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Medicare Part D (Prescription Drug Plan)

By Justin Fundalinski, MBA | August 20, 2016

Medicare Part DWith open enrollment for Medicare around the corner (October 15 through December 7th) maybe it’s time to start talking a bit about some important things to be looking out for.  Rather than trying to write an all-encompassing article about Medicare, let’s start with one part of Medicare, specifically prescription Part D.

What is Medicare Part D?

As you may already know, Medicare has its many parts. Part D is specific to prescription drugs. An easy way to remember it is that D is for drugs.  The intent of Part D is to subsidize the costs of prescription drugs and insurance for Medicare beneficiaries.

Part D comes in a couple different forms.  One can either enroll directly into a Part D plan (of which there are many different insurance providers that provide Part D insurance plans) or they can indirectly be enrolled in a Part D plan by joining a Medicare Advantage Plan[1] (Part C) that includes prescription drugs as a benefit.

In order to be eligible for a Part D plan one must be enrolled in the traditional Medicare Parts A and B (essentially insurance for hospital and doctor’s visits).

What is a formulary?

The Centers for Medicare and Medicaid Services (CMS) does not have a set list of drugs (aka formulary) that must be covered in a Part D insurance product.  What they do have is a list of drugs that are not covered[2] by Part D. That said, one of the most important aspects of choosing the right Part D insurance provider to understand what drugs the plan will cover.  The best thing you can do when shopping for a prescription drug plan is not to focus primarily on premium cost, rather to first ensure that the drugs you need are covered under the insurance plan’s formulary.

Examine the formulary annually:

Choosing the right prescription plan in the first place does not mean you are good to go.  Prescription drug plans can and do change their approved drugs from year to year[3], not to mention you may be prescribed new drugs throughout the year. Come open enrollment, it is imperative you check that all drugs prescribed to you (or possibly will be prescribed) are on the approved list. If not, you can consult your doctor to see if there are alternative drugs that are offered in the formulary will meet your needs, or you can begin shopping for a new Part D plan.  You can ease the process of comparing each and every Part D insurance plan by entering the drugs you take at medicare.com and letting them search for programs that cover your prescriptions.

Remember, insurance companies strike deals with prescription drug companies to lower costs and they may require substitutes (generic or brand name) for the current drugs that you and your doctor feel comfortable with.  Always consult your doctor about substitute drugs that may lower your costs without affecting your health.

Manage the Doughnut Hole:

The doughnut hole is a point in prescription drug coverage when your 25% co-insurance ends (a feature of Part D plans) and you no longer receive any assistance from the insurer until you reach a point called “catastrophic coverage.”  During this middle ground your prescription drug plan does not cover any of your costs and you pay entirely out of pocket.  While this hole in coverage is getting phased out with the Affordable Care Act, it still exists and could be cause for substantial out of pocket expenses.  Some plans mitigate the doughnut hole but will manage the risk for loss in other ways like raising your premiums or co-payments.  Shop for a plan that not only fits your prescription drug needs best, but also manages all of the costs behind them.

In Conclusion:

As a quick update to what’s happening in the office – Andrew, who was hired on because of his Medicare background, has been studying with the Medicare Rights Center to bring to the office a new level of knowledge on various Medicare topics. While we are not currently selling or servicing any Medicare insurance products, we are happy to discuss this topic in more depth, review your current coverage and formularies, walk you through the Medicare website, etc….  Please do not hesitate to call if you have any questions or need help with Part D or other Medicare issues. We are always happy to point you in the right direction.

[1] Medicare Advantage plans are beyond the scope of this article.  We can save that discussion for a later date.

[2] This includes drugs for weight loss or gain, fertility, erectile dysfunction, cosmetic purposes, symptomatic relief of cough and colds, prescription vitamins and mineral products.

[3] Those enrolled in Part D receive an Annual Notice of Changes (ANOC) each September.  The ANOC details changes in formulary to the existing plan for the coming year.

Trickle-Down Taxes

By Justin Fundalinski, MBA | July 15, 2016


We have all heard about trickle-down economics – in its most basic sense it argues that over time tax breaks for large corporations and investors (the wealthy) will stimulate economic growth as they will be able spend more money in the economy rather than on taxes. Well, I have decided to coin a new term called trickle-down taxes – in its most basic sense I argue that tax law changes can get overwhelming bi-partisan support if they are presented to look like a tax on the wealthy, however over time because of how the tax is designed it slowly drags in and affects large proportions of the middle class.  In this month’s newsletter I will give a historical example of how this has occurred with Social Security taxation and a more contemporary example of how this is occurring with Medicare Premiums.

Social Security Example:

First, some history

In 1983 amendments were passed and Social Security first became taxable in 1984.  These changes were branded by Ronald Reagan, Alan Greenspan, and a bi-partisan congress as a way to shore up Social Security so that it would exist in the future.  Then in 1993, during massive budget reconciliation, Vice President Al Gore cast the deciding vote for a deadlocked congress (50/50) to bring Social Security taxation laws to their current state and was signed into law by President Bill Clinton.  This change was directly branded to affect only “higher income” beneficiaries.

Second, some cynicism

What really was not brought to directly to the public’s attention were the sneaky little details of these tax law changes that would over time effect more and more people than the “higher income” beneficiaries it was branded to affect.

Last month I went into a lot of detail about how Social Security income is currently taxed.  I discussed specifically how Social Security taxation gets phased as a comparison of “Provisional Income” to a “Base Amount” and an “Adjusted Base Amount.” Typically, when tax rules are phased in/out they are based off a figure made up in the law (i.e. Roth IRA contribution limits) and this figure is usually adjusted for inflation every year so that as inflation affects income levels the tax impact does not grow year over year. Unfortunately, when it comes to the Base Amount and the Adjusted Base Amount, these figures are not adjusted for inflation.  They remain the same indefinitely!

Third, some numbers behind my cynicism

Let’s just look at the Base Amount (which was established in the 1983 amendment) and Adjusted Base Amount (which was established in the 1993 budget reconciliation).  In 1983 any married couple that had Provisional Income greater than $32,000 would have their taxable Social Security income phased in up to a maximum of 50%.  Had this figure been adjusted for inflation like most tax phase in/outs, it would have grown to over $72,000(assuming an average 2.5% inflation rate for simplicity)! But no, currently in 2016 the Base Amount still sits at $32,000! So, this year and all future years, any married retirees that have Provisional Income greater than $32,000 gets affected by this tax.  This very concept also applies to the Adjusted Base Amount.

You can see how these law changes seemingly only affected high income retirees when they were established, but now in 2016 they affect more and more of the middle class.  Given more time, I am sure that nearly everybody with a Social Security benefit will be affected.

Medicare Example:

Back in October 2015’s newsletter I spoke extensively about Medicare premiums.  To sum it up, there are five different Medicare premium levels and they are based on the income levels of the Medicare recipient.  The first bracket is the most common and the majority of people fall into this category. However, if someone earns too much income in a year they are forced into what is called an “Income Related Premium” and must pay higher Medicare premiums.

Historically, these Medicare brackets have been adjusted for inflation and would grow proportionately as income naturally would grow. However, these brackets became “frozen” under the Affordable Care Act (AKA Obamacare) and are intended to remain frozen only until 2019 (I’m not a betting man, but I would put money on it that 2019 is a hopeful dream).  So what are the affects?  Well, as income grows and the brackets remain frozen, more and more people are forced into higher Medicare premiums. According to a Kaiser Family Foundation study, it is estimated that between 2013 and 2019 the percentage of Medicare beneficiaries that must pay income related premiums will nearly double from 4.6% to 8.3%.

Imagine what will happen if these brackets remain “frozen” indefinitely.  More and more people will be forced to pay Income Related Premiums. It seems like only high income earners are affected by this effective tax on Medicare premiums right now, but give it some time and it will begin to look eerily similar to what happened with Social Security taxation.

Trickle-Down Taxes:

As you can see from the Social Security and Medicare examples above, if a tax law is designed in a way that it disregards the effects of inflation on income, over time the tax will trickle-down from high income earners/retirees to the majority of the population. Trickle-down taxes are essentially a way to increase taxes every year without having to publicly announce an income tax hike.

In a stretch for irony, one might find it entertaining that my concept of trickle-down taxes is first evidenced in 1983 under a supply-side economic policy under President Reagan (AKA “Reaganomics”).  Supply-side economics is essentially trickle-down economics.

If you have any questions please feel free to contact us at the office.

Taxation of Social Security Benefits

By Justin Fundalinski, MBA | June 22, 2016

Taxation Social Security

There has been a lot of talk around the office and with clients about taxation of Social Security benefits. Since we are talking about taxation, we are talking about Internal Revenue Code (IRC), and we all know that the IRS likes to make things a clear cut as possible**[1].  In this week’s news article I attempt to break the concept down for one main reason; taxation of Social Security is overly complicated but it’s very important that retirees have a minimum knowledge of it so they can understand some advanced tax and financial planning strategies that revolve around Social Security taxation . In future articles I will explain some of these planning strategies.

The Summary

Up to 85% of Social Security is taxable.  Keyword “taxable”; the amount of your Social Security that will be included as income which will then be taxed at your applicable tax rate.  Something to understand here is even if someone’s taxable Social Security is at the maximum of 85%, Social Security income still has tax preference because the remainder 15% is not taxed at all.

There are thresholds that the IRS has set that phases in how taxable Social Security is:

  • If Provisional Income (defined below) is less than the first threshold Social Security is not taxed at all.
  • If Provisional Income is less than the second threshold 50% of Social Security could be taxable.
  • If Provisional Income is greater than the second threshold 85% of Social Security could be taxable.

Of course, finding out how much Social Security is taxable is made easy with a short 18 step form provided by the IRS**.  If you took the time and went line by line on the form you would likely come up with the correct taxable amount, but you was also have no idea as to why that figure is correct (and if you don’t know why its correct, you don’t know how you can strategize around it!)

The Calculation

This is my attempt to break down the 18 steps into a few concepts to help you understand how taxable Social Security is really calculated. I warn you, this reading gets a little technical!

First, “Provisional Income” must be determined.  This is fairly easy and can be done by adding up the following:

  • Half of the Social Security benefits received
  • All other taxable income (i.e. pension, wages, annuity, IRA[2] and 401k distributions, etc.)
  • All tax exempt interest (i.e. municipal bond interest) and other excluded income.

For example, if George received $20,000 in Social Security benefits, withdrew $21,000 from his traditional IRA, and received interest of $1,000 from a municipal bond holding, he would have provisional income of $32,000 ($10,000 + $21,000 + $1,000)

Second, a comparison needs to be made between Provision Income, the “Base Amount” and the “Adjusted Base Amount.” This comparison will then guide you on how the calculation is made. Things start getting a little wonky here, but below you find it explained in the most comprehendible manner that I could come up with.  Let’s start with some figures on what the Base Amounts and Adjusted Base Amounts are and then we can apply some concepts on what they represent.

Filing Status Base Amount Adjusted Base Amount
Single  $ 25,000  $ 34,000
Married Filing Jointly  $ 32,000  $ 44,000
Married Filing Separately (lived apart)  $ 25,000  $ 34,000
Married Filing Separately (lived together)  $ 0  $ 0


How It Basically Works

Provisional Income Less Than Base Amount

If provisional income is less than the Base Amount then no Social Security benefits are taxable.

This is fairly simple to understand. If half of your Social Security plus all of your other income is less than the Base amount that corresponds with your filing status then you won’t owe any taxes on your Social Security.

Provisional Income Between Base Amount and Adjusted Base Amount

If provisional income is between the Base Amount and the Adjusted Base Amount then 50% of the Provisional Income that is in excess of the Base amount is taxable and this amount cannot exceed 50% of the Social Security benefits received. For example:

If George – a single taxpayer – had $32,000 of provisional income then he would be above his Base Amount by $7,000 ($32,000-$25,000) but less than his Adjusted Base Amount.

If his Social Security benefit was $20,000 (as we talked about earlier) then no more than $10,000 (half of the $20k benefit) could be taxable.

Since 50% of the excess provisional income over the base amount ($3,500 – Half of $7,000) is less than $10,000 he would have to include $3,500 of his Social Security benefits as taxable income. Had half of the excess provisional income been greater than $10,000 the taxable Social Security would have been capped at $10,000.

Provisional Income Greater Than Adjusted Base Amount

If provisional income is greater than the Adjusted Base Amount – well… things get ugly. Just remember the highest percentage of Social Security benefits that are taxable is 85%. If you want to understand the nitty gritty then read the example below:

Assume George – our single taxpayer – still has the same Social Security benefit but now has $62,000 of provisional income (maybe he took an extra $30,000 out of his IRA to buy a new car).

First, we need to find out 50% of the difference between the Adjusted Base Amount and the Base amount. In his case this figure is $4,500 (50% of $34k minus $25k).

Second, we need to find out what 85% of the amount of excess provisional income is over the Adjusted Base Amount. In his case this figure is $23,800 (85% of $62k minus $34k).

Third, we need to add these figures together to get a tentative taxable amount and see if it is greater than 85% of his Social Security benefits. Tentative taxable amount is $4,500 + $23,800 = $28,300. 85% of his Social Security benefits is $17,000 (85% of$ 20k), so he would have to include $17,000 of his Social Security benefits as taxable income.  If his tentative taxable amount was less than $17,000 then he would have been able to use the lesser amount.

Congratulations on making it through the convoluted path of Social Security taxation.  It took me many times to make sense of it all so if the concepts are still unclear you are not alone.  However, if you are interested in learning more about this or wondering how you can optimize the taxation of your Social Security benefits please feel free to reach out to the office.

If you have any questions please feel free to contact us at the office.

[1] ** Indicates attempts at overt sarcasm.

[2] Note that ROTH distributions are generally excluded from this.

Long Term Care Stats

By Justin Fundalinski, MBA | May 20, 2016

Long Term Care Stats

Now that my family is covered by a robust health insurance plan I have decided to visit the doctor for a litany of things that I have been putting off for a while (apparently high deductibles work and I have avoided the doctor for years). Don’t worry, I’m in good health.  However, with all of my visits to the waiting room, long term care has come top of mind.  I guess with my knowledge of LTC insurance I’ve become more cognizant of long term care situations when they pass me in my day to day life – and man oh man, a medical waiting room is a melting pot of long term care cases.  As I waited for my name to be called, I found myself “Googling” incessantly to see if the person across from me was the reason long term care is so expensive. Aside from answering my questions, some tangential articles caught my interest and I thought it would be some nice information to share. Welcome to the May Newsletter- a few Long Term Care stats and a few opinions.

Handful of Medical Issues

The American Association for Long-Term Care Insurance reported some interesting stats in 2011.  Below you will find some of the top reasons people have placed long term care claims (figures are approximate):

  • 25% are due to Alzheimer’s disease.
  • 10% are due to one of the four following conditions – Stroke, Arthritis, Injury, or Circulatory problems
  • 8% are due to cancer.
  • 6% are due to nervous system related issues.
  • 5% are due to respiratory issues.

What I glean from the above stats is as follows. Far too many people don’t want to insure for long term care issues because “come hell or high-water” they will never go to a nursing home!  Well, if one has Alzheimer’s (the primary cause for claims) do you think they are making any decisions about how they will receive care? No! Or, do any or all of the top causes for long term care claims even require nursing home or facility care? No!  These stats simply reinforce to me that long term care is NOT synonymous with nursing home and no long term care plan (insurance or not) should be made without proper education on why somebody may need long term care.

Woman’s Issue

According to the American Association for Long-Term Care Insurance, women make up:

  • 70% of nursing home residents.
  • 75% long term care community residents.
  • 66% of formal and informal in home care recipients

The reasons for these outstanding statistics are fairly obvious. Women live longer than men.  We all know this, but what we don’t know is that this added longevity causes more than two thirds of Americans over the age of 85 to be women.  Looks to me like a pretty large demographic of long term care candidates. It becomes obvious to me why long term care insurance providers charge so much more for women than it does men.  (Don’t believe me on this bias – call for some quotes, or better yet google it)

A lot of people need long term care.

According to longtermcare.gov, “70% of people turning age 65 can expect to use some form of long term care during their lives.”  70% is a daunting number and doesn’t really tell us the duration or level of care needed, but nonetheless making a plan and hedging your bets is probably a good idea.


What is an Enrolled Agent?

By Justin Fundalinski, MBA | April 15, 2016

Enrolled Agent

Next year, Jim Saulnier and Associates will be expanding its services into the realm of taxes.  The net result of this is that I have decided to move forward with an Enrolled Agent (EA) designation from the IRS.  Unfortunately, not too many know what an EA is, so why not inform our monthly readers on the topic?  This month, I will be discussing what an EA is, what it takes to become an EA, and how we intend to implement this license into the business.

What is an Enrolled Agent?

According to the IRS, “An Enrolled Agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service. Enrolled Agents, like Attorneys and certified public accountants (CPAs), are generally unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before.”

Do I plan on doing much representation of tax payers in front of the IRS? Not really, but it’s possible.   However, one can deduce from the definition that an EA has been through some rigors to even be allowed such representation privileges, and those rigors will be what is more applicable in my practice.

What it takes to be an Enrolled Agent:

To become an EA one has to pass three tests administered by the IRA (cumulative called the Special Enrollment Examination). In the most basic measures, each part is as follows:

  • Part 1 – Individual Taxation
  • Part 2 – Business Taxation
  • Part 3 – Representation, Practice and Procedures.

To maintain an EA license once it has been earned, 72 hours of continuing education credit must be completed every three years.

Why all the efforts?

Why go through the effort to obtain the EA designation? Because tax preparation (short-term) and tax planning (long-term) can be two different things, and there is often a disconnect between the two.

  1. We have listened to our clients and they are clamoring for tax preparation and advice from a professional that understands taxation in retirement. As many readers of this may already know, taxes don’t get easier in retirement and for the vast majority of retirees that we work with they get harder.
  2. The knowledge gained will provide us with a far stronger capacity to implement long-term tax planning and tax consultation services for our clients. For example, we will be better address:
    1. Yearly liquidation (withdrawal) strategies from assets to optimize client’s tax brackets throughout retirement.
    2. Social Security claiming strategies on a tax adjusted basis.
    3. Roth conversion strategies prior to retirement to maximize tax efficiency before and after retirement.
  3. Unfortunately, there is far too often a disconnect between current year tax advice and long-term tax/ financial planning. Tax planning advice can often be overshadowed by a current year tax burden and if the two are not done in conjunction with each other there is a greater chance one will be stuck with a higher tax liability in the future.

Wish me luck in my endeavors, and as always please feel free to reach out any time with questions on this article.

5 End-of-Life Planning Documents Everyone Needs

By Justin Fundalinski, MBA | March 15, 2016

End-of-life planning

Naturally, end-of-life planning [1] discussions can be difficult, but they play a critical role to a complete retirement plan.  A good plan will direct who makes decisions on your behalf when you cannot regarding medical, financial, and other general decisions, it will facilitate access to medical information to the appropriate people, it will guide extremely difficult decisions that must be made on your behalf in an end-of-life medical situation, and it will clearly state your wishes regarding how to handle your assets when you pass away.  We often focus on the financial planning side of the retirement equation, but there are several legal documents that are necessary to complete the equation. In this month’s post we give you a general overview of five of the more important legal documents that everybody needs (retiree or not).

End-of-Life Planning Documents:

  • Will: Reasons to have a will are endless. But considering that any well written will indicates how your estate will be distributed, who will take care of minor children, avoids lengthy probate processes, minimizes estate taxes, assigns your executor to administer your estate, disinherits those who may stand to inherit assets if you die without a will, and can be changed at any time, the merits of having a will a fairly self-explanatory.
    • Let’s face it, life happens! Because of this we recommend you review your will every 3-5 years with your estate attorney to ensure that it is up to date with your current wishes.
  • Durable Power of Attorney: This document ensures that someone you trust will be able to manage the many practical and necessary tasks in the event of you becoming incapacitated (or really at any time you need somebody to act on your behalf incapacitated or not). For example, bills need to be paid from your account, insurance and claims paperwork must be filled out, investments must be managed appropriately, etc…
    • Don’t skip on this one. Make sure you do not just check off boxes as to what authority you want somebody you have. Specifics make a difference!
    • Be sure your attorney itemizes every piece of real estate (even if it is just one) to ensure that your agent does not have any problems acting on your behalf for each individual property.
    • List specific powers regarding the ability (or not) for the agent to make changes to beneficiary designations on accounts, as well as what gifting privileges the agent is able to make on your behalf.
    • On an annual basis, reaffirm this document with a notary so that custodians and financial organizations know that the document is current and to help ensure that they will accept the document.
  • Living Will or Healthcare Directive: This document has absolutely nothing to do with property. The purpose of it is to let people state their wishes for end of life medical care in the case that they become unable to communicate their decisions. In essence, it simply spells out your healthcare preferences in specific regards to deathbed issues. It is important because it will avoid painful disputes between family members and/or physicians who are forced to guess a seriously ill persons wishes and treatment preferences.
    • Again, life happens and opinions change. You should also review and update these documents with your attorney every 3-5 years.
  • Medical Power of Attorney: This document appoints someone that you trust to be your Healthcare Proxy to make necessary healthcare decisions on your behalf.  This is different from the Living Will because it is not specific to deathbed issues.  That is, just because you need someone to make a medical decision on your behalf, it does not mean that it is a life or death decision.
  • HIPAA Privacy Authorization Form: Part of the Health Insurance Portability and Accountability Act (HIPAA) was created to protect the privacy of health information. Unfortunately this Act also keeps information out of the hands of people that you want to information released to.  In an emergency situation the last thing a family needs is an Act of Congress blocking critical information being passed on to the people that care about you most. This situation can easily be avoided with a HIPAA Privacy Authorization Form being filled out in advance. Notably, the person that is your agent for a Medical Power of Attorney has the right you access medical records with various limitations defined by HIPPA (for instance mental health records cannot be accessed unless specifically stated).

With all that said, hopefully you can say that you have all your t’s crossed and i’s dotted.  However, from experience, I know that most readers cannot say their estate and end of life plan is complete AND up to date. If you are one of the many, waiting until tomorrow is not recommended and if you do not have a competent estate attorney in mind feel free to reach out to our office as we are happy to make some recommendations.


[1] Jim Saulnier and Associates is not a legal firm and we do not provide any specific legal advice. If you have questions regarding specific estate planning or legal topics we recommend you consult a knowledgeable attorney in this field.

Secure Income Options – Social Security vs Annuity

By Justin Fundalinski, MBA | February 15, 2016

Secure IncomeAs many of our readers know, we are advocates of ensuring there is enough secure income[1] to fully cover a retiree’s required expenses[2].  The reasoning behind this concept is that in a “worst-case” scenario in which a retiree’s assets become depleted  (due to overspending, poor market performance, extended longevity, etc.), they are able to maintain a reasonable standard of living that is maintained by the monthly income generated from there secure income sources. That is, with enough secure income a retiree can rely on the safety and security of their secure income sources just as they relied on the safety and security of their paycheck while they were in the working force.  Unfortunately, generating enough secure income can be a difficult task and it requires hard decisions early on in retirement.  Most often, one of the key recommendations that we make currently is to delay Social Security.  Recently, we were asked to defend that recommendation against turning on Social Security income at Full Retirement Age (age 66 in this case) and supplementing it with annuity income to offset any income difference that an earlier Social Security claim would create.  This month’s article is an overview of this case and our defense!

The Options:

  1. Claim Social Security at age 70 and begin collecting approximately $40,700 annually of inflation adjusted[3]
  2. Claim Social Security at age 66 and begin collecting approximately $28,200 annually of inflation adjusted income. To offset the income gap from claiming early, approximately $8,700 annual inflation adjusted annuity income is purchased.[4]

The Primary Costs:

  1. The cost of delaying Social Security in this case is the forgone income that could be generated from claiming Social Security early as well as the income generated from the annuity. The four years of lost income adds up to $147,400 (adjusted for inflation).  This $147,400 is the cost of delaying Social Security.
  1. The cost of turning Social Security on early and purchasing the annuity is rather easy to calculate. It is the premium of the annuity. In this particular case a 66 year old Colorado female was quoted a premium of $188,500.  This $188,500 is the cost of turning on Social Security on early.

When you look at the costs it seems like delaying Social Security is a clear winner as it is about $40,000 less expensive than purchasing an annuity.  However, we recognize that this is a hard concept to follow so think about it like this; at age 66 this person could do one of two things:

  1. They could take $147,000 (maybe a bit more to cover the inflation adjustments) and place it in a bank. Each month they can take out the amount that Social Security and the annuity would pay them.  By age 70 this account would run out and their Social Security would turn on for the equivalent amounts being withdrawn.
  2. Or, they could turn their Social Security on and take $188,500 and buy an annuity.

The end income result is essentially the same. The question is would you rather give $147,000 to the bank so you can pay yourself or give $188,500 to an annuity company?

The Secondary Costs:

Social Security is a unique income source when you consider how it is taxed.  Unfortunately, to explain in detail how Social Security is taxed would take a lot more time than I can dedicate in this article. However, to sum it up, depending on the amount of Social Security and other income sources that one receives, the amount of Social Security income that actually gets taxed ranges between 0% and 85% (that is, a maximum of 85 cents out of every Social Security dollar received could be taxed at one’s marginal income tax rate) .  A better way to think about it is the more taxable income someone has on top of Social Security the more Social Security income that will be taxed.

What I am getting at here is, the more income that is generated by Social Security as opposed to other taxable sources the less taxes one will likely pay.  So, depending on what type of asset is used to purchase an annuity can make a substantial tax impact.  Considering we are dealing with retirees who generally have the majority of their assets in Traditional IRAs or 401(k)s any annuity income purchased with these “qualified” assets would be subject to ordinary income taxes and would likely increase the amount of Social Security that is taxable.

Another side effect that could occur if more income becomes subject to taxation is that an individual could be pushed into a higher marginal tax bracket.  Depending on what tax bracket they are in this could not only cause taxes on income to be higher, but is could also cause taxes on capital gains to increase. 

The Tertiary Costs:

The fact is that retirement is an emotional hurdle. We get it!  Some people just feel better once their secure income is turned on and they are receiving a check every month for the rest of their life. Our only stance on the emotional cost of waiting longer to turn Social Security on is this:  It’s the retiree’s choice in the end, our job is only to explain the financial costs of the different options out there.  We are not in the business of telling retiree’s how to feel.

A key takeaway from this article is that not all retiree’s secure income needs are the same so this is not an overarching discussion regarding the best way to file for Social Security.  Also, Social Security income is not calculated based off of current interest rates like the annuity income is. In the future when interest rates are higher, it may very well make more sense to supplement Social Security income with annuity income as opposed to delaying Social Security.  For more information regarding this topic please view our February 2015 article regarding this very topic.


A Fixed Annuity is a long-term financial product designed largely for asset accumulation and retirement needs. Fixed Annuities generally contain fees and charges which include, but are not limited to, surrender charges, administrative fees and for optional contract riders and benefits. Withdrawals and death benefits are subject to income tax. If withdrawals and other distributions are received prior to age 59 ½, a 10% penalty may apply. Fixed Annuities typically carry surrender charges for several years that may be assessed against withdrawals. Certain Fixed Annuity product features, offered by some Fixed Annuity companies, such as stepped up death benefit, a bonus credit and a guaranteed minimum income benefit, carry added fees. If you are investing in a Fixed Annuity through a tax-advantaged plan such as an IRA, you will get no added tax advantage. Under these circumstances you should only consider buying a Fixed Annuity if it makes sense because of the Fixed Annuities other features, such as lifetime income payments and death benefit protection. All guarantees of a Fixed Annuity are backed by the claims paying ability of the issuing insurer.


[1] Our definition of Secure Income is an income stream that (1) is predetermined and known; there is no ambiguity with how much income you will receive throughout your retirement; (2) your income can never be cut, it can only increase and (3) the income is not backed by your assets alone, it is backed by a third party

[2] A Required Expenses is an expense if you don’t cover you will suffer an economic, financial or medical hardship. Required Expenses by their very definition are difficult to cut or reduce and must be fully covered until mortality with inflation adjusted guaranteed income.

[3] Note that we cannot predict what the inflation adjustments will be, but for the sake of this analysis we have assumed an average COLA (cost of living adjustment) of 2.5%

[4] You might be saying to yourself, “Now wait a minute – $28,200 plus $8,700 does not add up to $40,700.”  You are right and you are wrong!  Remember that this income is being turned on at age 66 and is adjusted for inflation.  Remember, we want this income to match the income that could be generated at age 70 from Social Security.  Four years after this inflation adjusted Social Security and Annuity income is turned on it is combined income of about $40,700.

Child-In-Care Spousal Benefit

By Justin Fundalinski, MBA | January 15, 2016

Child-in-care spousal benefit

Between our Social Security blog, our Radio Show/podcast, and conversations in the office, we have discussed Social Security benefits for spouses an innumerable amount of times. However, there is an offshoot of spousal benefits that we have not covered in much detail; that is, Child-In-Care Spousal Benefits.  Really, it’s the same spousal benefit we know and love but the qualifier to receive the benefit and the calculation of the benefit amount is what makes it special.  In this month’s post I am going to briefly cover some of the details around this “special” spousal benefit.

What is the Child-In-Care Spousal Benefit?

As I mentioned in the introduction the Child-In-Care Spousal Benefit is no different than the standard benefit for spouses, however it has few caveats that make it a very unique filing option.  Remember, when a worker files for Retirement Benefits (based off of their own earnings record), the worker’s spouse could be eligible for a Spousal Benefit based off of the worker’s earnings.  Keyword “could.”  More often than not, what makes the spouse eligible is they are at least age 62.  However, there is another qualifier that entitles the spouse to benefits; that being they have a child who is under the age of 16 in his/her care.

How much is the Child-In-Care Spousal Benefit?                                                

The interesting part about Child-In-Care Spousal Benefits is that it deviates substantially from how “normal” Spousal Benefits are calculated.

Keep in mind the “normal” calculations in a Full Retirement Age scenario for a spouse.  Once a worker files for their retirement benefit their spouse is eligible for a maximum of half of the workers Full Retirement Age benefit amount (a.k.a. Primary Insurance Amount).  However, if the spouse claims before their own Full Retirement Age (anywhere between 62 and Full Retirement Age) they are subject to a permanent reduction of their benefit.

On the contrary, when a spouse has a child-in-care that is under the age of 16 the calculation is much simpler.  No matter when the spouse claims he/she will receive half of the worker’s Full Retirement Age benefit (Primary Insurance Amount). That is, there are no reductions.  Also, note that a spouse with a child-in-care can claim their benefit at any age as long as the worker has filed for their retirement benefit and the child is under age 16.  However, as with every aspect of Social Security there is a twist.  The benefit amount is subject to a family maximum and considering all of the family benefits involved in a case like this there will be a child or children that is/are eligible for a benefit of their own. So the actual amount paid to the spouse and child(ren) will be limited by this family maximum and they will split the benefit proportionally.  (Keep in mind the child(ren) is/are a minors, so any benefit paid to the child(ren)will actually be paid a parent and must be spent for the benefit of the child(ren).

Unique About the Benefit

What is very unique about the Child-In-Care Spousal Benefit is that an early claim will not reduce the “normal” Spousal Benefit.  For instance, consider a 66 year retiree, a 62 year old spouse, and their 13 year old child.  The retiree can turn on their Retirement Benefits and the spouse can turn on his/her Child-In-Care Spousal Benefits (remember the child gets a benefit too- but we are not focusing on that in this article).The spouse will receive Child-In-Care Spousal benefit for the next 3 years (until the year the child turns 17), at which point he/she will be 66 and eligible to turn on their “normal” Spousal Benefit without any reduction to it.

What are the trade offs?

The tradeoffs between the standard claiming early and claiming later strategies is not as clear in regards to Child-In-Care Spousal Benefits (as well as Children’s Benefits) and needs to be weighed on a case by case basis. A case can be made for a worker/retiree to turn their own benefits on early to allow the spouse and child to claim some family benefits for a longer period of time. However, a case can also be made for the worker to delay at least to Full Retirement Age or even age 70 depending on what type of income security is needed in the later years of life.  There is no doubt that having a child-in-care creates a very unique case where claiming early may quite possibly be a better option.

As always, if you have any questions please feel free to contact us at the office.


Social Security Tradeoffs

By Justin Fundalinski, MBA | December 15, 2015

Social Security Tradeoffs

It’s Not Just About Your Finances

In financial planning, the best advice is sometimes counterintuitive or difficult to conceptualize.  Social Security tradeoffs and the merits of delaying Social Security for a higher benefit have been iterated over and over, but there should always be a discussion beyond the complicated financial projections that focuses on preferences, opinions, and tradeoffs. Specifically, there are a few key topics that will help a retiree decide what is best (beyond a financial projection) when it comes to claiming Social Security/funding your retirement lifestyle. The key items to discuss are the tradeoffs of generating a higher Social Security benefit, your opinions and family history in regards to longevity, and one’s personal feelings regarding the possibility and effects of outliving their assets.

The Tradeoffs:

The most substantial tradeoff for generating a higher Social Security benefit is the fact that a retiree will have to spend from their assets early in retirement. Because these large withdrawals are in the beginning of retirement a significant portion of the assets (the portion that is spent) will never have the opportunity to grow as an investment; thus putting a handicap on the overall lifetime value of the portfolio.  However, there are some tradeoffs that benefit this handicapped portfolio over the long run. Those tradeoffs are that a retiree will have to spend less from their portfolio once a higher Social Security benefit is turned on, that Social Security income is backed by the Federal Government (unlike an investment portfolio), and that Social Security income is taxed differently than other sources of income creating a smaller tax burden.

There are clearly many variables that come into play that will ultimately decide whether or not delaying Social Security was the best decision in regards to a retiree’s portfolio value and most of those variables become more important as longevity becomes a factor.


When it comes to longevity hindsight is always 20/20, but hindsight doesn’t help when a decision has to be made now that will affect the rest of one’s life.  As alluded to above, a retiree’s opinion on how long they expect to live plays an important role when deciding the best methods to fund retirement. Longevity will decide whether or not a late Social Security claiming strategy would indeed pay off not only when considering total Social Security income received, but also when you look at total taxes paid, retirement account drawdown rates, and the retiree’s perception/reality of financial security.  The math is fairly straightforward when it comes to estimating most of these considerations and an analysis can certainly help explain how much longevity is needed for one strategy to trump the other.  However, there is one key item that cannot be projected – that being the retiree’s perception and the reality of financial security.

Security If One Outlives Their Assets:

The key reason why delaying Social Security is often recommended is simple; to generate guaranteed income that is on par with expenses that cannot be cut.  If there is enough income to ensure that a basic standard of living is guaranteed, retirees have the freedom to spend their assets in a manner that they choose opposed to a manner that is dictated by the performance of equity and fixed income markets. With the appropriate amount of guaranteed income (often referred to as Secure Income at the office) the freedom to spend assets as one chooses and to override the risk of becoming destitute becomes a real possibility.  However, without sufficient guaranteed income the potentials of poor market performance or overspending assets can wreak havoc on the later years of retirement.  The key point being made here is that when one perceives and has the reality of a certain level of financial security no matter how quickly they spenddown their assets, it is more likely that they will be able to enjoy their retirement rather than worry about their retirement and every dollar they spend.

The Million Dollar Question:

Are the upfront tradeoffs on portfolio value worth the perception and reality of a certain level of financial security?  Hopefully you and your retirement plan have considered this.


Congress Threw Your Social Security Claiming Strategies In the Trash!

By Justin Fundalinski, MBA | November 15, 2015


Social Security claiming strategies

The new budget law with bipartisan approval by Congress has effectively dismantled Social Security claiming strategies that retirees  and financial planners have come to rely on to generate steady and secure income throughout retirement.   Unfortunately, these changes will unequivocally impact those who have planned their retirement around certain expectations that Social Security claiming options would be available.   This article is meant to inform how the budget bill has reformed “restricted applications” and “file and suspend” claiming strategies as well as describe who may be impacted by this.

Restricted Applications:

Prior to the new law taking affect, Social Security claimants who are Full Retirement Age (ages 66-67) or later could choose to “restrict” their claim to only Spousal Benefits.   This restriction would allow them to claim their Spousal Benefit and delay claiming their Retirement Benefit until age 70. The late claiming of Retirement Benefits allowed the claimant to accrue “Delayed Retirement Credits” and enhance their Retirement Benefit by 8% per year.  Since a claimant could claim a smaller Spousal Benefit for several years and enhance their Retirement Benefit, this strategy was often coined the “Claim Now, Claim More Later” strategy.   See the timeline below for a simplified understanding of this strategy.


Social security restricted application prior



This simple strategy that allowed substantial growth of a Retirement Benefit is now off the table for anyone who is not 62 by December 31st, 2015[1].  The new law essentially extends what Social Security calls “deeming.”  Prior to the law, any claimant who filed for their benefit before Full Retirement Age was deemed (or forced) to claim the highest benefit available to them.  Basically, Social Security would turn on all of the benefits that the claimant is entitled to, cut a check to the claimant for the highest benefit available at the time, and disallow the opportunity to delay Retirement Benefits for further growth.  The new law now extends this concept beyond Full Retirement Age and applies it at all times for Spousal and Retirement Benefits.  This effectively eliminates the opportunity to “Claim Now, Claim More Later.”

It is imperative to note that that these changes do not include Widow’s Benefits, and that widows and widowers can continue to restrict their claim to Widow’s Benefits and delay claiming their Retirement Benefits. On the other hand Divorced Spousal Benefits are impacted by the bill, and the same new rules will apply regarding restricted applications. That is, if one is not age 62 on or before December 31st, 2015 they will not be able to restrict their claim to only Divorced Spousal Benefits and allow their own Retirement Benefit to grow.

See the timeline below for a better understanding of these changes.

Social Security restricted application after

File and Suspend:

Under current Social Security rules, once a claimant reaches Full Retirement Age they are able to file for their benefits, and at any time prior to age 70 they can suspend the payment of their benefit.  The reason someone would want to do this is because they have effectively filed for Social Security benefits which “unlocks” the opportunity for specific members of the family to claim a benefit using the earnings record of this person  (for example, someone can only claim their Spousal Benefits if their spouse has already filed for Social Security benefits .  At the same time, the suspension of benefits allows the claimant to earn the Delayed Retirement Credits of 8% per year.  Essentially, this strategy opens the door for someone to file a restricted application for Spousal Benefits without affecting the Retirement Benefits of the other spouse and allows for the accrual of Delayed Retirement Credits.

This strategy is especially helpful for couples in which one spouse had higher earnings throughout their lifetime than the other.  This is because it allows the higher earner to delay their claim, earn the Delayed Retirement Credits, collect a higher benefit while they are alive, and pass on the higher benefit as a Widow’s benefit when they decease.  See the timeline below for more details.

Social Security file and suspend prior



The new law has changed how benefits are “unlocked” for those who can claim on somebody else’s earning record.  Suspending benefits is still possible, however it is no longer the act of filing for benefits that unlocks this opportunity; rather, it is the act of receiving the benefit that does. In other words, suspending a Retirement Benefit also suspends benefits for those that can claim based on someone else’s earnings record.  In order for a higher earner to open up the door for their spouse to claim Spousal Benefits they would have to claim and receive the benefit, forfeit the Delayed Retirement Credits, collect a lower benefit throughout retirement, and pass on this lower benefit as a Widow’s benefit when they decease.  The claiming strategies and benefits around filing and suspending Social Security benefits have been erased.

May Also Apply to Divorced Individuals

Notably, this change may also apply to divorced individuals who are claiming on their ex-spouses earnings record. While we don’t expect this to be true, it is not clear in the bill how they will treat divorced spouse benefits in a file and suspend scenario. The final answer to this is pending and will likely be determined based on how Social Security interprets the new law.

Fortunately, the bill was amended from its original draft to allow those who have already filed and suspended or those that file and suspend within 180 days of this bill’s enactment to be grandfathered into the old set of rules.   While it is a fast timeframe for this rule to take place, it at least does not ruin the filing strategies that people already implemented.

Other Noteworthy Items:

  • Prior to the new budget law, any claimant that filed and suspended their benefit could choose to receive a lump sum payout of the benefits that they suspended and resume their benefit schedule as if they filed at Full Retirement Age. For example, this strategy may have been utilized by a single recipient who decided to file and suspend their benefits with the intent to earn Delayed Retirement Credits, but also give them the opportunity to back out and receive a lump sum of the “missed payments” if the money was need or wanted (as may be in the case of a diagnosis of a terminal illness).  Lump sum payments from suspended benefits are longer an option.
  • More often than not, restricted benefits are used in conjunction with a file and suspend strategy. So, while the changes that are being made to restricted benefits have a longer time frame for enactment compared to that of the changes made to filing and suspending benefits, many of the reasons for taking a restricted claim will be off the table anyways.
  • Finally, there are still many reasons to include Social Security planning with income planning and with the recent changes it is even more important now than ever. Total household income drawn from Social Security is likely to be lower because the benefits of waiting are not as great as they used to be. Notably, Social Security income for survivors may be greatly impacted because file the file and suspend strategies that significantly increased a survivor’s income will be less appealing.  Other income or assets need to be in place to fill this gap and active income planning may help retirees overcome the changes in Social Security claiming rules.

As always, if you have any questions please feel free to contact us at the office.







[1] By definition, those with a birthdate of January 1st,1954 (or those who turn 62 on January 1st,2016) are age 62 as of December 31st, 2015 in the eyes of Social Security.

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