Talking Open Enrollment: FSA's

 

It’s coming around to that time of year again when retirees and employees with group health insurance have the opportunity (the burden?) of choosing their healthcare insurance coverage for the coming calendar year.

For Medicare beneficiaries, it’s the usual drill: regular Medicare or a Medicare Advantage (Part C) plan, a Medicare supplement policy, a Part D/prescription drug plan.  I won’t elaborate on those choices now.  But everyone covered by Medicare owes it to himself and his wallet to evaluate the available plans every year.  What works best and is the most cost-effective one year may not be the best option the following year.  Plans change.  Health changes.   Shop, or get an independent agent to help you.

For those under a group plan and who are fortunate enough to have a choice of plans or insurance companies, the same advice applies: shop and compare.  But for this group there is one decision that should be easy.  If the employer offers a medical flexible spending account (FSA), sign up for it.

An FSA is an account that allows the employee to set aside money for certain medical and dental expenses from his paycheck.  The money is not taxed before it goes into the account, and when it is spent on qualifying expenses it is not taxed upon withdrawal.  It’s literally tax-free money.

The main objection to these accounts in the past came from mostly healthy people who did not expect to incur many medical expenses throughout the year.  If they did not spend the money that was set aside before the year’s end, the money was forfeited.  But thanks to the Coronavirus Aid, Relief, and Economic Security Act (CARES), that should be less of a concern now.

True, one must still consider carefully how much money to set aside.  Typically the money is deposited from each paycheck throughout the year, with an annual limit of $2750 in 2020.  And that money can still be forfeited if not spent.  But CARES significantly expanded the definition of “qualifying expenses”.  The young person who anticipates no “sick visits” to the doctor, no prescription drug co-pays, and no dental expenses not covered by dental insurance probably doesn’t want to put hundreds of dollars into an FSA: but does that young man or woman ever buy over-the-counter antacid or headache remedies?  That’s covered now.  Adhesive bandages?  Yes, covered.  Mileage to the dentist or doctor for a check-up?  Yes.  Even feminine hygiene products are covered now.  And these are permanent enhancements—in the sense that they will remain after COVID departs, though Congress can always change the rules again.

One distinct advantage that partially makes up for the forfeiture clause is that FSA’s are pre-funded.  That is, if you incur an expense on, say, January 2 and haven’t deposited a single cent into that year’s FSA fund, the full amount you committed to contribute that year is available for your use.  You don’t have to wait until the money is actually deposited to be able to use it.  It’s advanced to you, essentially.

Another often overlooked advantage of the FSA is related to that pre-funding.  An employee can forfeit unused funds at year’s end; but conversely if he were to leave the employment of the company sponsoring the FSA and had used more money from the pre-funded FSA than he had contributed, the company forfeits the difference.  Anyone contemplating quitting his job needs to be aware of the balance in his FSA to plan appropriately and at the very least not forfeit any money he has deposited.

Happy health insurance shopping. 

 

Until next time,

 

Roger

 

“Be sure you have sound advice before making plans.” Proverbs 20:18, CEV

Education Has Its Own First Responders

I’ve written in this space before about the out-of-control borrowing to pay to attend college (I’m having trouble, frankly,  calling it “higher education”) and the devastating effects the debt load has for years to come for most borrowers.  Now I’m wondering if maybe the COVID-19 national health emergency might do what years of preaching and warnings have failed to accomplish: slowing down the borrowing cycle and even causing a fundamental shift in thinking towards college, its value, and how to finance it.

I began to smell change in the air when some of the big-name universities sent students home during the spring semester this year and switched to online classes.   Good move.  The right move.  But it started people thinking, “Am I getting my money’s worth with just online classes?”  What about “sitting at the feet” of “learned professors”, mingling with people of different cultures, and the much-vaunted “college experience” (which usually meant little more than Friday night drinking parties at a frat house or that symbol of the 21^st century American university, a climbing wall in the student center)?  Suddenly, attending college was not a lot different than playing a video game in your room, alone.  How much is THAT worth?

While the schools had little choice in the spring semester, they do have options for the fall semester; but they are shooting themselves in the foot.  From what I’ve read, many or most are going to have just online classes again—but without reducing the tuition.

I realize there are such things as fixed costs, but the long-term damage to the schools’ image in the wake of their decision may be irreparable.  Students (and their parents) care little about the fixed costs.  What they see is an education that is cheaper to provide, is basically “no frills”, yet they are having to pony up the same amount of money for it as they did the whole package.  This is especially galling when the university has a large endowment.  Take Harvard, for example.  It has an endowment of over $40 billion but doesn’t seem inclined to tap into it to lower tuition.  Smart move short-term perhaps, if their investments are down and they don’t want to sell low; but it is potentially disastrous long-term.

According to a Wall Street Journal report a few weeks ago, many idled workers—remembering the long-term unemployment of the last recession—are taking steps to prepare for a future when their former jobs have disappeared in the wake of the pandemic.   They are taking online courses, just not at the big universities.  “At LinkedIn Learning, downloads of certificate-eligible classes in professions like accounting, project management and information technology have increased more than 600% since February”, the article reads.

“Community colleges, often the first responders when it comes to developing courses for new labor-market needs, typically see enrollments rise during economic downturns”, the report went on, quoting an economist at the Massachusetts Institute of Technology.

First responders.  Now that’s a term you hear a lot these days, and almost always coupled with praise.  Could it be that the humble community college with its still very competent and knowledgeable and real-life-experienced teachers is the future of higher education?  Will they have the edge in preparing students for a recession-proof career?  And will they do all that while offering it at relative bargain prices and at the expense of enrollment numbers at the bigger universities?

Students and their parents should give serious consideration to the local community college as the first stop in post-secondary schooling.  It may serve as the last stop in launching a successful career.  It can certainly be a money-saving way to get the basic classwork out of the way before transferring to a four-year college, especially since so many of the latter have guaranteed admission agreements with nearby community colleges.  And that is how the community college may save the financial life of many a student in the aftermath of the pandemic, as Americans reconsider how they obtain their education and ponder what it’s really worth.

Until next time,

Roger

 Do not deceive yourselves.  If any of you think you are wise by the standards of this age, you should become “fools” so that you may become wise.” I Corinthians 3:18 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™

Used by permission.  All rights reserved worldwide

So Your Employer Cut Back Your 401(k)

While the U.S. death toll from the coronavirus pandemic as of this writing is a bit over 125,000, and hundreds of thousands more have been sickened by it, its financial impact has been felt by many more than that.  Millions have lost their job or seen their business—perhaps the dream of a lifetime—fall victim to the disease and the national response to it.

Even among those of us fortunate enough to keep our employment, some have had wages or hours reduced; and work routines have definitely changed.  One of the more common responses among companies strapped for cash due to the national health emergency has been to suspend matching contributions to workplace retirement plans like 401(k) accounts.

This is especially unfortunate because it deprives workers of an opportunity to purchase more stocks, mutual funds, etc. at the very time when they have gone down in price and become relative bargains.  The same dollar amount of contributions and company match would have purchased perhaps 33% more investment assets in April than in February…if only the employee had kept contributing (many didn’t) and the employer had matched it.  That’s the whole idea of “dollar cost averaging”.

So what if your employer has stopped matching your retirement contribution?  Should you continue to sock money into the account?

Saving money for retirement at any stage in life is hardly ever a bad decision.  It’s a no-brainer when the company matches your money.  Who in their right mind would turn down what amounts to free money?  Even when the match disappears, continuing to contribute on your own (assuming you are not in financial crisis mode) is a good idea.  But should it go into the company retirement plan?  That’s where it gets a little tricky.

Personally, since my new employer is halting contributions, I’m going to funnel my money mostly to a Roth IRA.  By doing so, I will not be losing matching funds and will be funding an account that will give me a tax-free income source in retirement.  Yes, I will lose the tax deduction this year.  Yes, I am late in my career and will miss out on the years of non-taxable growth in the value of the investment which is the main attraction of a Roth account.  Nevertheless, leaving that account to grow for just a few years before tapping it will give me a source of income in my retirement years that will not increase my adjusted gross income, helping save my Social Security benefits from taxation.  Retirement planning, after all, involves tax planning.  Moreover, many financial advisors are telling their clients that tax rates are certain to rise in coming years to pay for the government expenditures for the coronavirus relief package (trillions of dollars).  Pay taxes, they urge, at today’s low rate on the money put into a Roth account now so it won’t be taxed at much higher rates upon withdrawal in retirement if put into a non-Roth account.

But my decision is not the right one for every employee.  For instance, a high-income family may have many tax deductions reduced or even unavailable to it.  The tax deduction of a 401(k) account (with its annual employee contribution limit of $19,500, or $26,000 if over age 50) might be the single biggest tax break they have and could be worth more as a current deduction than tax-free income in retirement.  Of course, there are income limits that might prohibit them from contributing to a Roth IRA, but there is no such restriction on contributing to a Roth 401(k), if available.

But even folks of modest means might be better served by continuing to make contributions to a non-Roth account.  Remember, such contributions are tax deductible in the year they are contributed.  If someone is saddled with student loans and is seeking relief in the form of an income-adjusted payment, contributing to such an account lowers their adjusted gross income on which their payment is calculated.  The same would apply to someone buying health insurance on the public exchange.  Deductible retirement plan contributions will lower the modified adjusted gross income used to figure eligibility for federal subsidies.

It pays to know the rules of your company retirement plan.  If you stop contributing altogether, will that mean that you will lose out on other employer contributions besides the company match—money like Safe Harbor contributions?  Large employers have to adhere to certain standards and meet stringent tests to have their plans certified.  I am not an expert on these very complicated rules, but it would make sense to learn more about your own employer’s defined contribution plan (like a 401(k)) so you do not inadvertently cheat yourself out of “free money” from your employer.  Over 70% of the money in my 401(k) is attributable to the employer’s contributions and the growth on that money (it includes profit sharing, match, and Safe Harbor money).  Don’t walk away from that  that kind of money by forgetting to re-start your contributions if your employer restarts theirs.  Keep an eye on your accounts!

Until next time,

Roger

 

"Therefore keep watch, because you do not know the day or the hour." Matthew 25:13
 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™

Used by permission.  All rights reserved worldwide

What a Difference a Month Makes

I received the April issue of Kiplinger’s Personal Finance magazine in March as the first restrictions were being imposed in the United States to halt the spread of COVID-19 and as the financial markets began to tumble.  And what an interesting and anachronistic read it was.  Throughout the journal several references were made to “the longest bull market in history” that was “still going strong”.  There was an article comparing “good and bad debt”.  Another pondered whether a college education is still a good investment.  There was some mention of Coronavirus.  On page 18 Capital Group U.S. economist Jared Franz was quoted saying, “U.S. economic fundamentals are sound” and the virus should not present an obstacle to the 2% economic growth he projected for the nation for 2020.  On page 31 a Kiplinger writer noted that the coronavirus had the potential to disrupt economies but assured readers that in other recent outbreaks of infectious diseases (citing 2003 in particular) the S&P stock index posted positive returns in the thirty days after the first reported case in the U.S.

Fast forward to last week (mid-May)  I just got the June issue, a special edition on “Coronavirus and Your Money” (followed two days later by the May issue, I might add; but those things happen).  What a contrast.  The questions posed on the cover were “When will the bear market end?”, “What’s the best way to raise emergency cash?”, “Where can I get debt relief?”.

The whole tone had changed, and in just the span of a few weeks.  The bull market was history.  Right now there is NO good debt.  And colleges, if they open at all in September, will likely conduct classes online primarily.

How can things fall apart so fast and for so many with little or no warning?  How can the pendulum of economic fortune swing so dramatically so quickly?  How can the experts be so off-target?

Quite easily, as it turns out.  If the coronavirus and its trail of woe teaches us anything it should be that precious few things in life are certain.  All our laws and regulations, our safeguards, our social safety nets, our sophisticated monetary systems, are sometimes mostly impotent to stop even things that we might have foreseen.  We forecast in part based on what history has taught us.  But sometimes events are unprecedented or just different enough to throw the models off, to cause the normally effective “cures” to be useless.  Or as my pastor observed, sometimes it is not the event(s) itself but the reaction to the event that creates the chaos and takes a toll on humanity and everyday living.

How this national health emergency will play out for our long term collective physical and fiscal health is a landscape still to be painted.  The government does what it can and hopefully doesn’t harm us in the process, but I am of the firm conviction that your wellbeing on both fronts is largely up to you.

I hope you are personally in good health and financially secure to weather this storm.

Until next time,

Roger

“While people are saying, ‘Peace and safety,’ destruction will come on them suddenly, as labor pains on a pregnant woman, and they will not escape.  But you…are not in darkness so that this day should surprise you like a thief.” I Thessalonians 5:3,4 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™

Used by permission.  All rights reserved worldwide

KIds Make You Rich (Just Not Yet)

A just-published opinion piece in MarketWatch by Andrew G. Biggs, former principal deputy commissioner of the Social Security Administration and now a resident scholar at the American Enterprise Institute, takes aim (as have some others recently) at the claim that far too many Americans are behind in their saving for retirement. 

 

I’ve read several studies that cite statistics allegedly showing that one-third of us have not saved anything for retirement.  The now-defunct Money magazine even ran an ad from a big investment firm that featured a picture of a burrito and the caption, “This costs more than what one-third of Americans have saved for retirement.”.  That has not been unchallenged.  For his article, Biggs worked from the premise of a study that estimated 35% of Americans have under-saved for retirement.  To that more conservative estimate, he applied another variable to the mix: children.

 

Financial planners generally agree that in retirement we can expect to be able to maintain our standard of living by establishing an income stream equal to just 75% of our pre-retirement income, or thereabout.  That is just a rule of thumb; it will be different for different people and circumstances—some will need more, some less.  But Biggs cites studies that show a two-parent, two-child household will typically see 31% to 47% of total household spending going toward the children.  In other words, they spend less on themselves than their childless peers.

 

I bet you can see where this is going.  His contention is that parents become accustomed to spending less on themselves and will actually need less money in retirement than nonparents to maintain the same standard of living they had pre-retirement.

 

I don’t know if (and let’s take the higher figure here) the 47% being spent on kids includes a prorated portion of expenses like the mortgage payment and other general household expenditures.  But if parents are getting by for themselves on 53% of their income and will only need 75% of that in retirement, I figure that’s about 40% in the end.  Ironically, that’s about the average amount that Social Security benefits are designed to replace.  And this guy used to work at the Social Security Administration?  Hmm.

 

So what’s the lesson?  Have kids?  Have a lot of kids?  There’s more than just your retirement finances that should go into a decision to have children.  Much more.  But I can’t help but think about the story my son always got a good laugh over…the man who was beating himself on the head with a hammer, and someone asked him why he was doing it.  “Because it feels so good when I stop,” he said.

 

And the same guy, in this story?  Why do you have so many kids?  “Because I can live so much more cheaply when they move out.”  Assuming they move out, fella.

 

Until next time,

 

Roger

 

“Like arrows in the hands of a warrior are children born in one’s youth.  Blessed is the man whose quiver is full of them.” Psalm 127:4, 5  NIV®*

 

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™
Used by permission.  All rights reserved worldwide