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Retirement Health Care Costs

by Alan

The issue of health care costs in retirement -- and planning for them well in advance of retirement -- is becoming key to any retirement planning discussion.

A recent study by Employee Benefit Research Institute (EBRI) sheds light on different types of health care costs to consider in retirement. It projected that in 2014, men and women who wanted a 90% chance of having enough money to cover out-of-pocket health care expenses in retirement would need to have saved $116,000 and $131,000 respectively by age 65.¹ This is a sobering goal when you consider that just 42% of workers in their 50s and 60s report total savings and investments in excess of $100,000.²

Part of the problem with putting a price tag on retiree health care expenses is that every situation will vary depending on an individual's health, the type of health care coverage they carry, and when they hope to retire. That said, EBRI has identified some "recurring expenses," or standard elements of cost that can be estimated and planned for in advance as well as "non-recurring" expenses that are less predictable but tend to increase with age.

Recurring vs. Non-Recurring Expenses

EBRI was able to categorize utilization patterns and expenses into these two separate types of health care services using data gleaned from the Health and Retirement Study (HRS). HRS is a longstanding, highly respected study of representative U.S. households evaluating individuals over age 50.

● Recurring services -- These include doctor visits, prescription drug usage, and dentist services. Since these services tend to remain stable throughout retirement, it is possible to calculate an average out-of-pocket expense among individuals age 65 and older of $1,885 annually.³ EBRI's study projected forward, and factored in the following assumptions: a 2% inflation rate, a 3% rate of return on investments, and a life expectancy of 90 years. The study estimated that one would need $40,798 at age 65 to cover the average out-of-pocket expenses for recurring health care needs throughout retirement. It should be noted that this calculation does not include expenses for any insurance premiums or over-the-counter medications.

● Non-recurring expenses -- This category includes overnight hospital stays, overnight nursing home stays, home health care, outpatient surgery, and special facilities. Unlike recurring expenses, the cost of most non-recurring services increases with age. For example, average annual out-of-pocket expenses for nursing home stays are estimated at $8,902 for those in the 65 to 74 age group, $16,948 for those aged 75 to 84, and $24,185 for individuals aged 85 and up.³

Because the likelihood of utilizing these services and the degree to which they will be needed is largely unknown, projecting the savings needed to cover these costs throughout retirement is an elusive exercise. One way to estimate expenses for yourself is to start with the total out-of-pocket health care savings goals of $116,000 for men and $131,000 for women cited earlier. Then, divide these estimated expenses into recurring and non-recurring costs.

Bigger Picture Planning

Certified Financial Planners™ often recommend taking a holistic approach to calculating income needs in retirement, by factoring in such costs as taxes and debt payments along with other typical expenses including health care. In addition to the out-of-pocket health care calculations discussed above, consider what you think you might have to pay in annual premiums if you were to apply for health insurance today. Lastly, and perhaps most important, add in an allowance for inflation -- both general and health care inflation.

Your Certified Financial Planner™ can help you get started by creating a Comprehensive Financial Plan that includes a projection for health care costs in retirement. This is especially useful just before you "pull the trigger" on your decision to retire, and give notice to your employer. Knowing that your plan will work can give you the confidence to move forward.

This article offers only an outline; it is not a definitive guide to all possible consequences and implications of any specific saving or investment strategy. For this reason, be sure to seek advice from your CPA and Certified Financial Planner™.

¹ Employee Benefit Research Institute, news release, "Needed Savings for Health Care in Retirement Continue to Fall," October 28, 2014.

² Employee Benefit Research Institute, 2014 Retirement Confidence Survey, March 2014. (Not including the value of a primary residence or defined benefit plans.)

³ Employee Benefit Research Institute, "Utilization Patterns and Out-of-Pocket Expenses for Different Health Care Services Among American Retirees," February 2015.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Market Confusion: Up is Down and Down is Up

by Akemi K. Dalvi

If you were watching the markets day to day, you experienced a mild roller coaster, what trading professionals refer to as a sideways market. One day it was up, the next down, each day (or week) seeming to erase the gains or losses of the previous ones. The best explanation for this phenomenon is that investors are still looking over their shoulders at interest rates, waiting for bond yields to jump higher, making bonds more competitive with stocks and triggering an outflow from the stock market that could (so the reasoning goes) cause a bear market in U.S. equities.

However, investors have been waiting for this shoe to drop for the better part of three years. Meanwhile, interest rates have drifted decidedly lower in the first quarter. The Bloomberg U.S. Corporate Bond Index now has an effective yield of 2.93%. 30-year Treasuries are yielding 2.48%, roughly 0.3% lower than in December, and 10-year Treasuries currently yield 1.87%, down from 2.17% at the beginning of the year. At the low end, you need a microscope to see the yield on 3-month T-bills, at 0.02%; 6-month bills are only slightly more generous, at 0.10%.

This interest rate watch has created a peculiar dynamic where up is down and down is up in terms of how traders and stock market gamblers look at the future. The generally positive economic news is greeted with dismay (The Fed will notice and start raising rates sooner rather than later! Boo!). Conversely, any bad news sends the stock market back up again into mild euphoria (The Fed might hold off another quarter! Yay!).

There are several obvious problems with this. First, probably least important, the Fed’s future actions are inscrutable. You will hear knowledgeable Fed-watchers say that the Fed will take action as early as June or as late as next year, and none of them really know.

Second, small incremental rises in interest rates are not closely associated with bear markets, as everybody seems to assume. When rates have gone up in the past, the price people will pay for stocks has also gone up. Why? For exactly the reason you think: rising rates are a sign of a healthy economy, which is precisely why the Federal Reserve Board would decide that stimulus is no longer necessary. Companies—and their stocks—tend to thrive in healthy economies.

Finally, we should all welcome the Fed pullback, not fear it. A lot of the uncertainty among traders and even long-term investors is coming from anxiety over how this experiment is going to end. The U.S. Central bank has directly intervened in the markets and in the economy, and is still doing so. When that ends, normal market forces will take over, and we’ll all have a better handle on what “normal” means in this economic era. Is there great demand for credit to fuel growth? What would rational investors pay for Treasury and corporate bonds if they weren’t bidding against an 800-pound gorilla? Would retirees prefer an absolutely certain 4.5% return on 30-year Treasury bonds or the less certain (but historically higher) returns they can get from the stock market? These are questions that all of us would like to know the answer to, and we won’t until all the quantitative easing interventions have ended.

What DO we know? The U.S. economy is less dependent on foreign oil than at any time since 1987, and the trend is moving toward complete independence. Oil—and energy generally—is cheaper now than it has been in several decades, which makes our lives, and the production of goods and services, less expensive.

Meanwhile, more Americans are working. The U.S. unemployment rate—at 5.5%—is trending dramatically lower, and is now reaching levels that are actually below the long-term norms. Unemployment today is lower than the rate for much of the booming ‘90s, and is approaching the lows of the early 1970s.

Further, real GDP—the broadest measure of economic activity in the United States—increased 2.4% last year, after rising 2.2% the previous year. America is growing. Not rapidly, but slow growth might not be so terrible. Rapid economic growth has, in the past, often preceded economic recessions, where excesses had to be corrected. Slow, steady growth may be boring, but it’s certainly not bad news for the economy or the markets.

It has been said that people lose far more money in opportunity costs by trying to avoid future market downturns while the markets are still going up, than by holding their ground during actual downturns. In every case so far, the U.S. market has eventually made up the ground it lost in every bear market we’ve experienced. The last trading day of the quarter looked bearish, as have many other gloomy trading days during this seven year bull market. It seems like every week, somebody else has predicted an imminent decline that has not happened. People who listened to the alarmists lost out on solid returns. You filter out the good news at your peril.

Sources:
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-
bonds/us/http://www.bloomberg.com/news/articles/2015-04-01/u-s-oil-imports-from-opec-have-plunged-to-a-28-year-low
Aggregate corporate bond rates: https://indices.barcap.com/show?
url=Benchmark_Indices/Aggregate/Bond_Indices
Aggregate corporate bond rates: http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

 

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The Able Act Helps Disabled Americans

By Alan Kondo

Up until recently, parents of disabled children had a dilemma. Their children could qualify for Medicaid (Medi-Cal in California) and receive lifetime medical coverage. However, if the parents set aside more than $2,000 to pay for expenses that were not covered by Medicaid or Medi-Cal, it could put the child at risk for losing those valuable benefits.

The only exception was a Special Needs Trust for the benefit of the disabled person. Parents had to name a trustee so that the assets in the trust were not considered owned by the child. If done properly, assets in the Special Needs Trust did not disqualify that individual from receiving assistance.

Now, disabled children can take advantage of a new type of account. Late last year President Obama signed into law legislation that created "ABLE accounts". These are aimed at giving disabled Americans and their families the opportunity to save for qualified education, job training and other related expenses in a tax-advantaged vehicle without jeopardizing their government benefits.

This legislation marks a major departure from the financial constraints that prevented people with disabilities from doing what the rest of us take for granted: setting aside money for future use.

What ABLE Offers

Modeled after 529 college savings plans, money invested in "Achieving a Better Life Experience" (ABLE) accounts can be withdrawn tax free to pay for qualified expenses including education and job training, transportation, health care, and housing.¹ Individuals can accumulate as much as $100,000 in such accounts without affecting their eligibility for Social Security Income (SSI) and other federal benefits. Further, Medicaid coverage will not be affected by how much money is accrued in an ABLE account.

Not a Cure-All

Still, some restrictions apply. To qualify for an ABLE account, an individual must have experienced the onset of his or her disability prior to the age of 26. Each beneficiary can have only one account, and while there are no limits on how many family members and friends can contribute to the account, there are limits on how much can be contributed annually. For 2015, the total annual gifting limit allowed is $14,000, an amount that is adjusted for inflation each year. Any account accumulation totals in excess of $100,000 would trigger a suspension of the recipient's SSI benefits, but Medicaid benefits would continue.

States Must Get On Board

ABLE accounts can be set up starting this year, but as with 529 plans, individual states must take the lead in making them available to individuals and families. Some states, including California, Maryland, and Pennsylvania already have plans in the works.² Generally beneficiaries must belong to their home-state plan -- and spending of account assets can occur only in the individual's state of residence -- although exceptions (and individual state tax benefits) may apply.² If the ABLE account beneficiary dies, any funds remaining in the account may be claimed by the state to recoup expenses paid by Medicaid.

While the ABLE Act is by no means a cure-all, it does take a small, important step toward helping millions of disabled Americans live a more independent, fulfilling life.

¹ Disability Scoop, "Obama Signs ABLE Act," December 22, 2014.

² AARP, "New 529 Plan Created for People With Disabilities," December 22, 2014.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Tax Time: Tips for Getting Organized

By Akemi K. Dalvi

Ask many Americans about their experience with tax time and they are likely to describe lots of paperwork, confusing rules, and late nights on their computer. But it doesn't have to be that way. Getting organized now may help streamline your tax preparation and help you identify deductions that you might otherwise overlook in the last-minute rush.

You'll need the right paperwork to get started, but you may want to consult a tax advisor to determine whether you need to consider additional factors that are unique to your situation. Tax Preparation Documents

  • Form W-2 from your employer - The starting point for determining your taxable income.
  • Form 1099 and other statements from investment firms - Helps you compute capital gains, which are taxable, or capital losses, which you may be able to deduct. Dividends and interest are typically taxable at ordinary income tax rates. Contributions to a traditional IRA may be tax deductible if you meet income thresholds established by the IRS.
  • Real estate records - You may be able to deduct mortgage interest and real estate taxes. Expenses associated with investment real estate may be deductible. If you sell real estate at a profit, you may be required to pay taxes on a portion of the gain.

After you have accounted for the most common aspects of tax preparation, dig a little deeper to discover other areas of your life that may offer tax breaks.

Parenthood

Children are not just a blessing to your family. They also bring with them a host of potential tax breaks.

  • Dependency exemption. For the 2014 tax year you can deduct $3,950 for each qualifying child you claim as a dependent on your tax form. If your adjusted gross income is above a certain level, you may not receive the full exemption amount.
  • Child Tax Credit. This credit can be worth as much as $1,000 per child under the age of 17 that you claimed as a dependent on your tax return. For 2014, the amount of the credit begins to phase out for joint filers with adjusted gross incomes that exceed $110,000 and for single filers and heads-of-household whose income exceeds $75,000.
  • Child Care Credit. If you paid childcare for a dependent child under age 13 so you could work, you can earn a credit of between $600 and $1,050 in 2014. If you are paying for the care of two or more children, the potential credit you can earn increases to between $1,200 and $2,100. As with most other tax breaks, the size of the credit depends on your income and, in the case of this particular credit, how much you pay for care. (You can count up to $3,000 for the care of one child and up to $6,000 for the care of two or more).1
  • Adoption credit. If you adopted a child in 2014, you can claim a credit of up to $13,190 help offset the cost. Income phase-outs apply for adjusted gross incomes that range from $197,880 to $237,880.1

Lesser-Known Deductions

You may be able to benefit from either a tax deduction or a tax credit if you had any of these types of expenses during 2014.

· Purchased an electric car or plug-in hybrid · Had student loan debt paid by parents · Had out-of-pocket expenses related to a job search · Had moving expenses associated with a first job · Were self-employed and paid Medicare premiums · Had jury duty pay that was surrendered to employer · Utilized the American Opportunity Credit and/or other government-sponsored education programs to pay for education expenses · Made energy-saving home improvements

These are just a few of the tax savings that may await you come April 15. Of course, your individual circumstances will determine if you are eligible for these and other tax breaks. Your CPA should be able to provide more information on what you do and don't qualify for.

Source/Disclaimer:
1Source: TurboTax, "Birth of a Child," updated for tax year 2014.

This communication is not intended to be tax advice and should not be treated as such. Each individual's situation is different. You should contact your tax professional to discuss your personal situation.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Can I Save More on My Taxes???

Akemi Kondo Dalvi, CPA

The holidays are behind us and many of us are getting ready for that much dreaded tax season. The whole ordeal can be pretty daunting. First we wait for our W2s and 1099s to come by mail. Then we figure out which documents never arrived and track those down manually. Next steps are to dig through our files and figure out what deductible expenses we incurred during the year (medical expenses, donations, etc.) and what supporting documents we have saved so we can deduct them if itemization is an option. Preparing your tax return can be a challenge you decide to take it on yourself (bless your soul if you do) or pay a professional to save you the headache. Finally, the end result can be a welcomed tax refund or a loathsome tax payment due. Although the government appears to spend our money wisely, the latter is never welcomed news.

Whichever category you find yourself falling into, one thing many people ask in the end is how they can save more on their taxes. Below are a few helpful tips. Some of these can be implemented this year and some will help in the tax-year to come.

  • Itemized Deductions – It is much simpler to take the standard federal deduction over the itemized deduction, and if you have a very straight forward financial situation, this may also be your best option. However, if you have more complex finances, your expenses such as mortgage interest, education expenses, dependent care expense or medical expenses to name a few, could provide you tax savings if you itemize your deductions. Other deductible items include investment management fees paid to your Financial Advisor or tax preparation fees paid to your CPA. The list of itemized deductions is pretty long and it may pay off to ensure you’re deducting everything you can. Refer to the IRS website to see a full list of possible itemized deductions:
    http://www.irs.gov/taxtopics/tc500.html
  • Maximize Your Retirement Savings – Many of those currently working have the option of contributing to a work sponsored retirement plan such as a 401k, 403b, 457, Simple or SEP IRA. Your contributions to your own retirement accounts are also a direct dollar for dollar reduction in your taxable income for the year. This is a quick and relatively easy way of moving money from your taxable pocket to your tax-deferred pocket and the money is still 100% yours. In 2015, the maximum contribution limits for a 401k, 403b and 457 are $18,000, plus another $6,000 “catch up” contribution for those age 50+i. For a Simple Plan, the maximum contribution limits in 2015 are $12,500 plus another $3,000 “catch-up”ii. The maximum contribution limits are adjusted regularly for inflation so you should check annually for the new limit.
  • Donor Advised Funds – Charitable giving strategies are also an excellent way to reduce your income tax, capital gains tax and estate tax liabilities. Despite many misconceptions, you do not need to be a millionaire to consider charitable strategies. A donor-advised fund is a tax-advantaged charitable giving vehicle that offers maximum flexibility to take tax deductions and recommend grants to charitable organizations. By definition, donor-advised funds are public charities under Section 501(c)(3) of the Internal Revenue Code, and contributions to such funds are tax deductible. Donor-advised funds are particularly family-friendly, as parents and children can consolidate their giving activities through a single fund account. In addition, children can be named as successors to a fund, ensuring the continuation of a family's giving legacy. Another significant advantage of a donor-advised fund is its capacity to accept any one of a variety of assets as a charitable contribution. Checks/wire transfers, commercial paper, mutual fund shares, securities, bonds, and restricted stocks all are acceptable assetsiii. In addition, the account has the potential to grow over time, increasing the donor's giving power. Your Certified Financial Planner ™ can help you evaluate if this approach is suitable for you.
  • Plan Ahead – Many only examine their taxes after they are filed, but there are many things you can do ahead of time to minimize your taxes. Tell your Financial Advisor and CPA ahead of time what your goals are for the year to come and give them permission to communicate with each other during the year so they can work together as a team to accomplish your goals. For example, we had a client come to us who had realized losses of $90K from a prior investment venture. When she began working with us, she asked if we could help her offset gains in her account with losses she had incurred in prior years. Coordinating with her CPA, we were able to help her realize tax free gains in her accounts over a 3 year period.

We’ve found that the most successful people plan for success rather than stumble upon it. With good planning and preparation, you can probably save some of your hard-earned money. Set an appointment with your Certified Financial Planner™ and your CPA in May or June and ask them to work together as a team to help you in the year ahead.

i http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-401k-and-Profit-Sharing-Plan-Contribution-Limits
iihttp://www.irs.gov/Retirement-Plans/COLA-Increases-for-Dollar-Limitations-on-Benefits-and-Contributions
iiiInvesting in mutual funds involves risk, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Investing in stocks involves risks, including loss of principal.

This commentary on this website reflects the personal opinions, viewpoints and analyses of the Kondo Wealth Advisors, Inc.  employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc.  or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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