Retirees End of Year Planning

Retirees End of Year Planning


It is less than two months until 2017 is over and before that all of the holiday happenings will be here. Now is the time for retirees and those near retirement to tackle some financial issues for this year and next. Some are easy to complete but others may take a little more effort. To help you get these done efficiently and take away some stress I have created a Retiree checklist.

Evaluate Medicare
As most retirees know, the Medicare open enrollment period ends Dec. 7. If you have traditional fee-for-service Medicare with a Medigap supplemental add-on, there's no need to change that. But if you also have a Part D drug plan or Medicare Advantage, it's a good idea to re-evaluate that coverage each year. These plans often change their premiums from year to year. The Kaiser Family Foundation calculates that for current enrollees who do not change their coverage next year, 73% will see premium increases; among those, about one third will see premiums rise $10 or more per month.

The first place to go when starting to shop around is the Plan Finder on the Medicare website. Plug in your Medicare number and drugs (you will need each drug's name and dosage). The plan finder then displays a list of plans that match your needs, including their estimated total cost (premiums and out-of-pocket expenses); which drugs are covered; and customer-satisfaction ratings. The finder also advises on drug utilization and restrictions.

For Medicare Advantage plans retirees should revisit their coverage to see if there are new healthcare providers available. Providers and drug coverage may change from year to year for a given plan. Meanwhile, many Advantage plans include drug coverage that can change from year to year. And Advantage plans can make changes to their networks of healthcare providers at any time.

For Medicare Part D coverage premiums may have increased, but the list of covered drugs and the prices you pay for them can change. Plans also frequently change their rules for cost-sharing, coverage of specific medications and if a specific drug will be covered.

When evaluating premiums, keep in mind that these will vary depending on whether you pick a basic or enhanced plan. Basic plans come with a gap in coverage, often called the "donut hole," where the beneficiary must pay out of pocket after reaching a cap. In 2018, the number is $3,750, and coverage resumes when total out-of-pocket spending reaches $5,000.

Copay's are flat amounts, while co-insurance is a percentage of total cost. This means some high-cost, specialty drugs could generate sizable out-of-pocket expenses. Don't focus on the wrong things when you shop. Many focus only on the premium, and not projected total costs.

Review Your Tax Situation in Non-Retirement Accounts
Mutual funds, especially actively managed funds, typically distribute capital gains in December. These will occur if the fund manager has sold securities that appreciated in price in the year prior, and over the past month have begun publishing estimates of impending distributions. While I don’t recommend or buy actively managed funds, you may have accounts elsewhere that do. As in the previous few years, those distributions could be large at some funds.

Besides the regular turnover managers create, many active funds are also dealing with large amounts of money being withdrawn and exacerbating capital gains distributions. As more people are moving towards index funds like I have been using with clients for the past 10 years, active managers have had to sell more of their investments to pay off departing shareholders. Capital gains money is then distributed over a smaller group of mutual fund shareholders making for a higher tax bill.

Capital gains distributions can be a nuisance for investors in taxable accounts who are reinvesting those distributions. Those distributions are taxable, meaning that you could owe taxes on a fund even if you yourself haven't sold any shares. Selling preemptively can make sense if you wanted to lighten up on a holding for fundamental reasons or if your fund has been a serial distributor and you'd like to make your taxable portfolio more tax-efficient. Investors in the 10% and 15% tax brackets owe capital gains tax at a 0% rate and are prime candidates for tax-gain harvesting.
Year-end is also your deadline to harvest tax losses if you want to use them to reduce your tax bill for the 2017 tax year. You can sell depreciated securities from your taxable account and use those losses to offset an unlimited amount of capital gains and up to $3,000 in ordinary income.

Take Required Minimum Distributions
You have until December 31st to take your required minimum distributions from IRAs and company retirement plans or else face a 50% penalty on the amounts you should have taken but didn't. However, I suggest you get your RMD taken care of now to avoid processing delays or any other issues that may arise.

Another consideration is the fact that you don't need to take RMDs from all of your holdings. Instead, you can strategically employ RMDs to help rebalance and improve your comprehensive portfolio plan. My suggestion is to conduct a complete year-end portfolio review and determine which holdings and or what company the account is with to cut back on underperforming or expensive holdings. Whereas rebalancing is often psychologically difficult, RMD season leaves little room for excuses. You have to take those distributions, so you might as well take the ones that make the most sense from a portfolio standpoint.

Charitable Gift Planning
Year-end is also your deadline to make charitable contributions if you want to be able to deduct them on your 2017 tax return. If you're using the qualified charitable distribution from your IRA you also need to make that contribution by year-end. You can use QCDs to satisfy required minimum distributions. For holdings in taxable accounts you can steer highly appreciated holdings from your equity portfolio into a donor-advised fund. This allows you to deduct the amount you've contributed to the donor-advised fund, then take your time in getting the money deployed into the charities of your choice.

Add-up Deductible Healthcare Expenses
Tax planning may also include your out-of-pocket healthcare expenses for the year to date, including health insurance and Medicare premiums, premiums for long-term care insurance, nursing home costs, and prescription drug expenses. If those expenses exceed 10% of your adjusted gross income for 2017 (up from the 7.5% threshold that applied to individuals 65 and older through 2016) you'll be able to deduct any additional amount on your tax return for the year. If it appears that you're close to hitting that threshold heading into 2017's fourth quarter, it may make sense to incur healthcare expenses this year rather than next in situations where you have the leeway to do so. But don't go too far out of your way--you don't get to deduct the 10% of adjusted gross income plus any overage; you can only deduct the amount that exceeds 10% of your adjusted gross income.

Get Cash Ready For Next Year
The end of the year is when you should make sure you have enough short term cash for the coming year. The last thing you want is being forced to raise cash if the market is in the middle of a correction.  An acceptable strategy is to periodically refill your cash account from dividend and income paying investments and when your portfolio needs to be rebalanced. Retirees who are subject to RMDs can use those distributions to help fund the cash account for upcoming living expenses.

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