Alright let’s go and get started then.  Good morning everybody!  Welcome to today’s episode of Coffee Talk.  Our topic today is “The Loophole That Used to Exist with Social Security.”  They just closed a very attractive loophole that used to give folks, if you use the rule correctly, what amounted to be an interest free loan.  So, let’s talk about what the rule was, what the new rule is and how this might affect you.

So the old rule pretty much allowed you to take advantage of, let’s call it, a”do-over.”  You could start collecting Social Security before your full retirement age.  Full retirement age for folks is either usually age 65.  Some people, it’s age 66 and however many months beyond age 66.  But you could take early Social Security benefits, obviously, as early as age 62.  So for example let’s say it that age 62 your Social Security benefit is $750 a month.  At full retirement age, let’s call it 65, and I know for some of you to be age 66 your Social Security benefit would be $1,000 a month.  So the advantage of collecting early is you get $750 a month for three, sometimes four, years before you would otherwise start collecting social security benefits.  The disadvantage of course is you’re getting $750 month in this example instead of $1,000 a month.  Well, what if you wanted to do-over your Social Security benefit and start collecting that $1,000 a month?  You used to be able to do that and all you really needed to do is pay back the money that you had collected before you started your new Social Security benefit.

So in this example if you start collecting $750 a month at age 62 and then at age 65 you said, “Nah, you know I want to start over.  I really want to collect that $1000 a month.”  Then all you really would’ve had to do is pay back the three years of Social Security benefits at $750 a month.  Now some people, obviously, may not be financially able to do that because you’ve got to write one big fat check.  But other people maybe are in a position to do that and then they could reapply for their $1000 a month social security benefit.  And even if you wanted to defer collecting Social Security until age 70, and at age 70 in this example the Social Security benefit would be almost, well actually it would be a little over $1,300 a month, you will do the same thing.  And you used to be able to do as many do-overs, if you will, as long as you liked.  So you could’ve started collecting $750 at age 62, collect $1,000 a month, pay that money back at age 70 and start collecting $1,300 and month.  Well that was the old rules.  And those are all gone.  Those rules no longer exist.  Social Security has realized the opportunity, if you will, some people were taking advantage of and they closed that door.

And here’s how they closed the door.  From now on, you still can do a do-over as I refer to it, but only if you’ve been receiving Social Security benefits for less than 12 months.  Hmmm, so the attractiveness of this strategy has been severely cut back and limited.  So in the same example, if you start collecting Social Security benefits that age 62 at $750 month, really before you turn 63, you gotta’ decide whether you’re  going to pay those funds back and reapply either then or at some point in the future or just stick with collecting the reduced Social Security benefit.  So what this really means is now more than ever for folks starting or are trying to determine the optimum time to start receiving Social Security benefits, now more than ever it’s important to do proper planning to make sure that you make a choice that’s right for you.

And I’ll caution you this really is an individual situation.  You may see some media reports on this next year come to light.  There really is no right or wrong way when it comes to selecting your individual Social Security benefit because everybody’s situation is different.  Are you working or not?  What other income sources might you have?  How will that affect your taxes?  That all goes into the mix as to what the ideal time for start collecting Social Security has for you.  And of course if you’re already receiving Social Security benefits, and you’ve been receiving them for over 12 months now, guess what the do-over opportunity no longer exists.  So, if you’ve been thinking wondering hearing reports about that, no need to burn your thinking with these thoughts anymore.  You’re not eligible as we understand these rules.  You’re not eligible for a Social Security do-over.  So the bottom line is planning is always the key.  You gotta’ make smart choices about your money about your finances to give you the best shot towards your version of a worry-free retirement.  Hope this was a useful and helpful.  We’ll see you next year with another episode of Coffee Talk.  In the meantime, I just want to wish everybody a Merry Christmas and Happy New Year!  Bye now.

The bottom line is we all know there is no free lunch.  Where is the annuity company getting the money to pay this advisor?  Yeah!  From you!  It’s coming out of your pocket.  Now they might camouflage it and hide but at the end of the day, the bottom line, the money is coming out of your pocket. Well in this particular situation they were shocked. They had over $15,000 a year in hidden fees and expenses coming out of their annuity contract and yet they were getting statements.  And here’s what catches a lot of people, they got a statement from the annuity company that said their admin fees and the dollar amounts were zero.  Now is the annuity company lying?  Do I know what I am talking about?  Well, yes and yes.  The annuity company, they are not lying, but certainly are misleading.  It’s true there are no admin fees as defined by the annuity company being charged or assessed to the annuity contract.  However, there is a boatload of hidden fees and expenses that aren’t properly, in my opinion, disclosed to the tune of over 2-3 percent per year.

Now here’s what that means.  I’m going to use the example of a $100,000 and you can just do the math, multiply or divide, based on whatever dollar amount might be of interest or concern to you.  But if you put money, $100,000, into a variable annuity, most of them are going to charge hidden fees and expenses around $3000 a year and you are not going to see it.  Are they breaking the law?  No.  Are they meeting the current disclosure requirements?  Yeah.  Are they treating their customers in an honorable and ethical manner?  Hmmm, I don’t think so but I’ll let you be the judge.  So we’ve got a hundred thousand dollar variable annuity.  It’s supposed to give us all kinds of great and wonderful benefits. That’s the subject for a different day and time.  I’m just talking today about the hidden fees and expenses.  So now we’ve got somebody paying $3000 a year in hidden fees and expenses that they didn’t even know about.  Oh, and on top of that, they find out this information and then they come to find out that they have a surrender charge or withdrawal penalty and that’s going to amount to maybe $5000!  Oh my goodness! What’s a person to do?

Well our advice in a situation like this was you’re going to pay the fee one way or the other.  So you might as well stop the bleeding now.  And what do I mean by that?  Well, sad to say, but true, it’s probably better off to go ahead and pay the surrender charge and move on and get into lower cost investment vehicles.  I mean for the same $100,000 in low cost, no load index mutual funds, you’re talking about hidden fees and expenses.  That’s right; index funds still have fees and expenses that aren’t clearly disclosed.  You and I really don’t see them but nonetheless they are there.  But for an index mutual fund, the annual fees and expenses may, on $100,000, be $500-$600, not $3000.  That’s a huge difference especially when you multiply that over the next 5, 10, 15, or 20 years.  Think of all that extra money that could be in your pocket instead of sending it off to an insurance, annuity, or mutual fund company.  Make sense?  I hope so.

So the bottom line is we told this particular person that it would make sense to go ahead and cash in their annuity, pay the withdrawal penalty because, kind of like refinancing a mortgage, at the end of the day you have some costs to, in this case, get out of the annuity.  But because of moving into lower cost investment vehicles, you’re going to recover the withdrawal penalty in probably 12 to 24 months.  In their case it was close to 18 months.  And then from every month thereafter, they are ahead of the game. So the bottom line is you gotta’ be aware of hidden fees and expenses.  Anytime somebody tells you, “Don’t worry, the annuity pays me. The insurance company pays me.  The mutual fund company pays me.”  I just want you to remember this, at the end of the day, that’s not who really pays the fee.  You pay the fee.  The customer always pays.  Don’t let anybody try to mislead you and suggest anything differently.

Now speaking of misleading.  This particular advisor – I happen to know who it is!  And I consider them to be a very honest ethical person in the context of I don’t think they are trying to intentionally rip people off.  Certainly they’re not the next Bernie Madoff in the making.  But they’re just operating on, unfortunately, with what I consider to be a poor business model.  And what I mean by that is, you know the reason this person came to us to begin with is their original advisors, a friend they met through another friend from a charitable organization, they felt comfortable with them. But they never got any follow up at advice.  The only time they heard from the advisor is either when they called with a question or concern or when the advisor called to recommend another investment vehicle. And the sad part is they suffered through the 2008 market meltdown without any proactive action or advice from this prior advisor.  Well, I don’t necessarily fault the advisor directly but the business model they are operating under, I think,   caused the problem.

And here’s what I mean by that.  And this is going to be controversial. And you’re free do disagree with me but I think I make some sense here.  When advisors receive payment from transactions, commissions, their business model is flawed.  And what I mean by that is when you do business with people like that you expect them to follow up and give you ongoing advice and management and oversight of your investment accounts, right?  Common sense.  Well, the reality is they’re in business, they need to make money.  They got to pay their bills.  Well if they’re in a commission transaction oriented environment, they got a tough decision to make.  They can either spend time looking after your account giving you advice which they are no longer getting paid because they already got paid when you bought something from them.  Or they need to be out looking for other people with money to invest that they can collect another commission or a transaction fee on.

So that’s were we see a lot of folks, if not immediately, over time become unhappy and disillusioned with commission-oriented advice relationships.  Not because the advisors themselves are bad.  Not because the advisors don’t necessarily know what they’re talking about but because they advisor’s business model is broken in terms of allowing them the time to take care of the clients that they already have.  And that’s why; I think, in this case, our recent client received no ongoing advice or management.  That certainly isn’t going to be the case with us.  That isn’t our business model at all.  But that’s, again, a topic for another day and time.  The bottom line is, don’t let anybody mislead you but thinking somebody else is paying when you purchase an investment.  The customer always pays.  Don’t forget about that.  And in that regard we all know it is better to keep your fees and expenses as low as possible.  Well that’s it for this episode of Coffee Talk.

I want to thank you for joining us today.  As always, if you have any questions or concerns, feel free to call the office or send an email.  I will be happy to answer your questions directly or via email.  The office number is, just use our toll-free 800 number.  It’s 1-800-393-1017.  Email, our general email address is info@fmcretire.com.

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So that said, those of you that some we are overseeing managing monies and investment accounts for you, just a reminder we’re monitoring the investment situation on a daily basis. We have price points where on a holding by holding, investment by investment, if it hits our price point either on the upside or downside, we take money off the table certainly on the downside we want to keep losses to a minimum and on the upside kinda like pruning a bush, sometimes the bush grows and grows and the way to take care of it and make sure it continues is you have to prune it back, so we have profit targets as well. So even though we may like the position and we want to keep holding it, we’ll take profits off the table from time to time as well.

So that’s it for today, as always, if you have questions or concerns about this or any other financial topic you’re free to contact us at the office. The best way to reach us 1-800-393-1017 or you can send us an email with a question or comment to info@fmcretire.com. Thanks for joining us for this week’s episode of coffee talk. We will be back with you next week with another edition of coffee talk.  Bye.

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And that brings up another topic. If you have money now, and you’re thinking about buying a mutual fund between now and the end of the year or adding money to an existing mutual fund between now and the end of the year, before you do that, check with the mutual fund company see when they are going to declare their year-end capital gain distributions because if you buy a mutual fund now before they declare their year-end capital gain distributions guess what you’re going to get a 1099 for capital gains that you really weren’t around the whole year to benefit from and that could hurt especially if your fund stays flat between now and the end of the year and yet you get to pay taxes on essentially somebody else’s capital gains. So this trips up a lot of people and sometimes we kinda know about it but then we forget about it so just a friendly reminder to be wary of capital gain distributions.

Now with mutual funds, they are great and wonderful tools. Most of them provide plenty of diversification. That’s a way to reduce risk, provide for some professional management and oversight so there’s more good than bad with mutual funds don’t get me wrong there, we still like and believe in mutual funds especially low-cost no load mutual funds. One of the things if you’re looking to purchase mutual funds, one of the things you can look for in terms of knowing whether it’s a tax efficient mutual fund and help you control your taxes with your mutual funds, is if the fund is actively managed. Look and find what the turnover rate is and turnover is typically expressed in percentages. 20% 70% 100%. It can even go higher than 100% 140% and all that means is during the course of a year buying and selling, how much buying and selling goes on in the mutual fund relative to the value of the fund. And that works out into a turnover ratio. So very common practically managed mutual funds have a turnover ratio of 100% some even go as high as 140%. And that just means in the course of the year, the mutual fund the entire portfolio in the mutual fund on average is bought and sold. Even though you may have bought and held that fund for years and years and years. So you think you’re a long-term investor, but the mutual fund could actually be a very short-term trading type of fund. Conversely, there are some low turnover funds and low turnover is typically in the 30 to 40% range that would be considered a low turnover and this may be surprising the majority of low turnover funds, over time tend to be your better performing funds as opposed to the high turnover funds. Interesting there. So that’s one way to kind of take control of your tax capital gain issues with mutual funds,

The other of course is to use index funds either an index mutual fund or what is called an ETF exchange traded fund. Whenever possible I recommended and we try to use whenever possible exchange traded funds. They are essentially an index mutual fund that trades like a stock. So you can put a stop loss order in or put in an order to buy a fund at a particular price plus all the other trading advantages that you would have with an individual stock. Compare that to an index mutual fund when you buy or sell you’re getting the price at the close of that particular day. So you really don’t know exactly what price you are going to be buying or selling at because it is the price based on the close of the market the day you buying or selling, so not as much flexibility and control. The other advantage with an exchange traded fund. You don’t get a capital gains distribution 1099 unless you actually sell more fund. With an index mutual fund you’re gonna get a 1099 or capital gains distribution whether or not you sold your fund or not, so that’s just a small difference. But by and large index funds are going to be more tax efficient than actively managed funds and exchange traded funds are going to be even more tax efficient compared to index funds. Cost wise, exchange traded funds internal fees and expenses, they’re going to be at least the same if not lower than index mutual fund. So another reason. The only disadvantage to an exchange traded fund is when you’re buying and selling them, you’ve got commission expenses so use a discount broker and those trading fees should be in the $8-$10 range. So if you’re dollar cost averaging or adding modest sums of money on a regular basis then maybe you’d want to stick with an index mutual fund.

Now there’s a couple of things we want you to stay away from that we would recommend. There’s a lot of product sales people out there that have a solution to eliminate the 1099 on your mutual funds. See if this doesn’t sound familiar. You can eliminate the 1099 you get from your mutual fund company, transfer your money over into one of these three instruments an equity index, annuity, an EIA, a variable annuity or variable like. I’m not going to get into the details of all three of these products today, but you heard it from me if somebody is recommending any one of these products, I would suggest that you just say no especially with equity index annuities. Variable annuities most of them have very high fees and expenses probably 10 times the cost of an affordable index mutual fund. Same thing with variable life, those expenses are even higher because of course there is an element of life. They are all packaged up. Save money on taxes with tax deferral, withdraw money in the case of variable life tax-free. I will get into those details in future coffee talks. I’m going to tell you that we have been down this path with virtually all of the so-called wonder products and we’re not real big fans.

Now, if you have a variable annuity or a variable life plan also know that there are some no-load low-cost no commission programs out there that may make sense depending on your situation to transfer your existing plan over say a low-cost no-load no commission plan. Again that is a topic for another time. Really what I wanted everyone to know today is if you’ve got mutual funds, check with the fund company, find out when their year-end capital distributions are to be declared, see what the tax impact might be for you and if you want to better control your tax situation consider either an index mutual fund or an exchange traded fund.

Well that’s it for this edition of coffee talk. Thanks for joining us and make sure and tell your friends and as always, if you’ve got questions or concerns about this topic or any other financial issue were here to help. Feel free to contact us at the office either by phone or e-mail. Contact information for the phone is 1-800-393-1017. If you prefer e-mail, our general e-mail address is info@fmcretire.com. Thanks everybody have a great week. We’ll be back next week with another edition of coffee talk. Bye now.

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The general rule of thumb when it comes to benefits (medical insurance disability, long-term-care, life insurance, cancer coverage) those types of choices and options, my general basic rules of thumb is don’t insure don’t pay for stuff for risk that you can handle yourself. One of my pet peevees is cancer. Cancer is prevalent in our society I understand that. Some benefit packages or programs allow a cancer option so if you’re diagnosed with cancer you get a benefit usually a fixed dollar amount above and beyond your medical coverage. And the cost is relatively inexpensive, downright cheap. Well the reason for that is the insurance companies know and understand that when the odds are they’re not have to pay out claims or too many claims in that regard. So what I’d rather see you do, it is if you’ve got cancer coverage or you’re thinking about that type of coverage, don’t spend money there, spend money on increasing the benefits under your traditional health insurance coverage and that way you’ve got coverage regardless of what you’re medical situation may be, so if it’s something other than cancer you’ve got improved coverage. So hopefully that makes sense.

Medical coverage. We’re probably all familiar with PPO preferred provider organization, HMO healthcare maintenance organization, FSA a flexible spending account. So by and large, if you’re super healthy, little or no need for doctors, we see folks are happy with, content with an HMO type of plan. The more medical issues that you have, then we see more and more folks gravitate towards the preferred provider type of coverage. And of course, if you’re the type of person, and this is me, if you’re the type of person that you want to have a say in your health care and be able to have a little bit more flexibility in picking and choosing your doctors and so on, then a PPO type of coverage is probably going to be your better choice compared to an HMO. A couple of things with health care FSA, flexible spending account. That’s just an opportunity where you can pay roll deduct into a medical account and pay on a pretax basis for healthcare related expenses. Deductibles, co-payments, prescriptions not covered by the insurance plan. A lot of people either don’t take advantage of those plans or under fund the plan simply because there is a provision that says on a yearly basis, if you don’t use it you lose it. So again, this is where you need to be able to go back and look at your history. What have you been spending out of pocket for health care expenses and use that as a guideline as to what to set aside in a flexible spending account if you have one available. And of course everybody’s concerned about increasing healthcare costs these days. Currently one of the better options to minimize your health insurance premiums would be what is called an HSA health care savings account. That’s two components; first component would be a high deductible health insurance plan maybe for a family maybe as high as a $10,000 per year out-of-pocket limit, for an individual probably a $5000 annual out-of-pocket limit. And then if you want, it’s an option if you want, you can match that with a health care savings account and the advantage of that is different than a flexible spending account. Money in the health care savings account you can withdraw for qualifying medical expenses. When you turn 65 if you have money left over in your account, this is not a use it or lose it account. When you turn 65 you can take a distribution and have that money available for yourself. So there’s the big advantage to a healthcare savings account.

A couple of things that I did want to touch on are optional benefits. Disability. So if you’re employed, you probably have an option to pick up short-term or long-term disability. Quite common is for employers to cover or pick up a certain level of short-term disability, but not long-term disability. That is something you probably would have to a pay for out-of-pocket or payroll deduct on your own. And we always guess, especially if you have not accumulated sufficient funds to retire now, then pick up and pay for the maximum long-term disability benefit that’s made available to you.  That’s typically 60% to 70% of your base pay. So check with your plan administrator. Some companies it’s 60% other companies it’s 70% but make sure you do pay for an in depth the maximum long-term disability coverage that you can under your benefit package.

A couple of other group insurance options that you may want to  think about before jumping in would be life insurance and long-term care. Let’s talk about long-term-care first. More and more companies are offering group long-term care insurance benefits. We’re all getting older and older. The baby boom generation is aging, increase demand for home healthcare, nursing home long-term-care so more companies are making options available. Here’s what we found, group long-term care coverage is significantly different than an individual long-term care insurance policy. And what I can tell you from experience, none of our clients who have purchased long-term care insurance have purchased group long-term care insurance even though it was available to them after they looked at the difference between coverage afforded via group long-term care compared to what they would get in an individual long-term care plan. And yes, they paid a bigger premium compared to the group long-term care, but when they finally looked at and understood the benefits or I should say limitations with a group long-term care plan, they opted not to do group long-term care, and instead go and purchase the individual long-term care plan. So don’t just assume that the group long-term care option if you have one available is your best option. What I’m telling you is from our experience it probably is not. And you definitely want to evaluate it against an individual long-term care policy.

Now let’s talk about life insurance. Some companies give you a certain amount life insurance at no additional expense to you. Sometimes it’s one-time pay or two times pay or what have you and then you’ll have the option of picking up additional life insurance coverage either a term or most frequently universal life. Before you pick up extra life insurance I want you to think about this and check into it, if you leave your employer will you be able to take your group life insurance with you. Often times you can’t, so if you need additional coverage if you want additional coverage your better option more flexibility would be to purchase an individual life insurance policy. You own it, you control it, you can take it with you, even if you leave the company. Regardless of what your circumstances, whether you’re laid off or retired, your policy even if it’s an individual policy is yours.  If you’re going to purchased life insurance through a company option, I would always always always recommend the term life option. Don’t go with the universal life or the whole life for any type of cash valued savings plan option and the reason for that really is very simple. There’s not enough disclosure. You really don’t know what the internal fees and expenses are on the life  insurance policy and the insurance company typically has the right to change the internal fees and expenses without notifying you in advance. They can change the interest rates, yes there is a minimum interest rate, but they can play games with that as well. So it’s just to me the universal life or the cash value insurances are nothing more than combining an expensive term policy with the savings component where there is no disclosure on what the true cost of insurance and little if any disclosure on the savings component of the plan. Stay away from those plans. The term policy as the name implies, you pay a modest premium, you get your life insurance coverage, and that’s it.  And then it’s just a matter of is it better for you to purchase the term insurance through the company or buy your own stand alone policy. Something to bear in mind as I share all this information with you, we are not insurance agents. We are fee-only advisors just wanting to help folks make smart choices about their money so that you have the best shot possible of your version of a worry free retirement.

That about covers it for what I wanted to discuss and get you thinking about today and the bottom line is open enrollment. Have you looked at your benefits or have you reevaluated them? Don’t just roll over and renew. Yes, maybe what you had last year may be your best choice, but look at it and make sure and make sure you’re aware of all your options. I also mention Medicare. Medicare is a whole animal all into itself. Too involved and too detailed to get into here today. If you got questions on Medicare, we do have a Medicare insurance specialist and we’re happy to put you in touch with them. Again, there is no money changing hands between us and them. They are just good reliable resource people that have done a good job for our clients and we’re happy to connect with them as well. If you need to get in touch with us or have a question about this issue or any other financial issue, we’re happy to help. We also welcome your feedback and comments about today’s topic or ideas you would like to see us cover or topics you would like to see us cover on an upcoming Coffee Talk. The best way to get in touch with us by phone is to use our 800-number 1-800-393-1017 or by e-mail. Our general e-mail at address is info@fmcretire.com.

Well that’s it for this week’s edition of Coffee Talk. We’ll see you next week. Have a great week.

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So who wouldn’t want income that you can’t out live? That has some merits, however there are some pitfalls.  With a lifetime annuity it’s kinda like a lifetime pension, think of it in that regard you’ve given up access to a lump sum of money in return for monthly payments, in this case that you cannot out live no matter how long you live. Whether that life span is short or long, so there is the double-edged sword.  If you transfer over a lump sum of money to get an annuity payment and then you’re killed in an accident a month or two months later, guess what?  There’s nothing left to transfer over to your heirs unless you select a little bit different variation of the income annuity option. So that’s the reason a lot of folks shy away from so-called income annuities. The concern is they meet with any unexpected premature demise. They or their family are not going to get back even what they paid in to purchase the annuity income stream. So long those lines, there are some income annuities where you can purchase a guaranteed income stream plus lifetime, usually that would be life with 10 year certain.  And all that means is the incoming payment will continue for life no matter how long you live or 10 years, whichever is longer so if you meet with an untimely demise, if you haven’t collected 10 years of payments, your family members or your beneficiaries will.  The drawback to that of course is as you can imagine, if you think about it, your monthly annuity check is not going to be as big compared to a life only without any kind of a guaranteed time period of payments.  And that just make sense.  So the bigger monthly income stream you want, the better option is purely a life only annuity, but if you want to make sure the payments are received for a period of time even if you pass away prematurely, then a life with a certain period of time guaranteed and 10 years is the most common option.

Now the other obstacle or drawback with an income annuity is inflation. Inflation hasn’t been that high recently, but I think everybody kinda expects inflation to start picking up at sometime certainly over the next let’s say 10 years and beyond. Well what looked liked attractive annuity payments or for that matter pension payments, what looks attractive today 5-10 years from now isn’t going to be as attractive because usually with the annuity payments, you’re locked into your monthly income payment for the life of the annuity. So that could be a drawback. So for that reason, a couple of words of caution.  If you’re thinking about taking some of your lump sum savings and investments to purchase a monthly annuity payment or a monthly income stream, what you want to do is not use all of your money or the majority of your money because over time you’re going to lose purchasing power thanks to inflation. The other thing to bear in mind and this is really why we’re not recommending to our clients today that it make sense to purchase an income annuity with a portion of your money, and that’s simply a look at where we’re at in interest-rate cycle. Interest rates are at all-time historical lows. And while the interest rate isn’t directly attributable to your income annuity, the annuity carrier has to factor in the current interest rate environment to determine what your monthly benefit or what your monthly annuity payment would be. And all that means really is the higher the interest rate environment, the higher your monthly payment and when you buy an income annuity, typically you’re locking yourself into that monthly payment. So if we’re looking an interest-rate environment of 1%- 2% today, your annuity payment is going to be much lower compared to buying an annuity income stream in an interest-rate environment where interest rates are let’s say six or 7%. So our advice or our suggestion would be if the idea of using some of your money for income guaranteed for life is appealing may be deferred that decision, defer that investment, while we are in a low point in the interest-rate cycle and revisit as a potential opportunity when interest rates have gone back up or are rising so you get to buy yourself a bigger monthly income benefit. Remember not to use all of your money. We would recommend probably no more than 15% -20% of your money be allocated to an income annuity and again we would do that not today in today’s low interest rate environment, but consider doing it once interest rates are starting to move back up, and maybe even dollar cost average if you willing into an income annuity so maybe take 5% of your money when rates start to move up and then over time add another 5%, another 5%, so you may end up purchasing for different income annuities from four different carriers, the only way to diversify because by the way your income payment is guaranteed by the annuity company, which is typically an insurance company.  The payments guaranteed by the annuity by the insurance company so the safety guarantee of those payments is as strong as or weak as the financial solvency or the financial footing of the issuing company. Depending on the amount of money involved, it might make sense to purchase not one but several different income annuities from multiple companies and again stage it over a period of time so you can dollar cost average or if you’re familiar with the laddered CDs,  it’s the same thing concept in that regard.

That’s about it for today’s edition of Coffee Talk. Hopefully this gave you some food for thought. Challenging your thinking. I encourage you to join us again next week for another edition of coffee talk and in the meantime, if you have any questions or concerns about your financial situation, we’re happy give to give you some friendly advice at no cost or obligation all you have to do is contact us here the office. The best way to do that is to call the 800 number or send us an e-mail. The 800 number is 1-800-393-1017. The e-mail address is info@fmcretire.com and we also appreciate any topics or questions that you’d like us to address on a future edition of coffee talk. Send us those ideas and comments as well too. Until next week have a great week and we’ll see you next week on another edition of coffee talk. Bye now.

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So a stock-option basically gives the employee the right, but not the obligation or requirement, it give the employee the right or the option to purchase a certain number of shares of company stock at a set price at any time in the future before the option expires. So usually a stock option grant is good for 10 years so if your company gives you an option to buy 1000 shares of company stock today in the stock today is trading at $50 a you’ve got 10 years to decide whether or not you want to buy those thousand shares, and if you choose to buy thousand shares your cost is $50 even if the company stock is trading 10 years from now or even tomorrow, is trading at $100 or $150. So there is the value of the stock-option. You get the option to decide whether or not you want to buy a stock and basically the theory behind that of course is you’re going to work hard as an employee to help the company prospering and do well to increase the stock price or the stock value of the company.

So we’ve got these stock options, and the most common, there are couple of different varieties of stock options that you need to be aware of, and if you have stock options you really need to know what kind or what flavor option you have, and the two most common types are non-qualified stock options and incentive stock options (ISO). The most common by far is what is referred to as the non-qualified stock option and really all that means is when you decide to buy the stock, you are going to be taxed at ordinary income tax rates, whatever they might be, whatever your tax bracket might be, you are going to be taxed on the paper profit, whether you buy the stock and hold it or whether you buy the stock and immediately sell it. So in this example, we’ve got a stock option grant at $50 and you exercise at $150, you’ve got $100 profit per share of stock that you exercise, your going to pick up $100 of ordinary income, whether you decide to own the stock, hold the stock or sell immediately. So what we often find with non-qualified stock options, purely from a tax planning point of view, it makes sense to simply buy and immediately sell the non-qualified stock option. Most companies, publicly traded companies, have a mechanism that creates in essence a cashless stock option exercise where you do not have to come up with the money to buy the stock to then immediately turn around and sell it because that is the technical logistical process that has to go through. You’ve got to exercise your right to buy the stocks. You buy the stock and then immediately sell the stock. So most companies with publicly traded stock, have a cashless exercise option. In this example we’re using today, once you’ve exercised and sold immediately, instead of you having to come up with $50 and then selling stocks for $150, you would just get $100 in profit if you will, minus some tax withholding because the company typically is required to withhold some money for taxes. And then at the end of the year the company gives you a 1099 or it’s included on your W-2 as a form of income and compensation for tax purposes. So that’s the most common form of stock option, the nonqualified stock-option. You’ve got 10 years to exercise the option usually, and most often there some sort of vesting schedule. So if you were given a stock option grant today, you may not have vested in any of those shares. Investing typically occurs over a 2 to 3 year period. It changes from company to company and actually different stock option grants. If you’re stock option grant is older than two or three years, you’re probably 100% vested. If it’s less than that a portion of your shares might be vested but you still might be unvested in some of those shares. It’s important to understand your vested and unvested shares. Depending on how the unvested shares are treated, if certain life events come up or come into play, what happens to unvested shares in the event of retirement, in the event of divorce, death, termination, you leave the company for reasons other than retirement. There really is no hard and fast rule or guideline. Different companies employ different policies as far as unvested options with these types of life events. Sometimes, obviously if it’s termination with cause, usually unvested options are forfeited. Sometimes, even vested options could be subject to forfeit depending on the offering in the offering document, but typically retirement. We’ve seen a gradual change in some companies, in fact one company, one grant of unvested stock options could be exercise would vest at retirement and could be exercise based on the original expiration date. So if there were 5-6-7 years left before the options expired, the retiree would have that period of time to decide if and when they wanted to exercise options. We’ve seen other companies, and in one recent case, the same company a different stock option grant, when the retiree actually retired, unvested options were forfeited and you were done. The other issue is with vested options, especially in retirement, what is the company requirement as far as exercising vested options in retirement. We’ve seen instances where companies require the options to be exercised or purchased within 12 months of retirement, sometimes as early as 90 days, sometimes three years and sometimes it’s whenever the options would’ve originally expired if you had remained employed by the company. So those are just minor details that you need to be aware of with your stock options and it can and does change from one company to the next and can even change within the same company from one option grant to another.

If that isn’t enough to keep track of, the next thing you want to beware of are any of your options (ISO) incentive stock options. Those are even better than non-qualified stock options and the reason for that is incentive stock options can get capital gain tax treatment. So the same example here, you’ve a grant for a share of stock at $50. It’s trading now at $150. You decide to exercise your option. Well, if you exercise and sell, that $100 profit on incentive stock option is still treated as ordinary income short-term capital gain if you will. However, with an incentive stock option you have the option or the choice to hold the stock for 12 months. If you hold it for 12 months and a day and then sell, that stock receives long-term capital gain tax treatment. So the same example here, you exercise your right to buy a share of stock at $50, you hold it for a year and a day then you sell, that $100 of profit is now taxed at long-term capital gain rates instead of ordinary income tax rates. So that’s the good news, but of course there’s always a little bit of bad news whenever you have good news and the bad news of course is you have to monitor the stock and make sure the value holds or increases, because what happens if the stock goes down in value well the profit opportunity has been forfeited. You loose the profit opportunity or some of it and in hindsight, maybe it would’ve been prudent just to cash it in and paid ordinary tax rate instead of long-term capital gain tax rate. The other bad aspects of incentive stock option you don’t pay tax immediately when you exercise, because we don’t know if your profit is taxed as ordinary income or long-term capital gain until you actually sell that stock. So that’s the good part. The bad part in certain circumstances is the paper profit is subject to the alternative minimum tax. Depending on what you’re other taxable situation looks like, when you exercised incentive stock option you could in fact trigger alternative minimum tax, and sometimes that could be significant if you don’t watch what you’re doing and create additional income tax, and yet you haven’t sold the stock yet. so you’ve got to come up with other money to pay the increased income tax. Most frequently caused by the alternative minimum tax. So sometimes when it comes to exercising incentive stock options it makes sense to do them in combination with non-qualified stock options to reduce if not eliminate your exposure to the old alternative minimum tax. But other than that, if I had a choice personally between the incentive stock option or non-qualified stock-option, I’d always opt for the incentive stock option simply because I’ve got at least an opportunity to have the profit taxed as a long-term capital gain. With the non-qualified stock option that opportunity doesn’t exist. It’s always good to be taxed as ordinary income.

So there you have it in a nutshell. What we see a lot of folks misunderstanding is the difference between a qualified stock option or incentive stock option with favorable long-term capital gain tax treatment. Not understanding the difference between that type of a stock option grant and a non-qualified stock-option grant. Not realizing that the option has an expiration date which could be different dependent on life events occurring: death, disability divorce, retirement, termination with or without cause, all of those events could create a different expiration date for stock option grant. And then of course just forgetting about, believe it or not, forgetting about whether or not you’ve got a stock option award at all. Let’s face it, you get something awarded to you at 07-08-10 years ago, you got to stay on top of that because we’ve seen folks come close, and unfortunately in some instances they’ve let stock options expire and these were in the money stock options, there was true value, and they just forgot plain and simple forgot about the option and forgot to exercising time in and when you hit an expiration date, you’re done. Why wouldn’t you want to exercise a stock-option? Well, that seems straightforward. If you’ve got a stock option grant of $50 and over the next 10 years before the grant expires, if the stock doesn’t trade above $50 there is no advantage to you to exercise that option, whether it’s a qualified stock-option or non-qualified option, because you would be better off just buying the stock in the open marketplace. We saw that happen in the late 90’s during the Internet’s technology boom and bust so some late option grants with technology companies and then their stocks fell through the floor with the technology bubble popping, those types of option grants in most cases expired with no value. And even recently with the market meltdown in 2008, option grants issued in anything from probably 2005 and beyond, today may not have much if any value that doesn’t mean they won’t have value in future.

There you have it. We’ve just skimmed the surface on stock options. We just wanted to with today’s program get you thinking about stock options, oftentimes there is more value than what most people realize. Of course then the next question is almost forgot this I apologize, so when is the best time to exercise a stock-option? We’ve had all kinds of very educated mathematicians do all kinds of analytical programs and calculations for us, and some of these folks are engineers that make planes fly and bombs go through windows in Baghdad in very precise and calculating equations and formulas and it all boils down to the best time to exercise a stock option is when the stock is at its all time high during the period that you’ve got the option to exercise that option. Sounds kind obvious now doesn’t it but here’s something to think about, instead of just trying to time the all time high for your stock, the other is the stock option money profits that may be in your pocket so to speak when you exercised is that pot of money, what I would call life-changing money. In other words is this money going to be important part of your overall financial situation enabling you to live your version of a worry free retirement. If so, I would encourage you that when you arrive at a sufficient nest egg to finance and pay for your worry free retirement, you think seriously about cashing in those stock options and not worrying about timing the option is as far as an all-time high point for the company share price.

Alternatively, if you’re stock-option award isn’t really going to affect your lifestyle one way or the other, if this thing becomes worthless or it hits the proverbial a grand slam home run, if it’s not going to change your situation that much, then I say, you know if you want to wait and try to time the market on a stock, that’s okay. It’s a higher risk approach, and as well you can just wait until it comes close to expiration time. Again you have to look at your overall option awards and factory in when they’re all expiring. We’ve seen some situations where the options, multiple option awards expire close together creating higher taxes, which could be minimized. I’m not going to say they could be eliminated, but the tax impact could be minimized simply by exercising options over a period of time. You’re familiar with dollar cost averaging buying stocks, what we can dollar cost average out of stock options and that takes away some of the share price volatility and also we can spread some of the tax liability over multiple years. So as you can imagine stock options can make life a little bit more complicated when it comes to planning and mapping out your financial situation. I wish there was an easy magic button or an easy button that you could press to make the process simple for you, but the reality is everybody’s situation is different. Everybody’s income picture is different and how your stock option grants factor into your situation will in often times be significantly different than your coworker and certainly other companies. So the bottom line is you got it sit down and do the planning based on your own individual situation and what you’re trying to accomplish for yourself and your family.

I hope this is been helpful. We hope you join us next week for another edition of Coffee Talk, and as always we’re open to your questions, comments. You can then share that or get in touch with us two ways; we’ve got a toll-free 800 number or an e-mail. The toll-free number is 800-393-1017. Or if you want to get in touch with us via e-mail, the general e-mail address is info@fmcretire.com Have a great week and we’ll be back with you next week with another edition of Coffee Talk. Bye now!!

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