insurance vehicles. Insurance is a contract between two parties where the purchaser pays a “premium”  in exchange for “guarantees” against risk. The insurance company then takes those premiums and using the laws of large numbers, pools risk against other insureds.

Variable annuities are a little different than fixed and fixed-indexed annuities where the funds that are paid to the insurer are invested inside the company’s general account. With a variable annuity, your money is held in a separate account and you have the opportunity to allocate your investments to a limited selection of variable sub-accounts controlled by the insurance company.. These sub-accounts invest your allocated premiums in their underlying portfolios of stocks, bonds and other marketable investments.. The value of your annuity will fluctuate based on the market performance of the investments no different than a portfolio of ETF’s or Mutual Funds.  

Benefits of a Variable Annuity

If your investments do well, a variable annuity could earn a higher return compared to other types of annuities. They can be an effective way to grow your savings long-term and protect against inflation.

Investment gains in a variable annuity are tax-deferred, meaning you don’t owe taxes until you take money out of the account. This is the same benefit that you would get in a 401(k) or an individual retirement account (IRA).WARNING: Be careful about allocating “extra” after-tax money to these vehicles as while it creates a tax shelter for deferring taxes, when you pull money out later in life, those funds will be be subject to a LIFO (last in first out) tax treatment where there is a higher tax liability (at your marginal rate) than what capital gains would be if they were not invested in an annuity.

Variable annuities come with all sorts of “riders” or “options/benefits” that can be added to the base contract at an additional cost (usually they are costly). For example, there are lifetime income guarantees, return of premium at death guarantees, and others.  This can provide added comfort when you’re investing your life savings, but frequently they are expensive and are hardly ever used.

Drawbacks of a Variable Annuity

Variable annuities do not offer guaranteed investment returns.  This is a common misconception, Annuity salepeople typically market and sell these annuities on the basis of a guarantee built into the annuity in the range of 4% – 6%.  This “guarantee” is only on the Income Account Value if you paid for the Income rider and not actually on your Account Value or real money. If your investments do poorly, it’s possible your balance may not grow or may even lose money. We see this frequently due to poor investment options in the annuity and high expenses (that are not very transparent!).

The fees on a variable annuity can be significantly higher than on other types of annuities. They also trump fees you would pay if you invested in similar securities on your own because you’re paying a combination of both investment fees and insurance expenses.

Variable annuities usually come with a surrender charge that lasts for five to ten years. If you try to take out a lump sum withdrawal greater than the free withdrawal amount allotted, or cancel your contract before then, you will owe a substantial penalty, normally not to exceed 10% (plus taxes!).

Each month or quarter, your insurance company will debit your cash value to pay the policy’s monthly charges.  According to Annuity.org the average variable annuity charges total 2.3% per year, though these can eclipse 3.5% depending on your policy.  This average includes very low-cost variable annuities as well as variable annuities without riders.  It is not uncommon to see the total charges go north of 3.5% if the client elects multiple riders to get the “guarantees” on their income and death benefit. This percentage consists of several fees your annuity company deducts from your balance every year (see breakdown below).

Variable Annuity Cost Breakdown

FEE 1-

The Mortality Expense (M&E) charge compensates the annuity company for running the contract and taking on the risk of making sure you get the future annuity payments. It could also cover the agent’s commission for selling you the annuity. Typically the commissions for these products are between 6% and 10% of the initial premium (yes, that means if you put in $500k the “salesperson” will earn between $30,000 and $50,000 one-time, with little incentive to help you long term).

FEE 2-

The annuity company may also charge an additional fee for their administration expenses. This could be a small percentage of your account balance.

FEE 3-

The investment funds in the variable annuity may also charge their own annual fee, like the expense ratio on a mutual fund. Variable Annuity Sub-Account mutual fund fees vary significantly depending on the types of investments and strategy.

FEE 4-

You could add extra benefits to your variable annuity, known as riders. For example, you could purchase a rider to guarantee that you will keep receiving lifetime income even if your investment balance runs out of money. In exchange, you need to pay an additional fee each year for the rider. If you purchase an income rider typically the fees are based on the income account value which often is significantly higher than the actual account value or contract value, thus driving the fees/expenses up even higher.

If you need to withdraw a substantial amount—or all—of your money before your surrender period, you will face the applicable surrender charges noted in your contract. 


Expense NameCost
Mortality & Expensee Fees1.25%
Admininstrative Fees0.15%
Sub-Account Fees1.00%
Additional Rider Fees.75%
Total Fees/Expenses3.05%


A variable annuity might be good for someone who doesn’t mind taking the extra risk to earn a higher return. Out of all annuity types, a variable annuity has the highest potential earning power, even if there could be investment swings along the way. There is an added cost for the annuity insurance expense (and typically higher than average investment expenses) and you might be better off just investing your money in the market directly and getting the assistance of a competent advisor with reasonable advisory fees. That said, there are “stripped down”, low-cost annuities that can serve as prudent tax-deferral/savings vehicles. The devil is in the details.

Financial Advisor, Investment Advisor, Broker, “guy”. These are all terms that seem to be used interchangeably when talking to clients. While they might all seem to be the same thing, they can in fact be very different in terms of how your advisor is compensated, where their loyalty lies, and the objectiveness of their advice.

As of 2019, there were approximately 123,000 different mutual funds, 6,970 Exchange Traded Funds (ETFs) (Statista), and 630,000 individual stocks globally (Investopedia). Your advisor has the world of options at their disposal to invest your capital. Unfortunately, some of these investment options come with the advisor’s best interest at the top of mind instead of the clients.

We are going to outline a few of these funds and companies below and what to look out for when working with an advisor.

The Funds:

Without naming specific companies, there are a large number of mutual fund companies that offer advisor kickbacks in the form of selling arrangements and 12(b)(1) fees to incentivize the advisor to invest client money with them.

In recent years, some of these companies have begun directly marketing to advisors who work with FRS Investment Self-Directed Brokerage Accounts and other 401(k) platforms. They advertise that the advisor can “get paid” on assets that are in these employer plans. Most employer plans do not allow the client’s advisor to charge an advisory/management fee on the assets being managed. This is the honest, objective, fiduciary approach, and the approach we as a firm take with local 457(b), deferred compensation plans.

Instead, the advisor, wanting to get paid, will invest their client’s accounts in funds that return a part of the fund management fee to the advisor – and the clients that they are working with have no idea! The expenses can be outrageous – in some cases well over 2% to 3% per year, per fund. It is a very dishonest and sneaky approach.


The fee might not seem outrageous, but over the course of 10, 20, or 30 years it is substantial. In the below table we illustrate a $100,000 initial investment with an average annual growth rate of 6% invested in the above-mentioned ABC Mutual Fund vs. a low-cost alternative. Over the course of 30 years the account value difference is over $260,000 with the same annual return between the 2 funds!

An advisor with your best interest in mind would invest you in the low-cost alternative, but unfortunately, we see ‘Fund ABC’ being used more frequently.

Alternatively, some companies can manage assets in Self-Directed Brokerage Accounts and they charge a management fee, in addition to their fund fee, to their clients.

What to look for:

The first thing you need to determine is who does your advisor work for.

Do they work for a large/national company or are they local? Are they independent or are they affiliated with a subsidiary of a larger firm? Is the firm they work for in the advice business or are they in the product manufacturing business as well? For example, does their company also manufacture annuities, mutual funds, etc.?

Why does this matter? Most large firms are in the business of manufacturing products, and this is where they earn most of their revenue as a company. They hire a salesforce to distribute their product, but often call their salesforce “financial advisors”, “financial representatives”, or “financial planners”.

This is often why people feel awkward sales pressure when they sit down with a “financial planner” because they are really just sitting down with a salesperson in disguise.

The second thing you need to determine is how they get paid.

Commission-Based: This means the professional’s income is earned via commissions from the products they sell to you.

Fee-Based: This means you are paying your financial planner/advisor a percentage of the assets he/she manages for you.

Flat-Fee: This means a fee is agreed upon ahead of time and re-evaluated on an ongoing basis (quarterly/yearly/etc.).

Finally, you need to determine if they are a fiduciary or not.

A fiduciary is an individual or entity that has a moral, legal, and ethical obligation and is ethically bound to act in the best interest of his or her clients. The word fiduciary has been thrown around so much in the last couple of years that it seems like everybody claims to be a fiduciary these days. But that is not the case.

Some advisors, who are not fiduciaries, tell their clients that they have to abide by the code of ethics for ‘ABC Designation’ that they have. Not abiding by your designation’s ethics code is only an issue if it is reported by a client. Most clients do not know that they are being taken advantage of.

We see time and time again clients come in with 5-6 annuities that their advisor sold them (to earn a 6-figure commission). These annuities have not been reviewed by the advisor for years (because they aren’t paid to service these policies) and the annuities have underperformed the market significantly (often times by more than 10-15% annualized). No ethics violation was ever reported because the client thought their advisor had their best interest in mind.

Another issue is that many firms can only sell their proprietary products which means there is no way for their financial planners to do the proper due diligence to say that they have found the product or investment that is best for you and your unique situation. Additionally, many other firms have sales goals/quotas that their “financial planners” must meet to qualify for promotions or to be included in the annual company trips for their top salespeople. These create conflicts of interest.

Questions to Ask:

When you meet with a financial planner, typically they will ask you a lot of questions. But, you need to ask them a lot of questions as well. Below are some questions that you should ask every financial advisor:

The decision to work with a financial advisor can be very overwhelming. Many people know somebody who was taken advantage of by an advisor at some point in their life. Understanding the different compensation methods and fund choices as outlined above will put you in the drivers seat to make an educated decision and not be ‘sold’ something by a salesman in disguise.