High-Income Individuals Must Save Beyond Contribution Caps

Do you let the government set your goals?

It seems that when it comes to retirement savings, many people do.

Many individuals save 3% of their income for retirement because that's what the government recommends to employers as a "safe harbor" contribution. Yet it's important to know that the contribution level considered "safe" for the employer is not necessarily safe for the employee.

Other people save 6% of their income for retirement because that's what their employer will match. This percentage, however, more likely reflects what's required of the employer to remain competitive and attract qualified employees rather than reflecting the actual needs of their employees. So what does 3% or 6% have to do with your retirement security?

Evaluating Your Yearly Retirement Savings

The amount you should contribute toward your retirement every year is influenced by many factors:

• Age when you start saving for retirement
• Amount of debt you have
• Stability and predictability of your income
• Future growth in income
• Current marginal income tax bracket
• Standard of living, both now and in retirement
• Total income level (which can be capped)

Limits on Defined Contribution Plans

Congress sets total dollar limits on the amount you can save in tax-deferred qualified retirement plans. For defined contribution plans, in general, these limits in 2013 are:

• $17,500
• $5,500 extra "catch-up" contribution if you are age 50 or older
• $51,000 defined contribution limit for employee and employer total

Here's the kicker: The maximum compensation for defined contributions plans, in general, is $255,000 in 2013. Therefore, if your income is over $255,000, the contribution limits have even less merit as a guideline for adequate retirement savings.

One lesson rings clear: If your income is over $255,000, additional savings and investments beyond the contribution limit of a traditional profit-sharing 401(k) plan may be needed to provide you with a retirement that is in line with your accustomed manner of living.

The time to plan for achieving a comfortable retirement is now.

"A contribution level considered 'safe' for the employer is not necessarily the same for the employee."
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About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Stock Pickers Losing the War

When it comes to investing, the "active" versus "passive" management battle continues. What is it all about?

"Active" management describes investment advisors who think they can buy individual stocks and bonds that will perform better than the stock or bond market as a whole. For example, they buy Coca-Cola but not Pepsi, Apple but not IBM, or Macy's but not Target.

"Passive" management describes investment advisors who buy all of the securities in a market index in the proportion owned by the index. For example, they buy all 500 stocks in the Standard & Poor's 500 Index in the proportion that each stock is weighted in the index. The top five holdings would be Apple, Exxon Mobil, General Electric, Chevron and IBM. (Procter & Gamble is the eighth-largest holding, for those of you with Cincinnati roots.)

Investors Vote with Their Feet

In 2012, according to The Wall Street Journal, investors pulled about $120 billion dollars from actively managed funds, the largest yearly outflow since 2008, while pouring about $155 billion in to passively managed investments, the largest inflow since 2008.

Why Passive Management?

There are two key advantages to passive management.

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1. Cost. Passive funds have significantly lower management fees and expenses. According to The Vanguard Group, one of the largest passive fund companies, its passively managed funds are 82% less expensive than the industry average. This is particularly important for bond funds in a low-interest-rate environment.
2. Diversification. Passive funds own more securities so there is less specific security risk. More important is the performance of stocks an actively managed fund doesn't own. If an actively managed fund doesn't own just a small handful of the top-performing stocks, it will under-perform.

The battle between active and passive management has raged for years and will continue to do so. The advantages of passive management, however, are hard to beat.

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com.

Everything You Wanted to Know about Disability Insurance (But Were Afraid to Ask)

May is Disability Awareness Month. While most people know about life insurance, fewer people consider the importance of disability insurance. Here are some noteworthy facts about disability from credible, third-party sources, compliments of Bob Gertie of Advisor Insurance Resource.

Causes of Disability

Many people think of disability as something that only happens to a manual laborer or

blue collar worker. But a disability can happen to anyone. Consider these facts:

• While many people think that disabilities are typically caused by freak accidents, the majority of long-term absences from work are actually due to illnesses, such as cancer and heart disease. (Life and Health Insurance Foundation for Education, November 2005)
• Stroke is a leading cause of serious long-term disability. (Centers for Disease Control and Prevention, 2007)
• Common causes of individual disability insurance claims are:
  
  
• Over 85% of disabling accidents and illnesses are not work related, and are therefore not covered by worker’s compensation. (National Safety Council^®, Injury Facts^® 2008 Ed.) 

 Need for Protection

 A disability can happen to anyone, at any time.

• At age 40, the average worker faces only a 14% chance of dying before age 65 but a 21% chance of being disabled for 90 days or more. (Insurance Information Institute, www.iii.org, November 2005)
•  In 2007, 12.8% of people ages 21–64 surveyed had a disabling illness. (U.S. Census Bureau, American Community Survey, 2007)
•  In the U.S., a disabling injury occurs every second, and a fatal injury occurs every 4 minutes. (National Safety Council^®, Injury Facts^® 2008 Ed.)
•   In the home, a fatal injury occurs every 12 minutes and a disabling injury every three seconds. (National Safety Council^®, Injury Facts^® 2008 Ed.)
• There is a death caused by a motor vehicle crash every 12 minutes and there is a disabling injury every 13 seconds. (National Safety Council^®, Injury Facts^® 2008 Ed.)
• Almost 3 in 10 workers entering the workforce today will become disabled before retirement. (Social Security Administration, Fact Sheet, January 31, 2007)
•  In 2007, the employment rate of working-age people with disabilities in the U.S. was 36.9%. (U.S. Census Bureau, American Community Survey, 2007)
•  Forty-three percent of all 40-year-olds will have a long-term disability event prior to age 65. (JHA Disability Fact Book, 2006)

Disability Duration

The average disability lasts longer than you think.

• The average duration of a long-term disability is 30 months. (JHA Disability Fact Book, 2006)
• Nearly 1 in 5 Americans will become disabled for one year or more before the age of 65. (Life and Health Insurance Foundation for Education, November 2005)
• Three out of 10 workers between the ages of 25 and 65 will experience an accident or illness that keeps them out of work for three months or longer. (Social Security Administration, Fact Sheet, January 31, 2007)

Social Security Misconceptions

People have many misconceptions about the Social Security benefits they may receive if they become disabled. For example:

•  More than 1 in 5 adults believe that unemployment or Social Security will cover them if they become disabled. (Disability Literacy: How Consumers Rate Today, April 2005, The Hartford)
• Less than half―39%―of the 2.1 million workers who applied for Social Security Disability Insurance (SSDI) benefits in 2005 were approved. (Social Security Administration, Office of Disability and Income Security Programs)
• The average monthly SSDI benefit is $1,004. (Social Security Administration, Fact Sheet 2008)
•  In 2007, the percentage of working-age people with disabilities receiving SSDI payments in the U.S. was 17.1%. (U.S. Census Bureau, American Community Survey, 2007)

The Bottom Line

Disability is a major risk both in terms of probability and financial impact. Social Security is not a viable solution in many cases. Employer plans have limits―and you won’t work for your employer forever. Individual disability insurance coverage is often needed to supplement employer coverage, plus it is portable when you change jobs. Simply compare the cost of disability to life insurance and you can see the probability risk and financial risk of disability. Disability insurance is expensive but important!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Where Does Your Money Go?

Are you saving more money than you want to or planned? Probably not. Does it seem that even when your income goes up you can’t save more money?

Where does your money go? How much money are you saving? If you have a hard time answering these questions―and most people do―there are some easy solutions.

First, try a manual or “back of the envelope” approach. Start by identifying your annual income from your W-2 tax wage statement or year-end payroll stub. Then identify how much you contributed to investment accounts like your 401(k), IRA or 529 college savings plans. Next, calculate how much cash you accumulated or depleted by comparing your bank account balances from the beginning of the year to your balances at the end of the year. If your bank account balances were higher at the end of the year than at the beginning, you accumulated cash. If they were lower, you depleted some cash.

To calculate the percentage of your income that you saved, divide the amount you contributed to investment accounts plus any cash that you accumulated minus any cash that you depleted by your annual income total. For example, if your annual income was $100,000 and you contributed $15,000 to your 401(k) and accumulated $5,000 in your bank accounts, you invested or saved $20,000 or 20% of your income. That is very good and you may be able to stop here, unless you want to learn more about where you are spending your money so that you can try to save even more.

If your income was $50,000 and you contributed $1,500 to your 401(k) and $500 to a 529 college savings plan and your bank balances remained about the same, then you saved 4% of your income. Obviously, the higher your income, the greater percentage you should be able to save. However, it doesn’t always work out that way, as people tend to ratchet up their lifestyle spending as their income increases. As a general rule, you should try to save 10% to 25% of your income. Saving 5% is better than nothing, but it’s probably not enough to accumulate a retirement nest egg in the long run.

What technological resources are available to help you boost your savings? You have a wide range of options to choose from. Your bank website may have a resource to help classify and summarize expenses. Your credit card company may provide an annual statement that shows you how much you spent in certain categories. Check out the “restaurant” or “entertainment” categories and you may be shocked how the discretionary expenses add up. 

Two popular software packages that can help you track your spending and saving are Quicken and Mint.com. Quicken is a PC-based software and Mint.com is web-based. They are both owned by the same parent company, Intuit.

Mint.com is free and automatically collects your transactions from your bank and credit card accounts. It assigns an expense category based on the merchant code that is tracked when you swipe your credit card or debit card. For example, if you swipe your card at Kroger’s it will be classified as groceries and if you fill up your tank at Speedway it will show as gasoline. You can manually edit any entries in Mint.com and you do have to manually categorize any checks your write and any cash transactions.

Quicken is similar to Mint.com, but you have to manually download your transactions. Credit card transactions are automatically categorized, just as they are with Mint.com. Quicken has a much wider range of reporting capabilities and more flexibility in choosing historic time periods for reporting. Quicken also has an “Easy Answer” function to answer the questions “How much did I pay to…”  or “How much did I spend on…” for a wide range of time periods that you can select. Quicken also offers bill pay and check writing capability to further simplify your cash management. Different versions of Quicken are available that cost between $60 and $90 before rebates and discounts.  

Whether you use manual or software methods to track your income, expenses and savings, the process is enlightening and well worth your effort!

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

What Is Long-Term Care Insurance and Is It Right for Me?

We often find there is confusion regarding long-term-care insurance. Who should purchase it? When it should be purchased? Here is our four-point mantra on long-term-care insurance: 

1. Age 50 to 65 is the ideal time frame to consider long-term-care insurance; the earlier the better. 
2. Invest time to learn about long-term-care insurance, understand it, and decide if it is right for you.
3. Apply to see if you qualify medically. If you don’t, your decision is made for you!
4. Buy it or don’t buy it, but make an informed decision that you won’t look back on and question or regret.

But what is long-term-care insurance? It is not just nursing home insurance. You qualify for benefits if you cannot perform a number of “activities of daily living” such as getting out of bed, dressing yourself, feeding yourself, using the bathroom and bathing yourself.  

Long-term-care insurance can therefore provide benefits at any age, whether a stroke, traffic accident or other event puts you in a situation where you cannot perform some of the activities of daily living.

Long-term-care insurance can cover services at home, in an assisted living center or a nursing home.

Here’s a real-life example: My step-father is in an assisted living center because we do not want him living at home alone―he needs help taking his medications on a regular schedule, and we want him to have some supervision, social opportunities and good meals. But he can perform most of the activities of daily living, so he would not qualify for benefits if he had a long-term-care insurance policy.  

Consider your personal circumstances when thinking about purchasing long-term-care insurance:  

• Are you married? If so, what is the age difference between you and your spouse? If you are both close in age, what would happen if you both needed care? If there is an age spread, could caring for the older spouse leave the younger spouse with fewer assets for their life?
• How many children do you have, where do they live and how able would they be to help care for you? Would you want to move in with them?
• Do you own a home that could be sold to pay for your long-term care?
• Is the idea of needing care in the future and paying for it something that you worry about?
• What is your family health history? Did both your mother and father die before age 75 or did they live past 90? What about your other relatives?
• How is your current health? Are you an obese smoker with multiple health issues? Ironically, the healthier you are, the more likely you are to need long-term care insurance!
• Are you comfortable relying on government plans or would you rather have individual coverage that may afford you more choices and flexibility?
• Would you prefer to self-insure and rely on your savings and investments?
• How important is it to you to leave an inheritance for spouse or children? 

Remember, no one wants to live in a nursing home. No one wants to be infirmed or unable to take care of herself. No one wants their house to burn down, to be in a traffic accident, to get sick or to die prematurely, but that is why we buy home and auto insurance and health insurance and life insurance. The same principle applies to long-term care. 

Your financial peace of mind will be well served by learning about long-term-care insurance and deciding if it is right for you.

About Bruce J. Berno, CFP^®

Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.