Have you ever dreamed of being a half-millionaire? It’s got a nice ring to it, doesn’t it? Well, the fact is, if you are retired or are nearing retirement, thanks to Social Security, you can probably make this claim!

Social Security is just like – actually, even better than – having a pension or owning a private annuity. For a retiree to receive an inflation-indexed monthly benefit of $2,000 it would require an investment of about $500,000. Knowing that, people receiving Social Security benefits of that size can rightfully declare themselves to be a half-millionaire.

For millions of our oldest citizens, Social Security literally secures their financial independence and helps to keep them out of poverty. Given its importance, understanding your filing options, the program’s features, rules and quirks is a wise move.

As a small preview into what’s quickly becoming a perennial topic of the Front Street Foundation’s Money Series, here are just two features of Social Security we’ll discuss at our next program on Wednesday, January 10th.

First, waiting to collect can pay dividends. While the earliest you can file is age 62, for each year you delay in filing, you get a lifetime benefit boost of 8%. That annual boost can build all the way until age 70. The benefit difference between a person filing at age 62 and age 70 is huge.

A sad reality is that a large proportion of Social Security beneficiaries file at the earliest possible moment. That decision results in 32% less each month compared to filing at age 66, the current official full retirement age.

Of course, don’t forget, if you don’t think you will survive for at least 12 more years – and your spouse won’t either, if you’re married – giving up a year’s worth of Social Security benefits won’t pay off.

For example, if you are 65 and decide to wait another year to file, that 8% benefit boost will finally make up for your one year’s worth of forgone benefits by the time you reach your upper 70s. While that’s a pretty solid bet for many readers, it is certainly not a sure bet for everyone.

Second, an old trick that couples use to maximize their combined Social Security benefits is slowly expiring. If you are age 64 or older at the start of 2018, when you file at your official full retirement age you are still allowed to restrict your filing to receive just your spousal benefit. This restricted application allows your own benefit – the one based on your own life’s work – to remain untapped and growing. If you happen to be under age 64 at the start of 2018, the trick is long gone.

To learn more about Social Security, listen to Jason P. Tank, CFA present and answer questions for the non-profit Money Series on Wed., January 10th at 6:30pm in the McGuire Rm. at the Traverse Area District Library. To register, visit www.FrontStreetFoundation.org or call (231) 714-6459.

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With year-end tax planning underway, now is the perfect time to bring up a perennial tax trick; making a charitable donation directly from your IRA. This is known as a qualified charitable distribution.

Perhaps you’ve already received that annual letter from your favorite charity where it says you can support your cause while simultaneously satisfying your required minimum distribution from your IRA. Better yet, you can pull off this feat and lower your tax bill!

To begin to understand this pitch, we need to first quickly review what a required minimum distribution is and how it typically affects your tax bill.

When you reach the magical age of 70.5, the IRS expects you to start paying some taxes on your tax-deferred accounts. These include all of your IRAs, 401(k) accounts and any other accounts that were funded with pre-tax earnings.

For example, if you’ve saved $500,000 across all of your tax-deferred accounts, at age 70.5 the government expects you to distribute a minimum of close to $20,000 that very first year. It’s normally considered taxable income to you.

Now, when you make a donation to a qualified charity directly out of your IRA, the government says it’s okay to count it against your required minimum distribution and it’s also okay to not count it as taxable income. It’s as if the IRS officially turns a blind eye to the whole transaction. None of that IRA distribution has to be reported by you as income and, of course, no charitable deduction will be allowed by you either. It looks like a wash.

This begs the question, how can making the donation from your IRA be better than simply writing a normal check to your charity and taking the normal charitable deduction on your tax return? The short answer is, it may or may not. It depends on your tax situation.

There are two primary deductions on your tax return that are affected by your level of income, including IRA distribution income. They both reside on Schedule A, where you itemize your various deductible expenses.

First, you can deduct your out-of-pocket medical and dental expenses. However, only the amount that exceeds 10% of your income is deductible. Second, you can similarly deduct various miscellaneous expenses, such as the fees you pay your accountant and investment adviser. That deductible threshold is 2% of your income.

Naturally, if you make a donation directly from your IRA, being able to ignore that income on your tax return lowers those thresholds and allows an incrementally greater amount of your medical expenses and professional fees to qualify as deductible. Alas, you see a lower tax bill, however slight it might be.

But, what if your typical income is already so high – even before considering the income from your IRA distributions – that you aren’t allowed to deduct any of your medical expenses and professional fees anyway?

If this is your situation, going through the hassle of making a charitable donation directly from your IRA is no better than writing a check. If this is still confusing to you, just ask your investment adviser or tax preparer. Beware, they might charge you a fee, non-deductible, of course!

Any program impacting over 55 million people is worth reviewing at least once a year. This is so obvious that even our divided government officials can agree!

With its annual open enrollment deadline fast approaching, your window to learn about your choices in Medicare coverage is closing quickly.

In total, Medicare costs around $700 billion a year and it’s growing. Together with Social Security’s greater than $900 billion in annual distributions, these two critical social safety nets make up a whopping 40% of our federal budget. This is one reason the Front Street Foundation’s Money Series is holding educational programs on each topic over the next few months.

To kick it off, Fred Goldenberg of Senior Benefit Solutions will be discussing all facets of Medicare. This will include the specifics of Medicare’s coverages, its costs and how to handle your out-of-pocket responsibilities.

Medicare and the choices you face unfortunately sound like a bland bowl of alphabet soup. For example, within basic Medicare, there is Part A for hospital services, Part B for medical services, like doctor visits, and Part D for prescription drug coverage.

However, you should know that Medicare leaves you with a gap of financial risk because it will only pays for 80% of your service costs. Without the protective layer of a private Medigap policy, it’s possible unreimbursed medical expenses could eat up a big chunk of your life savings. In his upcoming presentation, Mr. Goldenberg will discuss the options you have to help protect your nest egg.

Predictably, this means you have more letters to consider! Medigap policies come in the enticing government-standardized flavors of Plan A to Plan N. Don’t ask about the missing letters, E, H, I and J!

Curiously, despite their standardization, monthly premium levels for Medigap policies do vary from insurance company to insurance company. As always, shopping around is important. However, switching around can get complicated. While you can always renew your current Medigap policy, there’s no guarantee you’ll pass the medical underwriting standards of a new insurer.

To simplify things, among other reasons, the government created Medicare Part C. This allows for a bundled package of the basic parts of Medicare along with the standardized elements of a Medigap policy and more. Part C is better known as a Medicare Advantage plan. Take note, it’s the only thing named with some marketing flair behind it.

Like anything else, choosing the one-stop shopping experience of a Medicare Advantage plan does minimize the number of moving parts. On the flip side, given the fact that bundled products do create less transparency, it does require a little more thought.

The good thing is the annual enrollment period for Medicare opened only two short weeks ago. This still provides you enough time to learn more by attending the upcoming Money Series presentation on Thursday, Nov. 9 at 6:30pm in the McGuire Rm of the Traverse Area District Library. To register, visit FrontStreetFoundation.org or call (231) 714-6459.

With trillions of dollars of collective wealth embedded in the value of their homes, it’s no wonder people ask about how they might someday access their real estate to help support their retirement years. This question often leads to a conversation about a little understood product, the reverse mortgage.

Reverse mortgages are somewhat complex and definitely counterintuitive. As opposed to the traditional “forward” mortgage, where you borrow money and then slowly pay back the loan, a “reverse” mortgage is an entirely different beast.

With a reverse mortgage, you borrow against your home’s value with no scheduled repayment. You either start out a reverse mortgage by receiving a lump sum, getting a monthly check, opening a line of credit or choosing a combination of these options.

Unlike a typical mortgage where each monthly payment you make builds equity in your home, a reverse mortgage produces just the opposite; a drawing down of the equity you have in your home. Your net worth literally heads in reverse.

Your reverse mortgage’s growing debt load – invisible, almost, with no payment obligation – will only come due when you move out of your home and it’s eventually sold. Your move may be by choice, by necessity or by death. At least one of those triggers is under your control!

Let’s dig further into the growing and invisible nature of the loan. With each check sent to you by your reverse mortgage, your principal and interest piles up. And, with each passing month, your new borrowing plus your unpaid interest speeds up your debt accumulation. It’s all by design, of course.

HUD, the government agency, closely regulates how much equity a person can tap with a reverse mortgage. Depending on your age and various other factors, only about 50% to 75% of your home’s equity is initially available to you. The reason for the limit is crystal clear.

If your debt pile grows to exceed your home’s value, the federal government is stuck with any shortfall after your home is sold. In fact, HUD’s current shortfall with reverse mortgages recently prompted them to increase the fees they charge borrowers in order to protect the government against future losses.

To get a sense of the fees involved with reverse mortgages, imagine your home is worth $250,000, you’ve reached age 62 – the youngest age allowed – and you currently have no mortgage. If you chose to borrow your initial maximum of around $125,000, your startup loan fees would likely exceed $10,000. This helps to explain why HUD requires all would-be borrowers to complete financial counseling before getting a reverse mortgage.

Join Jason P. Tank, CFA for the Money Series’ season opening presentation on reverse mortgages to be held on Wed., September 13 at 6:30pm in the McGuire Rm. at the Traverse Area District Library. To see the Money Series’ season lineup, visit www.MoneySeries.org

We certainly live in a brave new world. Welcome to the age of passive investing where almost half of all dollars are now invested in index fund strategies with the singular goal of “tracking the market.” That is double the level seen a decade ago and quadruple the level seen only two decades ago.

And, most actively-managed mutual funds – those run by human beings making decisions – are tightly hugging as close as possible to their market-based yardstick. This practice is known as “closet indexing.” Their marketing departments basically demand this lemming-like behavior.

For all intents and purposes, this means the vast majority of money is blindly following, not leading. The question is, to where is it leading?

Let’s examine what a typical balanced portfolio made up of index funds really looks like for the average passive investor.

Within the stock segment, a conventional approach would call for you to own a big dollop of large company stocks along with smaller helpings of mid- and small-sized companies and some international stocks. Within the bond portfolio, a conventional approach would lead you to own a mixture of risk-free government-backed bonds, corporate bonds and some mortgage-backed bonds.

Using the index funds created by Vanguard – the North Star of the indexing movement – the following is precisely what you’d actually own as an investor.

You’d own truly tiny pieces in 506 large companies, 348 mid-sized companies, 1,438 smaller companies and minute slices of 6,176 international companies. On top of that, you’d also own infinitesimally small pieces of 8,174 bonds. Together, you’d own 16,642 individual stocks and bonds.

Viewed another way, for a hypothetical $500,000 balanced portfolio, your biggest stock holdings would be in Apple, Microsoft, Facebook and Amazon and these big bets would represent only about $3,000 each. In addition to these well-known success stories, you’d also have thousands of other investments with an average size of $50 each.

As absurd as this portfolio diversification sounds, it’s important to highlight the primary benefit of the passive, index fund approach. Since no single human being is expending any thought on the investments being made or the risks being taken, the cost of investing in index funds is basically zero. Think about it, you get to invest in over 16,000 securities and it costs you nearly nothing.

Let’s now examine the state of the investment markets. Our current bull market phase is now in its ninth year. Stock prices are at levels only seen at market peaks. Bond yields rest at near-historic lows. And, we live in a world that’s increasingly drawn to artificial intelligence and automation, including entrusting it to manage a person’s life savings. Hmm…

We do live in a brave new world.