Do I Need Disability Insurance?

Do I Need Disability Insurance?

About Disability Income Insurance…

When purchasing disability income protection, there are a number of options to consider:

• Additional benefits available such as protection against inflation for future benefits paid referred to as Cost of Living Adjustment (COLA), Guaranteed Purchase Option (GPO), and Catastrophic Disability.

• Non-cancel-able or guaranteed renewable provisions.

• Various waiting periods are available. The longer the waiting period, the lower the premium.

• Coverage that offers varying benefit periods for you to choose from. The longer the period covered by the policy, the higher the premium.

• The Knights of Columbus Disability policy offers “Own Occupation” coverage for the first two years, which means we will pay benefits if the insured is unable to work in their specialized field. Thereafter it is any occupation for which you are reasonably qualified.

1 Source: SSA Publication No. 05-10029, May 2015.


2 Source: U.S. Census Bureau, Americans with Disabilities 2005 and 2010, Table 1 (Age 21-64) July 2012

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Learn More: Disability Income Insurance

Read more about how disability insurance fill in the financial gap when your family could need it most.

Disability Income Insurance

Disability Income Insurance

Your most valuable asset is your ability to earn an income.

Should you or your spouse experience a serious illness or injury, how would the loss of income impact you? Combine the loss of income with increased expenses due to necessary medical care, and the financial stress of a disability can become just as taxing as the disability itself.

While your employer may cover you with some form of company-paid disability insurance, often coverage is only partial and/or short term. Purchasing a Personal Disability Income Insurance policy can help you cover any financial gaps that you may have, with the added bonus that these benefits are paid to you tax-free.

Because the benefit period of short-term policies last a maximum of two years and long-term policies have a typically extensive waiting period, it is wise to acquire both long-term and short-term disability insurance policies. Having both policies will assure that you are covered from the unfortunate moment you fall ill or become injured through the entire period of disability, or even the rest of your life.

Policy Considerations

l Definition of disability: Some policies pay benefits if you are unable to perform the duties of your regular occupation, while others pay only if you can engage in no gainful employment at all. Some policies also pay benefits if you become ill or injured and are unable to earn a specified percentage of your income.

Amount of income: This amount varies by policy, but a policy that pays 50 to 60 percent of your monthly salary (not including bonuses or commission) is the most common and most affordable option.

Length of benefit period: You can choose to receive benefits that are payable from one year, two years, five years or to retirement age. Opting for coverage that lasts through age 65 affords the best protection against an injury or illness that permanently removes you from the workforce.

Residual benefits: Selecting this feature will give you partial payment in the event of an income reduction due to being unable to fulfill all of your job responsibilities.

Cost of living increases (COLA): Adding optional COLA to your disability policy means that the coverage you purchase today will keep up with the pace of inflation during the lifetime of the policy.

Short-term disability policies have a waiting period of up to 14 days with a maximum benefit period of no longer than two years.

Long-term disability policies have a waiting period of several weeks to several months, with a maximum benefit period from a few years to the rest of your life.

When disability occurs, most options, except insured income replacement, may be inadequate or quickly exhausted. 

Disability is difficult enough – disability without income is even worse. Disability income insurance can be a sound long-term solution to a long-term disability.

PROPER PLANNING FOR DEATH AND DISABILITY SHOULD BE CONSIDERED BY EVERYONE.

Odds of Death Chart

Use the chart below to learn more about current statistics of death before 65yo.

Odds of Death at Age

25

30

35

40

45

50

Within 15 Years

1 in 50

1 in 39

1 in 27

1 in 18

1 in 12

1 in 7

Within 30 Years

1 in 14

1 in 9

1 in 6

1 in 4

1 in 3

1 in 2

Before Age 65

1 in 6

1 in 6

1 in 7

1 in 7

1 in 7

1 in 8

Odds of Disability Chart

Use the chart below to learn more about current statistics of becoming disabled before 65yo.​

Odds of Disability at Age

25

30

35

40

45

50

Within 15 Years

1 in 37

1 in 31

1 in 21

1 in 14

1 in 9

1 in 6

Within 30 Years

1 in 11

1 in 7 

1 in 5

N/A

N/A

N/A

Before Age 65

1 in 5

1 in 5

1 in 5

1 in 5

1 in 6

1 in 6

 

Source for odds of death: 2001 Commissioners Standard Ordinary Table for Male, Age Last Birthday.

Source of odds of disability: 2012 Society of Actuaries IDEC Table for Male, Occupation Class 1, 90-day elimination.

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Learn More: Do I Need Disability Insurance

Read more about how disability insurance can keep and your family safe in a stressful time of need.

Retirement Assets Depletion Rates

Retirement Assets Depletion Rates

Important: Hypothetical illustrations generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2017 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee for future results.

High Withdrawal Rates Will Quickly Deplete Your Assets

Several issues should be examined when determining an investor’s withdrawal rate. Asset allocation, time horizon, and consumption patterns are all important factors in shaping how long portfolio wealth will last.

This chart looks at a hypothetical 50% stock/50% bond portfolio and the effect various inflation-adjusted withdrawal rates have on the end value of the portfolio over a long payout period. Each hypothetical portfolio has an initial starting value of $500,000. It is assumed that a person retires at age 65 and withdraws an inflation-adjusted percentage of the initial portfolio wealth ($500,000) each year beginning at age 66. Annual investment expenses were assumed to be 0.73% for stock mutual funds and 0.60% for bond mutual funds.

As illustrated, the higher the withdrawal rate, the greater the chance of potential shortfall. The lower the rate, the less likely an investor is to outlive their portfolio. Therefore, retirees who anticipate long payout periods may want to consider assuming lower withdrawal rates.

The image was created using Monte Carlo parametric simulation that estimates the range of possible outcomes based on a set of assumptions including arithmetic mean (return), standard deviation (risk), and correlation for a set of asset classes. The inputs used herein are hypothetical, based on historical long-term figures. The hypothetical risk and return of each asset class, cross-correlation, and annual average inflation follow. Stocks: risk 20.2%, return 12.1%; Bonds: risk 5.7%, return 5.4%; Correlation 0.00; Inflation: return 3.0%. Other investments not considered may have characteristics similar or superior to those being analyzed. The simulation is run 5,000 times, to give 5,000 possible 35-year scenarios. A 90% confidence level indicates that there is a 90% chance of the outcome being as shown or better. Higher confidence levels are chosen in order to view tougher market conditions. A limitation of the simulation model is that it assumes a constant inflation-adjusted rate of withdrawal, which may not be representative of actual retirement income needs. This type of simulation also assumes that the distribution of returns is normal. Should actual returns not follow this pattern, results may vary.

Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while returns and principal invested in stocks are not guaranteed. Diversification does not eliminate the risk of experiencing investment losses. Holding a portfolio of securities for the long term does not ensure a profitable outcome and investing in securities always involves risk of loss, including the risk of losing the entire principal.

About the data

Stocks are represented by the Ibbotson® Large Company Stock Index. Bonds are represented by the five-year U.S. government bond, inflation by the Consumer Price Index, and mutual fund expenses from Morningstar. An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for taxes or transaction costs.

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Learn More: Building Your Nest Egg: An Emergency Fund

Read more about how to keep your retirement years safe with tips to build your nest egg with an emergency fund.

Ways to Work Towards Happiness in Retirement.

Ways to Work Toward Happiness in Retirement.

The economy is struggling and that is affecting everyone’s financial future. As a result, you must take control of your retirement to ensure that you’ll stay above water when you’re ready to put your feet up and relax.

Here are some things to consider when planning for your retirement:

• Obtain adequate assets before you stop working. Do not rely on company pensions or benefits as your sole income in retirement.

• On average, women live longer than men; many married women outlive their husbands by at least 15 years. Economic decline often occurs after becoming a widow, so women need to prepare to be financially secure for their long lives.

• Outliving your assets is a reality. According to the National Institute of Health (NIH), life expectancy in 1952 was 68.6 years old. In 2006, that figure had risen to 77.85 years old. At this rate, this trend will continue because of lifestyle improvements and advances in medical care. It is wise to organize your portfolio so that a portion of your retirement assets cannot be outlived.

• Contribute as much as possible to your 401(k) savings plan. Set the company match as your baseline for your contributions. Then, as finances allow, increase your automatic contribution amount so that you can set your savings on auto-pilot.

• Save early and diversify your assets to seek to maximize the return on your investments for the amount of risk you are willing to take. Keep in mind that diversification does not ensure a profit or protect against market loss.

• Be prepared for changes in retirement. Remember to take inflation, a possible decline in your functional status, medical costs, and the death of a spouse and other changes in your life into account when saving.

• Decisions made before retirement will affect you in your golden years. This includes taking a new job, getting married, getting divorced or having or adopting a child.

• Maintain your job skills to protect your financial security. Your benefits ultimately depend on your ability to make money. By keeping your skills up-to-date, you can better ensure that you are able to work and make money.

* This is a hypothetical example for illustrative purposes and is not indicative of any investment. Investments involve risks that could result in the loss of principal. There is no guarantee that the strategy illustrated will produce positive investment results. This example assumes payroll deductions of $400 per month for the next 20 years growing at an assumed rate of return of 8.00% (converted to a monthly return), and then compounded monthly.

According to recent government statistics, people age 65 and older have the following incomes:

The median income for people aged 65 or older is $30,193, but there are wide differences within the total group. Approximately 11% have income under $10,000, and roughly 32% have an income of $50,000 or more.


Income differences by age are associated with differences in marital status. Income is highest for married couples, who have a median income more than 2½ times that of non-married persons. Median income is generally lower in older age groups. The striking differences by age are due in part to the disproportionate number of non-married women in older age groups.


In 2014, 85% of married couples and 83.6% of non-married persons aged 65 or older received Social Security benefits. Social Security was the major source of income (providing at least 50% of total income) for 47.8% of married couples and 70.7% of non-married persons aged 65 or older.

Source: Social Security Administration, Office of Retirement and Disability Policy, Income of the Aged Chartbook 2014; and Income of the Population 55 or older 2014, Released April 2016.

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Learn More: Retirement Assets Depletion Rates

Read about just how fast retirement funds are spent to maintain current lifestyles.

Long Term Care: What it Could Cost.

Long Term Care: What it Could Cost.

It is important to be in the Know – especially when it comes to your long term care options and their expenses. Balance out the possible “what ifs” with knowledge of the facts.

Did you know…

• About 19 percent of Americans aged 65 and older experience some degree of chronic physical impairment. By the year 2020, 12 million older Americans will need long-term care.1

• The U.S. Government Accountability Office estimates that 40 percent of the 13 million people receiving long-term care services are between the ages of 18 and 64.1

• One year in a nursing home can average more than $80,000. In some regions, it can easily cost twice that amount.1

• Disability income insurance will not cover most long-term care expenses.

• People will need to spend almost all of their assets in order to qualify for Medicaid benefits.

About MediCARE

Medicare pays only about 12% for short-term skilled nursing home care following hospitalization. Medicare also pays for some skilled at-home care, but only for short-term unstable medical conditions and not for the ongoing assistance that many elderly, ill, or injured people need.1

About MediCAID

The federal program that provides health care coverage to lower-income Americans – pays almost half of all nursing home costs. Medicaid pays benefits either immediately, for people meeting federal poverty guidelines, or after nursing home residents exhaust their savings and become eligible. Turning to Medicaid once meant impoverishing the spouse who remained at home as well as the spouse confined to a nursing home. However, the law permits the at-home spouse to retain specified levels of assets and income. 1 For 2018, the Medicaid maximum resource allowance for married patients is $123,600 2

Any gifts of assets must occur at least 60 months prior to applying for Medicaid in order to meet the asset guidelines.

1 A Guide to Long-Term Care Insurance © Revised edition, 2003, 2004, 2012, 2013 America’s Health Insurance Plans.

2 2014 Centers for Medicare & Medicaid Services, Medicaid Eligibility Policy.

Long-Term Care Costs by State: Average Nursing Home Cost

STATE

Private/day

Semi-Private/day

Private/month

Semi-Private/month

National Average

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusettes

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia

Wisconsin

Wyoming

$253

206

816

255

193

307

267

440

326

275

203

387

244

205

252

200

185

230

169

297

311

395

269

266

217

173

228

211

284

338

367

238

373

245

354

240

165

294

320

315

217

214

207

195

210

293

244

295

286

280

242

$225

195

800

207

161

250

228

407

315

244

190

355

229

184

210

182

171

206

160

275

286

370

250

242

209

156

218

185

261

320

325

213

361

216

359

210

145

277

298

273

199

205

190

148

185

283

221

265

275

257

217

$7,698

6,266

24,820

7,756

5,862

9,338

8,129

13,383

9,901

8,365

6,175

11,776

7,407

6,235

7,665

6,083

5,627

6,981

5,139

9,019

9,444

12,015

8,182

8,086

6,586

5,264

6,935

6,403

8,648

10,281

11,153

7,229

11,330

7,452

10,773

7,300

5,019

8,943

9,733

9,581

6,596

6,509

6,310

5,931

6,388

8,897

7,422

8,973

8,699

8,517

7,375

$6,844

5,931

24,333

6,296

4,905

7,604

6,935

12,364

9,581

7,422

5,779

10,798

6,965

5,597

6,388

5,536

5,201

6,266

4,867

8,365

8,684

11,254

7,604

7,361

6,357

4,730

6,631

5,627

7,939

9,733

9,885

6,471

10,988

6,570

10,905

6,388

4,410

8,425

9,071

8,304

6,053

6,235

5,779

4,502

5,627

8,608

6,715

8,060

8,365

7,817

6,593

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Learn More: Long Term Care: Medicare

Read more about what Medicare is and how you can supplement it to successfully cover the costs of long term care.

Long Term Care: Medicare – Getting Started

Long Term Care: MEDICARE - Getting Started

Medicare is a federal health insurance program for people 65 and older and others with a qualified disability. A Medicare health plan is offered by a private company that contracts with Medicare to provide Part A and Part B benefits to people with Medicare who enroll in the plan. Medicare health plans include all Medicare Advantage Plans, Medicare Cost Plans and Medicare Part D drug coverage.

Here is a closer look at the four types of Medicare:

1. Medicare Part A helps cover inpatient care in hospitals, skilled nursing facilities, and hospice and home health care. Generally, there is no monthly premium if you qualify and paid Medicare taxes while working.

2. Medicare Part B helps cover medical services like doctors’ services, outpatient care and other medically necessary services that Part A doesn’t cover. You need to enroll in Medicare Part B and pay a monthly premium determined by your income, along with a deductible. Many people also purchase a supplemental insurance policy, such as a Medigap plan, to handle any Part A and B coverage gaps.

3. Medicare Advantage Plans, also known as Medicare Part C, are combination plans managed by private insurance companies approved by Medicare. They typically are a combination of Part A, Part B and sometimes Part D coverage, but must cover medically-necessary services. These plans have discretion to assign their own copays, deductibles and coinsurance.

4. Medicare Part D is prescription drug coverage, and is available to everyone with Medicare. It is a separate plan provided by private Medicare-approved companies, and you must pay a monthly premium.

Getting Started

Medicare sends you a questionnaire about three months before you are entitled to Medicare coverage. Your answers to these questions, including whether you have group health insurance through an employer or family member, help Medicare set up your file and make sure your claims are paid correctly.

Coverage and Costs Change Yearly

Medicare health plans and prescription drug plans can change costs and coverage each year. Always review your plan materials for the coming year to make sure your plan will meet your needs for the following year. If you’re satisfied that your current plan will meet your needs for next year, you don’t need to do anything

More Information

Visit www.medicare.gov to get detailed information about the Medicare health and prescription drug plans in your area, find participating health care providers and suppliers, get quality of care information and more.

What are my Medicare Coverage Choices?

There are two main ways to get your Medicare coverage: Original Medicare or a Medicare Advantage Plan.

 

 

 

Use the following chart to help you decide how you want to get your coverage:

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Learn More: Long Term Care

Read what Long Term Care is and how to prepare today for what it will cost down the line.

Long Term Care: Medicare

Long Term Care: Medicare

The Medicare program has three parts. Part A is Hospital Insurance (HI), Part B is Supplemental Medical Insurance (SMI), and Part D is the Prescription Drug Plan (PDP). Part A is financed by payroll taxes based on covered work before and after eligibility for Medicare. Part B (SMI) is partly financed by premiums and partly by the general tax revenues of the government. Medicare becomes available at the beginning of the month in which an individual reaches age 65, whether you are retired or still working. It is also available if one has been receiving Social Security disability benefits for two years or has a chronic kidney disorder.

Part A. Hospital Insurance

The amounts you pay for hospitalization change every year, depending on the increases in hospital costs. Amounts shown reflect those in effect for 2017. However, you never have to pay more than the actual charges.

Monthly Premium: Most people don’t pay a Part A premium because they paid Medicare taxes while working. In 2017, you pay up to $413 each month if you don’t get premium-free Part A. If you pay a late-enrollment penalty, this amount is higher.

Hospital Stays: On immediate admission the client must pay a deductible of $1,316 per stay. After the first 60 days you must pay $329 per day. After 90 days the co-insurance amount is $658 for each “lifetime reserve day.” After 150 days, you pay all costs. With each admission, you will need to pay another deductible charge.

Skilled Nursing Facility Care: You may qualify for nursing facility benefits if both your situation and the facility meet Medicare’s strict standards. Skilled nursing facility care is available only after a hospital stay of at least three days. It is important to note that custodial care is not covered. If you qualify, you pay nothing for the first 20 days of covered expenses, and for the next 80 days, you pay $164.50 per day. Benefits stop after 100 days.

Home Health Care: Care such as part-time or intermittent skilled nursing care, physical therapy, medical social services, medical supplies, durable medical equipment and some rehabilitation equipment may be covered if prescribed by a doctor. You pay 20% of the approved amount for durable medical equipment. A hospital stay prior to these benefits is not required.

Hospice Care: The patient can be charged $5 per prescription and 5% of the Medicare Payment per day for respite care, for no more than 5 days. However, if hospice is selected, all other Medicare benefits stop.

Part B. Supplemental Medical Insurance Benefits

In 2017 you pay for the first $183 of qualified charges for covered medical services. This is the deductible. After that, Supplemental Medical Insurance will pay 80% of covered expenses, subject to the maximum of the standard charges recognized by Medicare.

Monthly Premium: $134 – Premium will be higher if your yearly income is greater than $170,000 for those who file a joint tax return and $85,000 for those who file an individual tax return. If you pay a late-enrollment penalty, the monthly premium is higher.

Covered Services: Medicare Part B helps cover what is medically necessary including medical and other services, clinical laboratory services, home health care, outpatient hospital services and blood. In addition, Medicare Part B offers preventive services to help you stay healthy. See Medicare & You for a complete list of covered services.

Part C. Medicare Advantage Plans

A Medicare Advantage Plan (like an HMO or PPO) is another Medicare health plan choice you may have as part of Medicare. Medicare Advantage Plans may offer extra coverage, such as vision, hearing, dental, and/or health and wellness programs. Most include Medicare prescription drug coverage (Part D).

Medicare pays a fixed amount for your care every month to the companies offering Medicare Advantage Plans. These companies must follow rules set by Medicare. However, each Medicare Advantage Plan can charge different out-of-pocket costs and have different rules for how you get services.

Part D. Prescription Drug Plan (PDP)

Medicare offers prescription drug coverage for everyone with Medicare. Medicare will provide coverage to help you pay for both brand-name and generic drugs you need. To get Medicare prescription drug coverage, you must choose and join a Medicare drug plan. 

Medicare drug plans will be offered by insurance companies and other private companies approved by Medicare. There are two types of Medicare plans. 

• There will be Medicare Prescription Drug Plans that add coverage to the Original Medicare Plan, Medicare Private Fee-for Service Plans that don’t offer Medicare prescription drug coverage, and Medicare Cost Plans.

• There will also be prescription drug coverage that is a part of Medicare Advantage Plans (like a HMO, PPO, or a PFFS Plan) and other Medicare Health Plans. You would get all of your health care, including prescription drug coverage, through these plans.

If you have limited income and resources, you may get extra help to pay for your Medicare drug plan costs.

Your costs will vary depending on your financial situation and which Medicare drug plan you choose. All Medicare drug plans will offer at least the standard level of coverage below. Medicare drug plans may design their plans differently as long as what their plan offers is, on average, at least as good as the standard coverage described below. Some plans may offer more coverage for higher premiums.

Standard Coverage (the minimum coverage drug plans must provide):

If you join in 2017, for covered drugs you will pay:

• A monthly premium (varies depending on the plan you choose).

• The first $400 per year for your prescriptions. This is called your “deductible.”

After you pay the $400 deductible, here’s how the costs work:

• You pay 25% of your yearly drug costs from $400 to $3,700, and your plan pays the other 75% of these costs, then

• When your total costs exceed $3,700, your cost sharing is 45% of covered brand name drugs and 65% of covered generics, then:

• You pay 5% of your drug costs (or a small copayment) for the rest of the calendar year after you have spent $4,950 out-of-pocket. Your plan pays the rest.

Some plans may be called standard plans but may be designed so that the deductible is lower and the coinsurance is slightly higher. Other plans may charge copayments or set amounts instead of coinsurance.

In general, your out-of-pocket costs should work out to be about the same under these plan designs.

Source: Medicare & You 2017, U.S. Department of Health and Human Services and www.medicare.gov

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Learn More: Long Term Care: Medicare - Getting Started

Read what it takes to get started with Medicare for long term care.

Building Your Nest Egg: Understanding the Roth IRA

Building Your Nest Egg: Understanding the Roth IRA

There are numerous factors to consider when selecting an individual retirement savings plan. Regardless of whether you choose a traditional individual retirement account (IRA) or Roth IRA, planning for retirement is always a step in the right direction. To learn more about the Roth IRA and help you determine if it’s right for you, review the basics below.

What is a Roth IRA?

A Roth IRA is a retirement savings plan that allows the plan owner to contribute after-tax dollars, and cultivate those funds through investments on a tax-free basis. Funds in a Roth IRA may be invested in stocks, bonds, mutual funds, annuities and, in some specific cases, real estate. They can also be purchased from banks, so that the underlying investments would be standard banking products such as CDs and bank money markets. When the plan owner wishes to retrieve funds from the plan in retirement, he or she is not taxed at the time of a distribution that is qualified. This is the primary difference between a Roth IRA and a traditional IRA. Traditional IRAs are taxed at the time of distribution, rather than at the time of contribution. In addition, Roth IRAs are not subject to required minimum distributions.

Who can contribute to a Roth IRA?

Anyone may contribute to a Roth IRA at any time throughout the year, as long as they are within the modified Annual Gross Income (AGI) limit requirements as set by the IRS. To be eligible to contribute to a Roth IRA in 2018, one must meet the following AGI limit requirements:

• If you are married and filing jointly, or you are a widow or widower, your modified AGI may not exceed $199,000.

• If you are filing as single, the head of the household or married filing separately and you did not live with your spouse in 2018, your modified AGI may not exceed $135,000.

• If you are married and filing separately, and you lived with your spouse in 2018, your modified AGI may not exceed $10,000.

How much may be contributed each year?

Like modified annual gross income limits, the IRS sets annual contribution limits each year. For 2018, contributions to a Roth IRA may not exceed the lesser of:

• $5,500 if you are under the age of 50 – or $6,500 if you are over 50 – minus other contributions to other IRAs that you make in the year, or

• Your taxable compensation minus other contributions to other IRAs that you make in the year.

If you exceed the contribution limit when funding your Roth IRA in any given year, you will be subject to a 6 percent tax that is applied to any excess contributions.

When can I retrieve my funds?

Since the sole purpose of the Roth IRA plan is to accumulate money for retirement, in most cases, it is best to leave the funds intact until at least age 59 ó, the age in which you may begin withdrawing from the plan without complication, as long as the Roth IRA has been established for at least five years. However, if you need to make an early withdrawal, you may typically withdraw from your Roth IRA contributions free of penalty, at any time, as long as you don’t withdraw from what you have earned from investments. If you withdraw more than what you’ve contributed, you will begin to dig into your earnings, which carries a 10 percent tax penalty on those distributions in addition to income tax on the earnings portion. You may not have to pay penalty in the following situations:

• If you are paying for qualified expenses associated with higher education

• If you suffer total and permanent disability

• If you are the beneficiary of a deceased Roth IRA owner

• If you have to pay for unreimbursed medical expenses that are more than 7 ó percent of your AGI

• If you are a first-time homebuyer and need up to $10,000 for costs

• The distributions are part of a series of substantially equal payments

• Distribution of the funds is due to an IRS levy

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Learn More: Building Your Nest Egg: Retirement Income Strategies

Read about how you can set up income strategies that will have a long-term effect for your retirement years.

Building Your Nest Egg: Traditional IRA vs. Roth IRA

Building Your Nest Egg: Traditional IRA vs. Roth IRA

TRADITIONAL IRA

Roth IRA

Up to $5,500 may be contributed annually with an additional catch up contribution of $1,000 available for individuals age 50 and older. Contributions may be tax deductible, but if either you or your spouse is an active participant in a qualified employer plan, your deduction may be reduced or eliminated depending on your modified adjusted gross income and filing status for the year.*

Up to $5,500 may be contributed annually with an additional catch up contribution of $1,000 available for individuals age 50 and older. Contributions are not tax-deductible.

Cannot make contributions past age 70 1/2.

Can make contributions past age 70 1/2.

A working individual not active in an employer-sponsored plan and a non-working spouse can each make annual contributions, as described above, without any income limitation.

The ability to make contributions are not affected by participation in an employer-sponsored plan.

An individual whose spouse is an active participant can make annual deductible contributions, as described above, with the allowable deduction for the year phasing out between a combined Modified Adjusted Gross Income (MAGI) of $189,000 and $199,000.

The deductibility of contributions for a married individual filing jointly and participating in an employer-sponsored plan phase-out with an MAGI between $101,000 and $121,000. The phase-out for single individuals who are covered by an employer sponsored plan is an MAGI between $63,000 and $73,000. For an individual who is married filing separately, the MAGI phase out is between $0 and $10,000.

The ability to make contributions are phased out for single persons with a Modified Adjusted Gross Income (MAGI) between $120,000 and $135,000, and for married couples, filing jointly, with an MAGI between $189,000 and $199,000. The contribution phase out for married couples filing separately is MAGI between $0 and $10,000.

Required Minimum Distributions (RMD) must begin by April 1 of year following attainment of age 70 1/2.

Required Minimum Distributions (RMD) are not required to begin when the owner reaches age 70 1/2.

Distributions before age 59 1/2 will be subject to ordinary income tax and a 10% penalty unless certain conditions are met.

Earnings portion of a distribution before age 59 1/2 is subject to ordinary income tax and 10% penalty unless certain conditions are met. 

Distributions after age 59 1/2 and after the Roth IRA owner’s qualified distribution five-tax-year holding period will be free of federal income taxes. 

Distributions after age 59 1/2 and before the end of the Roth IRA owner’s qualified distribution five-tax-year holding period will not be subject to a 10% early withdrawal penalty, but may be subject to ordinary income taxes. (After-tax contributions are withdrawn first, and no taxes are due until after all contributions are withdrawn and earnings begin being withdrawn.)

The 10% penalty will not apply for distributions for “qualified higher education expenses” for taxpayer, taxpayer’s spouse, children or grandchildren. It also will not apply for distributions up to a $10,000 lifetime limit for qualified first-time homebuyers expenses (expenses incurred by individuals who have not had an ownership interest in a principal residence for at least two years) if used within 120 days of purchase.

The 10% penalty will not apply for distributions for “qualified higher education expenses” for taxpayer, taxpayer’s spouse, children or grandchildren. It also will not apply for distributions up to a $10,000 lifetime limit for qualified first-time homebuyers expenses (expenses incurred by individuals who have not had an ownership interest in a principal residence for at least two years) if used within 120 days of purchase.

An account set up as a Traditional IRA can be converted to a Roth IRA without MAGI and filing status limitations. Taxes will be due on the deductible portion of the amount converted.

A contribution to an account or annuity set up as a Roth IRA, or amounts from a Traditional IRA that have been converted to a Roth IRA can be recharacterized to a Traditional IRA, provided the recharacterization is performed timely and all the applicable requirements are satisfied.

State taxes are generally paid on distributions.

 

 

In most states, there will not be any state taxes. Check your state for specific details because the state income tax treatment of your Roth IRA conversion and subsequent distributions may vary depending on your state of residence.

TRADITIONAL IRA

Up to $5,500 may be contributed annually with an additional catch up contribution of $1,000 available for individuals age 50 and older. Contributions may be tax deductible, but if either you or your spouse is an active participant in a qualified employer plan, your deduction may be reduced or eliminated depending on your modified adjusted gross income and filing status for the year.*

Cannot make contributions past age 70 1/2.

A working individual not active in an employer-sponsored plan and a non-working spouse can each make annual contributions, as described above, without any income limitation.

An individual whose spouse is an active participant can make annual deductible contributions, as described above, with the allowable deduction for the year phasing out between a combined Modified Adjusted Gross Income (MAGI) of $189,000 and $199,000.

The deductibility of contributions for a married individual filing jointly and participating in an employer-sponsored plan phase-out with an MAGI between $101,000 and $121,000. The phase-out for single individuals who are covered by an employer sponsored plan is an MAGI between $63,000 and $73,000. For an individual who is married filing separately, the MAGI phase out is between $0 and $10,000.

Required Minimum Distributions (RMD) must begin by April 1 of year following attainment of age 70 1/2.

Distributions before age 59 1/2 will be subject to ordinary income tax and a 10% penalty unless certain conditions are met.

The 10% penalty will not apply for distributions for “qualified higher education expenses” for taxpayer, taxpayer’s spouse, children or grandchildren. It also will not apply for distributions up to a $10,000 lifetime limit for qualified first-time homebuyers expenses (expenses incurred by individuals who have not had an ownership interest in a principal residence for at least two years) if used within 120 days of purchase.

An account set up as a Traditional IRA can be converted to a Roth IRA without MAGI and filing status limitations. Taxes will be due on the deductible portion of the amount converted.

State taxes are generally paid on distributions.

 

 

Roth IRA

Up to $5,500 may be contributed annually with an additional catch up contribution of $1,000 available for individuals age 50 and older. Contributions are not tax-deductible.

Can make contributions past age 70 1/2.

The ability to make contributions are not affected by participation in an employer-sponsored plan.

The ability to make contributions are phased out for single persons with a Modified Adjusted Gross Income (MAGI) between $120,000 and $135,000, and for married couples, filing jointly, with an MAGI between $189,000 and $199,000. The contribution phase out for married couples filing separately is MAGI between $0 and $10,000.

Required Minimum Distributions (RMD) are not required to begin when the owner reaches age 70 1/2.

Earnings portion of a distribution before age 59 1/2 is subject to ordinary income tax and 10% penalty unless certain conditions are met. 

Distributions after age 59 1/2 and after the Roth IRA owner’s qualified distribution five-tax-year holding period will be free of federal income taxes. 

Distributions after age 59 1/2 and before the end of the Roth IRA owner’s qualified distribution five-tax-year holding period will not be subject to a 10% early withdrawal penalty, but may be subject to ordinary income taxes. (After-tax contributions are withdrawn first, and no taxes are due until after all contributions are withdrawn and earnings begin being withdrawn.)

The 10% penalty will not apply for distributions for “qualified higher education expenses” for taxpayer, taxpayer’s spouse, children or grandchildren. It also will not apply for distributions up to a $10,000 lifetime limit for qualified first-time homebuyers expenses (expenses incurred by individuals who have not had an ownership interest in a principal residence for at least two years) if used within 120 days of purchase.

A contribution to an account or annuity set up as a Roth IRA, or amounts from a Traditional IRA that have been converted to a Roth IRA can be recharacterized to a Traditional IRA, provided the recharacterization is performed timely and all the applicable requirements are satisfied.

In most states, there will not be any state taxes. Check your state for specific details because the state income tax treatment of your Roth IRA conversion and subsequent distributions may vary depending on your state of residence.

Take the first step toward achieving your financial goals.

Learn More: Building Your Nest Egg: Understanding the Roth IRA

Dive deeper into the Roth IRA. Get tips on how to make your retirement fund work hard for your future through the Roth IRA.

The Future of Social Security

The Future of Social Security

In 1935, Social Security (the Old-Age, Survivors and Disability Insurance program) was introduced through the Social Security Act. Since then, retirees have used this as a reliable source of income to supplement retirement savings. The retirement age in which full social security benefits are payable is currently between the ages of 65 and 67, depending on your year of birth, while those who have reached age 62 are eligible for partial benefits. While the program has changed significantly since it was introduced, its goal has always been to provide a more stable income outlook for those that are retired or affected by disability.

Baby Boomers

The generation of Americans born from 1946 to 1964 has historically been called Baby Boomers. This generation will have a tremendous impact on the economy, strategy for investments and the future of social security. Beginning on Jan. 1, 2011, and every day for the next 19 years, it is projected that 10,000 baby boomers will reach the age of 65. In addition to the sheer number of baby boomers, the increase in life expectancy over the past few decades has caused the projected benefit obligations of the social security system to substantially increase.

 

Revenue and Expenses

While Social Security is not a business, the same concepts apply. For the system to continue operating functionally, it must generate a sufficient amount of income to cover the benefits that are paid out. In 2010 and 2011, Social Security expenditures exceeded non-interest income for the first time since 1983. This is expected to continue for at least the next 75 years under current circumstances. Thus, to continue the ability to fully pay all scheduled benefits, congress will have to either increase the revenues generated by social security taxes, decrease projected expenses or both. To generate income for Social Security funding, Congress enacted the FICA tax. Until recently, the income has been greater than payments, generating a surplus. This surplus has then been held in a trust fund, earning interest income. Any future funding shortfalls will be drawn from this trust fund.

Each year, the Trustees of the Social Security trust fund report on the financial status of the program. In 2012, the actuarial deficits were made worse because of updated economic data and assumptions. The Trustees determined that legislative modifications will be necessary in order to avoid disruptive consequences for beneficiaries and taxpayers. The primary goal of the report was to warn lawmakers not only about the extent of the issue of long-term projected shortfalls, but also that changes should not be delayed. Any additional delay will only make the problem worse and will reduce options available to lawmakers. One of the biggest issues with the program is that growth in program expenses is forecast to be substantially larger than GDP growth due to the aging population of baby boomers. Additionally, social security will be strained by the increasing life expectancy of its participants and growing health care costs in excess of GDP, and Social Security costs as a percentage of GDP are projected to increase from 4.2 percent in 2007 to 6.4 percent in 2035. With projected future shortfalls, the trust fund is projected to run out in 2033 (three years earlier than in 2011). While this is alarming, FICA tax is still projected to cover roughly 75 percent of schedule benefits after the fund is depleted.

Future

Changes to Social Security that would help solve future funding shortfalls (increasing income, decreasing expenses or both) are difficult, but necessary. Further complicating this issue is political matters. Neither political party would like to be seen as responsible for raising FICA taxes or extending the retirement age. However, changes to the system are necessary in order to extend the availability of fully funded benefits and therefore appear inevitable. While no material discussions are ongoing regarding changes to the system, the simplest change to help combat future shortfalls would likely be an increase in retirement age. The main reason for this is that changes have not been made to the Social Security retirement age since the early 1980s. Life expectancies have continually increased, rising above 78 years in 2011. Additional possible changes could include raising the FICA tax to higher levels, raising/eliminating the income limit for FICA taxes, introducing means testing and many more.

Effect on Financial Planning

The effect of the uncertain future of Social Security on financial and retirement planning is tremendous and should be taken into account by everyone, regardless of age. Based on the projections outlined by the Social Security Board of Trustees, there is a marked difference in the effect this uncertainty will have on different generations. For those already in retirement, while it is possible that benefits could be changed to reduce expenditures, it is highly unlikely that changes would be made for anyone already retired. With benefits still projected to be fully provided through 2033, any potential benefit shortfalls are relatively unlikely to affect individuals that are already retired. With a high likelihood that Social Security will be changed to solve funding shortfall problems, it is reasonable to rely on this income source for the rest of your life. 

Individuals near retirement have less certainty about the future of social security, as the projected future shortfall in the Social Security trust fund in 2033 will likely be within your planning time frame. The high likelihood that some Social Security regulations will change in the near future will make it extremely likely that this projection will change for the better. If you are near retirement, most of your investment decisions related to retirement have already been made. As a result, future changes in social security may have little impact on your retirement plan. However, it may be beneficial to analyze the potential scenario (however unlikely) that no changes are made and only 75 percent of projected income is realized from this source after 2033.

For people who are far from retirement, any future changes to the structure of social security will alter the projections for the viability of future payouts. This uncertainty means that a contingency plan to cover cash flow shortfalls should be in place, just in case Social Security benefits are reduced. It is important to remember that even if no changes are made and the Social Security trust fund is entirely depleted, 75 percent of benefits are still projected to be paid from ongoing taxes. Projecting cash flow under the assumption that only 75 percent of benefits are paid would be helpful to determine whether your savings will be enough, even in this scenario. An increased focus on saving personal funds would decrease the risk of not having enough resources to achieve retirement goals.

Take the first step toward achieving your financial goals.

Learn More: Long Term Care

Read about what Long Term Care really means and the projected costs that you may face when you get older.