Aikapa Financial Bites

Kaiser Permanente Physician Retirement

Kaiser Permanente Physician Retirement Package
Edi Alvarez, MSc, CFP

 After a long career, retiring physicians employed at Kaiser are faced with a Retirement Package that presents excellent opportunities and multiple planning pitfalls.  Giving yourself and your adviser sufficient time to plan each component will yield the greatest return for your situation.  Make sure that your retirement plan supports your goals and addresses each phase in retirement while reducing your tax burden.  Start early!

 The first component of the Kaiser Retirement Package is based on the number of years of credited service and the average of your highest paid three consecutive annual earning (base+bonus) years.  For most long-term Kaiser doctors, this is their largest retirement resource that can be in the range of $200,000/year (amount does depend on the specific situation).  Although HR will calculate this value for you there are many critical decisions that you and your adviser will need to address.  Some decisions such as your payout structure will need to be based on your goals, estate wishes and your tax situation.  They will require that you make life-long decisions on how you will receive these retirement benefits.  Will it be for Life, Joint & Survivor, Period Certain or Installment? - These are not generic or trivial questions. 

 The second component in Kaiser’s Retirement package for physicians is the Defined Contribution plan that will also be calculated for you but will require your input - particularly on how you wish it distributed.  Do you want it as a lump sum, an installment or defer until you are 70.5?  For tax reasons in particular, it is critical that this decision be made as early as possible (ideally 5 years before you plan to retire).  Often this component of the Kaiser Retirement package generates about $30,000 per year (this amount does depend on your specific situation).  Don’t forget that this amount will be further supplemented by social security.

 The third component of Kaiser’s physician retirement package is a Salary Deferral employee funded or 401K plan.  Your annual contributions, of tax deferred dollars ($16,500 limit in 2009), properly allocated and rebalanced will grow to supplement the first two components of the Kaiser Permanente Retirement Package.  With these three components Kaiser physicians can retire at close to pre-retirement salary levels.  

 The final piece of the Kaiser Retirement Plan provides benefits such as health care, dental and insurance benefits.  These should be reviewed carefully with your adviser to ensure that they match your lifestyle and will support all of your retirement needs.

2010 and the Year ahead

Edi Alvarez, MSc, CFP

Life Happens, so enjoy it! Regularly you should track your finances BUT do enjoy and appreciate the wonders of life in the moment. Do remain centered on your family and personal goals and don’t keep up with the Jones’s or act on water-cooler investment advice.

Always work on understanding & visualizing your goals. Try to live within your existing budget even as your income improves. Consider using software like mint.com or Quicken to track your spending.  Always save for a rainy day because when those days arrive you need to be well prepared to ensure you don’t drown.

 Negotiate everything from cable bills to credit card fees to rent. You never know until you ask. Many service providers will work with you.  Always be polite and ask for a reduced rate but don’t divulge your finances.

Employee benefits. Many firms have begun offering Roth 401Ks and Health Savings Accounts (HSAs), and firm equity. Review these benefits within your entire financial plan.  Are these benefits part of your wealth building plan?

Tax rates. Capital gains and dividend tax rates are low in 2010, but are expected to rise in 2011.  This may be a time to sell investments you are planning to sell in the next few years. Consider a Roth, it will likely benefit you to put some of your IRA money into it as long as you can handle the tax consequences all in 2010.  Since we don’t know the tax rates in 2011 consider carefully any suggestions to defer Roth tax payments to 2011 and 2012.  

Cash. Always evaluate your cash needs and only leave enough in cash that is not earmarked for short term uses or emergency savings.  You might want to keep your cash in the best earning conservative vehicle and the remainder should be in bond or may even be better used to pay down mortgage - you’ll need to check your overall plan and do the numbers to make sure which is the best choice for you.   

Rebalance regularly. The market continues to show us that we can’t predict when it will have sudden changes so don’t attempt to time the market, but do time your rebalancing to your portfolio allocation. This should give you opportunities to remove excess earnings from a winning security and buy those that are inexpensive.

Each year manage your credit report. If you have not already, implement a regular schedule of requesting your free annual credit report from www.annualcreditreport.com.  When making this request make sure that you are NOT paying a fee.  Carefully navigate the website and get one free report each year from each of the three main credit reporting agencies, make sure to request a different agency every four months. Always check the report for errors. 

Keep an eye on fees and expenses. Pay attention to commissions, fund management and other expenses incurred on your investments, banking and other services/products.  Make sure that the fees are appropriate with the service/results experienced.  Watch for hidden fees that are not providing you with value.

Itemized or standard Deductions? - that is the question.

Edi Alvarez, MSc, CFP

The ultimate test for when it is worthwhile to forget the no-questions-asked standard deduction and do the recordkeeping required to itemize is when the total itemized deductions surpass the standard deduction – an amount that is based on variables, such as filing status and age, and is adjusted upward each year to reflect inflation.  So read on … do the numbers and decide!  2009 Tax time is here.

The Standard Deduction

The standard deduction for 2009 is $11,400 for joint filers and surviving spouse, $5,700 for singles or filing separately and $8,350 for heads of households.  If a couple files separately they must BOTH file deductions the same way.

At age 65 and over you can add another $1,100 for married person and $1,400 for those filing single or head of household. You can also add another $1,100 for each blind person.

The standard deduction decreases for those who can be claimed as dependents on the returns of other people – can be as little as $950.

There is an inconsequential break that is in the books for 2008-09 that will benefit two types of clients – those who purchased homes late in the year and have NOT paid enough mortgage interest and taxes to make itemizing worthwhile OR those who have already paid their home mortgage.  These home owners will not need to itemize but can claim extra deductions of up to another $1,000 for joint filers or $500 for other returns.  The actual amount will be the same as the amount of the real estate taxes on Schedule A.

Another 2008-09 authorized addition to standard deduction (in place of Schedule A itemizing deductions) for those whose properties were damaged or destroyed in places declared federal disasters.  The standard deductions is increased by the uninsured losses attributable to natural disasters like hurricanes, fires, floods, earthquakes and landslides without the requirement that it exceed 10% of AGI or exceed $500.

There is also an add-on for the standard deduction for those who bought a new motor vehicles between Feb 17 and Dec 31.  The total of state and local sales and excise taxes will be added to the standard deduction up to $49,500 car purchase.  The motor vehicle must be a new car, sport-utility, light trucks, motorcycles (at least 8,500 lbs) and mobile homes BUT NOT used cars or leases. 

Many standard deduction extras are not available for those with AGI higher than $13K for individuals and $260K for joint filers.

On the other hand, itemizers will be able to have full deductions in charitable contributions, state and income tax or sales tax (not both), real estate taxes and interest on most home mortgages but only a limited write-off for medical expenses, casualty & theft losses and miscellaneous expenses. 

AMT and Itemized/Standard Deductions

Whether using itemized or standard deductions all filers may have to deal with additional tax from the alternative minimum tax (AMT).   AMT disallows standard deduction amounts and restricts several itemized deductions.  It allows medical expenses only for the portion above 10% of AGI (not 7.5%).  AMT also disallows deductions for interest on home equity loans (not used to purchase or improve home), state and local property and sales taxes, and most miscellaneous deductions.

Love & Money

When I am asked what is the secret for a strong happy marriage.  I always answer that for more than 20 years I have found that sharing values, respect and trust are often key ingredients.  Over time a willingness to plan and share our lives has deepen our relationship.

Serious relationships should include open and honest discussions about credit, debt, income, retirement, savings along with a serious conversation about family & career plans.  They should also include a healthy participation by both in family finances.  Since there is NO BLISS IN NOT KNOWING I would encourage you to begin these conversations by reviewing each other’s credit reports.  Begin healthy financial communications before you solidify your social contract with each other.

You can obtain each agency’s credit report 
www.equifax.com
www.transunion.com, and
www.experian.com

 Long before you say “I DO” ensure that you really do accept each others past, present and future behavior around money.  

Communication is critical in any relationship and failure to discuss finances is at the core of many failed relationships.  It is a huge red flag if you are both ready to join your lives and yet are not able to discuss and plan for your lives together.

If you need assistance consider a third party which may be covered by your benefit plan at work.

Begin 2010 with a plan in mind!

2010 has begun and you should have received our annual financial planning calendar. 

You should review the calendar adding your own important dates and family target dates.  Post it somewhere that will be visible daily.  This will help you enjoy the inspirational views from around the world as well as regularly target you and your family to think of the financial consequences of our actions. 

Don’t forget to mark your personal financial review/planning times as well as your family meetings.  We recommend that financial family meetings be set quarter or semi-annually.  Allow for enough time to prepare your financial data for these family financial planning meetings.

Engage our help if you need a third party to run or coach you to run these family meetings.

I encourage you to focus on your career, family life and worthy causes with a solid financial plan/structure for you and your family.  Although we live in an interconnected world it is up to us to ensure that we keep moving towards our goals and dreams.

Remembrance Day and the Poppy

In Flanders Fields

In Flanders fields the poppies blow
Between the crosses, row on row
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below.

We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved and were loved, and now we lie
In Flanders fields.

Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields.

John McCrae (1872 - 1918)

The American Moira Michael from Georgia, was the first person to wear a poppy in remembrance. In reply to McCrae’s poem, she wrote a poem entitled ‘We shall keep the faith’ which includes the lines:

And now the Torch and Poppy Red
We wear in honor of our dead.

Many two-minute silences are followed by a lone bugler playing The Last Post, reminiscent of times of war when trumpets were as much a part of battle as bayonets. A poem called ‘For the Fallen’ is often read aloud on the occasion; the most famous stanza of which reads:

They shall grow not old, as we that are left grow old:
Age shall not weary them, nor the years condemn.
At the going down of the sun and in the morning
We will remember them.

Fourth stanza of ‘For the Fallen’ by Laurence Binyon (1869 - 1943)

 

Insurance Claim tips

*** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

As you prepare your emergency document box that will allow you to return to life as usual following a disaster -we’d like for you to include the following:

1. Notify your agent and carrier promptly.  Let them know that you have sustained damage and are filing a claim.  Even if you did not buy an earthquake, or flood policy or the damages do not exceed the deductible.  Always contact your insurance in writing that you have sustained a loss for a disaster and are filing a claim.  Most policies have reporting requirements that are time sensitive and you may not be aware of covered items for EQ in  an non-EQ policy.

2. Be ready with your own expert opinion.  Have your own experienced contractor or licensed structural engineer once the insurance adjuster has completed their evaluation.

3. Review your policy again and remind yourself what limits you have per category and also notice the declaration limits since these can change your expected coverage.  If you read the policy carefully when you purchased it you should not be surprised regarding your coverage.  Note that earthquake policies provided by CEA are standardized (easy to use) but also quite limited.  Contact your insurance company and review your expectations and if not satisfied then contact 1-800-927-HELP and report your complaint.

4.  Do NOT agree to a quick settlement with your adjuster or insurance company until you’ve verified and understand your rights and coverage.

5.  Keep track of everyone you speak to with regards to your claim - this is your responsibility as a claimant.

6. Keep all receipts for expenses if planning to claim additional expenses or loss of use.  Remember that most CEA policies do not provide much for this coverage. 

7.  You should have carefully analyzed the wording so that during your claim you will be able to receive true replacement of your property - like kind quality.

8.  Estimates by your own contractor should be similar to those given by the insurance contractor otherwise you may agree to less than it will cost you to get your home rebuilt.  Care should be taken with inexperienced or out of state contractors who do not know what needs to be part of an EQ estimate.  Assisting them by connecting them with a local experienced EQ contractor may provide you with the quickest and most complete estimate.

*** Above all do NOT sign releases or waivers without legal advice — read carefully and have your legal representative do the same — particularly careful if it contains the words “final” or “release” language. ***

All AIKAPA clients are encouraged to contact us so that we can review your policy prior to needing a claim.

*** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

Earth Quake Planning Basics

*** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

We strongly encourage you to insure against catastrophic risks.  Katrina was a recent example of a catastrophic risk as would be a category 7.0 earthquake.  The best way to prepare is to plan for both your physical and financial safety.  

We address earthquake planning with our AIKAPA Managed clients and AIKAPA Guided clients usually consult with us as they need.  If you’d like us to provide more specific and personal discussion feel free to call us.  You may also find value in the links provided in the AIKAPA resource page (www.aikapa.com/links.htm). 
Here are answers to your most frequent questions on earthquake risk planning:

1)  Can I be denied earthquake insurance?  It is mandatory, in California, that home insurance providers make available earthquake endorsement to all home policies sold in this state.  The CEA (California Earthquake Authority) was created after the last major earthquake to assist home insurance companies so that they would be able to offer home insurance in California.  I encourage you to call California Board of Insurance directly if your agent states that you can’t get earthquake insurance but you have your home insurance with them (1-800-927-HELP).   The laws to protect you are under the California Insurance Code at section 790.03(h) of the California Code of Regulations at Title 10, Chapter 5, and in judicial decisions.

2) What is likely to be my premium?  This year we’ve found that premiums are more expensive - some as much as 75% more.  The actual policy premiums, in the Bay Area, can vary dramatically depending on your home’s location, cost of recovery, and deductible.  Insurance rates are calculated based on your zip code and the current cost of rebuilding your home.  If you login to the CEA website (link provided via www.aikapa.com/links.htm) you can use their premium calculator to estimate your likely policy premium.  Most of our clients have policies in the range of $1,200 to $4,500 per year.  These policies do give you credit for retrofitting which you’ll likely want to implement to increase your physical safety.

3) How much of a deductible should I get?  This type of insurance only comes with a fairly large deductible.  It is usually in the range of 10-20%.  A home that costs $600K to rebuild could have a premium around $1,500 and a deductible around $60 to $120K.  This means that you need to self insure the first $60 to $120K in earthquake damage.  These funds need to be inflation protected but accessible as part of your ability to self-fund earthquake damage below this level.

 4) What is the risk of earthquake damage?  No one can yet predict this with any certainty how your home will fare during the next earthquake.  You can review your county and city disaster recovery (earthquake) planning to have a local view of how to plan for your safety and also visit the ABAG and USGS website to find out more about your home and business location with regards to the fault lines and shake areas (see our resource page at www.aikapa.com/links.htm).  It is your closeness to the actual fault line and the type of soil (how much shaking and aftershock you experience) that determine the damage you experience.

5)  What is the likelihood of a quake?  The probabilities quoted appear to rise each year.  The 2008 USGS survey states that there is a 62% chance of a 6.7 quake in the next 30 years.  It is also believed that the next quake will strike further north of the Loma Pietra (1989) 6.7 quake.  Those who use frequency analysis to make quake predictions rather favor the prediction that we have entered a higher quake activity period resembling that seen around 1911.  You can read more about Geologist’s view at the USGS website. (See the AIKAPA resource webpage www.aikapa.com/links.htm) 

6) Should I buy this insurance from my current home insurance provider?  You should do a thorough review of many providers.  This is a pretty expensive premium that you need to feel sure will be available when and if you need it.  First, get quotes from large insurance providers including CEA-backed providers (these are easy to find).  Second, get a contractor or structural engineer to review your home’s structural condition in case of an earthquake and secure your home (see www.aikapa.com/links.htm for several useful links).  You’ll next need to carefully review each policy - this is not as straight forward as choosing the least expensive policy.  You will need to compare the limits and be aware of exclusions.  Make sure that when comparing costs you are comparing the same type of coverage, from companies that are either backed by the CEA or are able to withstand the cost of the next big quake.  

7)  When does it make sense to self insure?  When you are covering risks that are not catastrophic it is our belief that you should consider self funding.  You should also consider self funding a large deductible thus allowing you to have enough cash flow to pay for needed catastrophic insurance and also provide for other cash flow needs.  Using your current financial statement, cash flow and home equity you can quantitate your risk and life style exposures. 

*** We do NOT sell insurance or receive commissions from any products discussed in this forum ***

Habits and ruts encourage old age - Edith Wharton

… the deathly process of doing the same thing in the same way at the same hour day after day, first from carelessness, then from inclination, at last from cowardice or inertia.  Luckily the inconsequent life is not te only alternative; for caprice is as ruinous as routine.  Habit is necessary; it is the habit of having habits, of turning a trail into a rut, that must be incesantly fought against if one is to remian alive.

-Edith Wharton

Giving and Getting - Alex Haley

The giving and getting, the sense of belonging and contrbuting to something larger than yourself, to something that began before you were born and will go on after you die, can make it possible for you to accept life in a way that makes you wish the whole world could realize how easy it is to feel as you do, and wonder why they don’t.

- Alex Haley