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The Advisory Firm Newsletter:  May 2013

THIS MONTH IN PERSONAL FINANCE: chained CPI, Affordable Care Act (obamacare), more tax info, HSA's and Long Term Care rate increases.

 

I realized that I completely missed the month of April's newsletter due to studying for some exams. Let's see if we can make up for it by packing 2 months worth of personal finance topics into this May newsletter.....

Key Financial Data for 2013:

Download here or email me to get a hard copy mailed to you....

financial facts

Chained CPI?

As Congress and the President wrangle over budgets and what to do about the looming Social Security/Medicare deficits a new word was tossed out as a partial fix, chained CPI.

What is it? Well the Bureau of Labor Statistics (BLS) calculates many versions of the Consumer Price Index (CPI) which is used as a basis for Cost of Living Adjustments (COLA's) in many items especially Social Security Benefits. Basically it just measures the increase in price of a basket of goods, what we would call inflation. The argument is that the CPI over estimates inflation and that using a smoothed version called the Chained CPI index is more representative of the true increase in cost of living. The bottom line for politicians is that slowing the rate of increases in social security benefits each year by switching to the chained CPI can magically make our spending and deficit problem look much better! (on paper changing this method is "projected" to save $390 billion over 10 years).

You have to find it ironic that at a time when our Central Bank is printing $85 billion a month to stimulate the economy, that the politicians are trying to limit inflation increases in benefits..........

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Affordable Care Act is coming Jan 2014:

It has been several years since Congress passed the Affordable Care Act (Obamacare) and little has been said recently about this. However, get ready because big changes will start happening beginning in January. At this point most of us are still scratching our heads wondering what the potential impact will be. There are a few things we do know, and one is that employers with over 50 employees will have to offer health insurance or pay a fine. The fine overall is much less expensive than offering health insurance so it is estimated that many will pay the fine and / or try to cap their fulltime employees under 50. There is also the question of whether employers that already offer coverage will simply cancel it and send their employees to the exchanges to get individual coverage? If it makes financial sense you can bet they will.

One drawback by not getting health insurance through your employer? If you are a W2 employee and your health insurance is offered by your employer both your premiums and your employers are tax deductible. If you are forced to go to an exchange and buy coverage it will be with after-tax dollars.

The other potential headache is that employers will only be required to provide insurance for the worker and dependents. Depending on the wording your spouse may not be considered a dependent and they could be charged extra or not covered.

Ok, so now the benefit: if you work for a large company you already know that historically the big group health plans would not turn you down for health issues like individual coverage has. If you have ever purchased individual coverage you know that they can turn you down or charge big premiums for any pre-existing conditions. Now that all changes, all insurance is guaranteed issue meaning that everyone is accepted. The bad news is that will probably mean higher premiums for all.

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Some Facts about HSA's:

What is an HSA? It is a high-deductible health insurance policy paired with a Health Savings Account. As we are uncertain how these will be affected next January, the listing below is simply the current facts:

  • What qualifies as a high deductible insurance policy? a minimum deductible of $1250 single / $2500 family.
  • How much can I contribute to the pre-tax savings account? $3250 single / $6450 family per year.
  • What can I use the money in the Savings account for? deductibles, copays, medical expenses, prescriptions.
  • If I don't use all the money in the savings account within the year what happens to it? It continues to accumulate tax deferred and does not have to be used up like a flex spending account.
  • How can the Savings Account portion be invested? lower balances will sit in cash, higher account balances can be invested in mutual funds.
  • Who are these good for? Generally as a planner I don't recommend these for young families with kids (that tend to use medical services quite frequently). These work well for clients in their 40's and 50's that can put away more in pre-tax savings than they will use in medical services.

 

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Long Term Care rate increases:

The last couple of years have been difficult for the Long Term Care industry. For a variety of reasons many insurers have either pulled out of the market or begun raising rates on new policies dramatically. One additional side effect has been policy holders getting notices of rate increases.

When you purchase a LTC insurance policy you naturally assume you will pay the same monthly / annual rate for the life of the policy. As will all insurance the companies reserve the right to increase the premium for an entire class of policies if approved by a State's Department of Insurance. This historically hasn't happened often but the there has been a trend with LTC insurance to request rate hikes to compensate for the low interest rates and longer lifespans of policy holders.

So what are your options:

  • Keep the policy and just pay the increase. It is probably much less than a comparable new policy would be today.
  • take the option to keep premium the same with a reduced monthly benefit.
  • reduce your benefit period to keep lower premium
  • reduce the inflation adjustment or lock in your benefit and keep premium the same.

(credit for this article goes to Michael Kitces, Journal of Financial Planning April 2013)

 

Tax Link:

Tax reduction strategies are probably the biggest thing on clients minds this year. In 2013: you get new higher tax rates, the FICA tax break was reinstated, and there are surcharges on high income folks along with limits on itemized deductions. Here is a link to a quick tax overview pdf that I found on the web:

Tax Guide

 

Disclaimer: this information is for general purposes and should not be considered tax advice. Talk with your accountant and/or advisor before implementing!

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The Advisory Firm, LLC provides fee-only financial planning services for clients throughout metro Atlanta and North Georgia including the communities
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for financial services. Consult with your financial professional if you have any questions. The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.