An employee stock option gives you the right to purchase a specific number of shares of your company’s stock, at a specific price, within a specific time period. The grant price is typically the market value of the stock at the time your company granted you the options. For tax purposes, employee stock options are classified as either Incentive Stock Options (ISOs) or Non-qualified Stock Options (Non-Quals). The primary difference between the two is in their tax treatment.

Non-Qualified Stock Options (Non-Quals): A Non-qualified stock option does not qualify you for preferential tax treatment. You will pay ordinary income tax on the difference between the grant price and the Fair Market Value of the stock at the time you exercise the option.

Incentive Stock Options (ISOs): Incentive Stock Options are qualified under IRS Code Sec. 422 to receive special tax treatment. Generally, no income tax is due at grant or exercise. Rather, the tax on the difference between the grant price and the Fair Market Value (FMV) of the stock on the exercise date is deferred until you sell the stock. At that point, your tax rate varies based on how long you owned the stock. If you sell the stock after one year from the exercise and two years from the grant date, you will receive long-term capital gains tax treatment. If you sell stock within one year of exercise or two years of grant, your gain will be treated as ordinary income. You may also be subject to the Alternative Minimum Tax.

Restricted Stock Units are an award of company stock, subject to conditions (such as continued service to the company or attainment of performance goals) that must be met before you have the right to sell or transfer the stock. Taxes are due at vesting. When the shares vest, you will realize compensation based on the fair market value of the shares on that date. For example, if you have 100 shares that vest when the fair market value is $20 per share, you will recognize ordinary income of $2,000. Your company may offer various options for paying the income tax due on the $2,000, including choices such as:

Withhold-to-Cover: Your employer will automatically withhold some of the vested shares to cover the taxes due. Using the example above and applying a default tax withholding rate of approximately 40%, the taxes due would be $800 ($2,000 X 40% = $800/$20 per share), equal to 40 shares. Your employer would withhold the 40 shares and release the remaining 60 shares to you.

Cash: You may also have the option to pay the taxes directly to your employer via payroll or check. Your account will be credited with the full amount of vested shares.

Sell-to-Cover: A sufficient number of vested shares are sold to cover the taxes, commissions and fees due. Using the example above, your company would sell approximately 40 shares and release the remaining shares to your account. Please refer to your plan documents for details on your particular company’s tax payment methods.

College costs have been rising higher than the rate of inflation. More than 60 colleges now have a sticker price (tuition, fees, room and board) that's over $60,000 a year. While many college students receive some form of financial aid, applying for and maximizing your eligibility can be a challenging process. If you have children, you must have a plan. Consider this: a 13-year old has less than 60 months to left to save. The earlier you start, the better off you’ll be. Below are some of the common methods used to pay for college:

The Uniform Transfers to Minors Act (UTMA): allows a minor to receive gifts, such as money, stock, patents, royalties, real estate and fine art. Under the UTMA, the gift giver or an appointed custodian manages the minor's account until legal age. The property belongs to the minor, and earnings are taxed at the child's tax rate. It’s important to note that this may have a negative impact when the minor applies for financial aid or educational scholarships.

529 College Plan: provides tax advantages when saving and paying for higher education. The plans allow a person to grow savings on behalf of a beneficiary, who could be a child or grandchild, spouse or even themselves. A 529 plan may be established by anyone for a designated beneficiary. There is no limit on the number of 529 plans an individual can set up, but contributions should not exceed the cost of education nor the limit as set by the state.

There are two kinds of 529 plans:

• Prepaid Tuition Plans: allow the plan holder to prepay for the beneficiary's tuition and fees at a designated institution. Under a prepaid tuition program, eligible expenses for a fixed period of time or a fixed number of credits are prepaid.

  For example, an individual may make prepayments for two future semesters of college at today's cost. The prepayment guarantees the beneficiary two semesters, regardless of the cost in the future. This means that the college bears the risks of the investments. Contributions are limited to amounts necessary to pay the beneficiary's qualified education expenses.

  Prepaid plans differ in their specifics, but often have limitations that do not apply to 529 Savings Plans, such as age caps and residency requirements. They often have stricter limits on what expenses they can cover. Textbooks or room and board may not be eligible. On the other hand, some prepaid plans are guaranteed by states, while savings plans are subject to market risk.

  While prepaid plans are typically designed to pay for tuition at a designated school, the funds can usually be transferred or refunded in case your child chooses a different school.

  With the exception of the Massachusetts U.Plan, all of the state-sponsored prepaid 529 plans are only available to state residents.

• Savings Plans: 529 College Savings Plans offers a flexible, a tax-advantaged way to save for college. Plan holders open an account and have the option to invest in a range of mutual funds. Earnings from the 529 plan are exempt from federal income taxes, providing the withdrawals are used for qualified educational expenses. Distributions that are not used to pay for qualified educational expenses are subject to taxes and a 10% penalty, with exceptions for circumstances such as death and disability.

  Contributions to a 529 plan are not deductible on your federal income tax, however, some states do offer a tax deduction under certain circumstances.

• Student Loans - There are two kinds of student loans:

  Federal student loans: These are issued by the government and anyone with a high school diploma is eligible. The very first step is to fill out a form called the FAFSA — Free Application for Federal Student Aid. The information on your FAFSA is what the government and schools use to determine your eligibility for financial aid. This can come in the form of grants, work-study, student loans and even scholarships. If you’re awarded a grant, that money is free — so you don’t have to pay it back. Grants are typically smaller amounts of money, so even if you get one, you will likely still have to take out student loans — which you do have to pay back. Work-study opportunities allow students to work for the school to cover a portion of their tuition. Scholarships are like grants, if you’re awarded a scholarship, you don’t have to pay the money back.

  Private student loans: These are issued by private banks or other financial companies. With a private loan, you borrow money directly from the bank instead of the department of education. BE CAREFUL!!

  • Private student loans have much higher interest rates — so they’ll cost you a lot more over time.
  • When it comes time to pay them back, there’s really no wiggle room and you don’t have any of the repayment options available for federal loans that can help you with your loan payments.
  • Private lenders aren’t really there to help you through obstacles during your repayment period — they will come after you for the money owed.

Your estate is comprised of everything you own— your car, home, real estate, checking and savings accounts, investments, life insurance, furniture, personal possessions. No matter how large or how modest, everyone has an estate and you can’t take it with you when you die.

When death does occur, you probably want to control how those things are given to the people or organizations you care most about. To ensure your wishes are carried out, you need to provide instructions naming your beneficiaries, what you want them to receive, and when they are to receive it. You will, of course, want this to happen with the least amount paid in taxes, legal fees, and court costs.

That is estate planning—making a plan in advance and naming whom you want to inherit the things you own after you die. However, good estate planning is much more than that. It should also:

• Include instructions for passing your values in addition to your valuables.
• Include instructions for your care if you become disabled before you die.
• Name a guardian and an inheritance manager (custodian) for minor children.
• Provide for family members with special needs without disrupting government benefits.
• Provide for loved ones who might be irresponsible with money or who may need future protection from creditors or divorce.
• Include life insurance to provide for your family at your death,
• Include disability income insurance to replace your income if you cannot work due to illness or injury
• Include long-term care insurance to help pay for your care in case of an extended illness or injury.
• Provide for the transfer of your business at your retirement, disability, or death.
• Minimize taxes, court costs, and unnecessary legal fees.
• Be reviewed and updated as your family and financial situations (and laws) change over your lifetime.

What is a Will? A will is a legal document that sets forth your wishes regarding the distribution of your property and the care of any minor children. Creating a will gives you discretion over the distribution of your assets. It lets you decide how your assets and family heirlooms, should be distributed. If you have a business or investments, your will can direct the transition of those assets.

While wills generally address the bulk of your assets, there are a variety of items that are not covered by the instructions in a will. These items include community property, proceeds from life-insurance, retirement assets, assets owned as joint tenants with rights of survivorship, and investment accounts that are designated as "transfer on death."

While a will may direct the distribution of your assets at death, those assets will most likely still be subject to probate.

What is probate?Probate is the judicial process whereby a will is "proved" in a court of law and accepted as a valid public document that it is the true last testament of the deceased. It attempts to identify and inventory the decedent’s property, value the estate, pay any outstanding debts or taxes, and distribute any remaining property according to the will (or state law, if there is no will).

Simply put, the probate process is the way to remove a deceased person’s name from an asset (and transfer title to the beneficiaries). Probate can be very expensive and take a long time to complete. The decedent’s assets may be “frozen” as the court attempts to settle the estate. This can cause disruptions for dependents and beneficiaries of the estate.

Does all property have to go through probate when a person dies?

Most states allow a certain amount of property to pass through a simplified probate process. In California, for example, you can pass up to $100,000 of property without probate, and there's a simple transfer procedure for any property left to a surviving spouse.

What is a Living Trust?A trust is a fiduciary relationship in which one party, known as a Trustor or Grantor, gives (grants) another party, the Trustee, the right to control a legal entity that holds title to property for the benefit of a third party, the beneficiary.Example: Ted gives Judy the right to control a Trust that holds property for the benefit of Ted’s son, Bill. In this example, Ted is the Trustor or Grantor, Judy is the Trustee, and Bill is the beneficiary.

Trusts are established to provide legal protection for the Grantor’s assets, to make sure those assets are distributed according to their wishes. A trust can be used to determine how a person’s money should be managed and distributed while that person is alive, or after their death. It avoids probate by removing the person’s name from the assets while they’re still living. It can save time, reduce paperwork, protect assets from creditors, reduce or eliminate estate taxes and it can dictate the terms of an inheritance for beneficiaries.

Categories of Trusts

Although there are many different types of trusts, each fits into one or more of the following categories:

• Living or Testamentary: Also called an inter-vivos trust – is a written document in which an individual's assets are provided as a trust for the individual's use and benefit throughout their lifetime. The trust assets are then transferred to beneficiaries at the time of the Grantor's death. The individual has a successor trustee who is in charge of transferring the assets and settling the estate.
• Revocable or Irrevocable: A revocable trust can be changed or terminated by the Grantor anytime during their lifetime. An irrevocable trust cannot be changed once established. Often times, revocable trusts become irrevocable trusts upon the death of the Grantor. Living trusts can be revocable or irrevocable. Testamentary trusts can only be irrevocable.
• What is a Charitable Remainder Trust (CRT)? A tax-exempt, irrevocable trust designed to reduce the taxable income of the Grantor. This is done by donating assets to the trust and then having it pay the beneficiaries income for a stated period of time (or for the remainder of the Grantor’s life, depending upon how the trust document was drawn up.) Once this time-frame expires (or upon the Grantor’s death) the remainder of the estate is transferred to a charity as beneficiary.

  In addition to assisting your favorite charity, a charitable remainder trust also gives you three primary tax benefits:

  • You are allowed to take an income tax deduction and spread it over five years, for the value of your charitable gift. You do not get to deduct dollar for dollar the amount that you initially gave. Instead, the IRS calculates your total deduction as the amount you originally gave, minus what you can expect to receive as a return through interest payments. Example, if you gave $200,000 but are expecting to get back $100,000 in interest over the course of your life, your total deduction would be $100,000.
  • Since the property that the Grantor gave to the trust will go to the charity upon their death, the property will not be included in the Grantor’s estate for the purposes of determining estate tax.
  • You can turn assets that aren’t producing income into cash without paying a tax on any profits gained. For example, if Bea held 5000 shares of stock that had appreciated in value from $10/share to $100/share in the years that he held it, he could not sell off the stock without paying capital gains tax. If Bea donates the stock to a charitable trust, the trust can sell the stock and not pay a tax on the sale. Bea's charity can sell the $500,000 worth of stock, invest the money, and pay Bea the interest for the rest of her life, all without capital gains tax. If Bea had decided to sell the $500,000 worth of shares by herself, she would have had to pay a capital gains tax on the proceeds.
  • There are two main types of Charitable Remainder Trusts (CRTs):
    • Charitable Remainder Annuity Trusts (CRATs) that distribute a fixed annuity each year.
    • Charitable Remainder Unitrusts (CRUTs) that distribute a fixed annual percentage based on the balance of the trust assets.

There are many benefits to using a Trust as part of your overall estate plan. They are not just for high net worth individuals and families. They are valuable tools that we recommend all our client’s adopt. Since states have different laws, we’ll want to incorporate an estate planning attorney from your specific state in any plan developed.

Defined Contribution Plans

A defined-contribution plan is retirement plan that's typically tax-deferred, like a 401(k) or a 403(b), in which employees contribute a fixed amount or a percentage of their paychecks into an account that is intended to fund their retirement. The employer may match a portion of employee contributions as an added benefit to help retain and attract top talent. These plans place restrictions that control when and how each employee can withdraw from these accounts without penalties. There is no way to know how much the plan will ultimately be worth since future account values fluctuate on the basis of investment earnings. The most common defined contribution plans include:

• Individual Retirement Account (IRA): a type of retirement account that allows individuals to direct pretax income towards investments that can grow tax-deferred. You pay taxes only when you make withdrawals from the account. You may contribute 100% of earned income up to a specified maximum dollar amount each year. Contributions to a traditional IRA may be tax-deductible depending upon the taxpayer's income, tax-filing status and other factors. There is a 10% early withdrawal penalty on withdrawals taken prior to age 59½ if no exceptions apply. In the year you reach age 70½ you are no longer eligible to contribute to a traditional IRA, and must begin the process of taking annual Required Minimum Distributions (RMDs.)
• Roth IRA: An account that allows you to make contributions with money on which you've already paid taxes. You're able to withdraw your contributions tax- and penalty-free at any time, for any reason. Earnings may also be withdrawn tax-free and penalty-free provided that the Roth has been established for at least five years and one of the following conditions is met: age 59½, death, disability, qualified first time home purchase. There are no Required Minimum Distributions (RMDs) and contributions can continue to be made once the taxpayer is past the age of 70½, as long as he or she has earned income. Eligibility for a Roth IRA account depends on income.
• SEP IRA: A retirement savings plan established by employers, including self-employed individuals (independent contractors- sole proprietorships or partnerships) for the benefit of their employees. Contributions are made to each eligible employee's SEP IRA on a discretionary basis. That means that the employer can choose to contribute (or not) each year. However, if the employer does contribute, it must contribute the same percentage of compensation to all employees eligible for the plan, up to the contribution limit. The individual employee accounts are similar to a traditional IRA and are subject to many of the traditional IRA rules.
• Simple IRA: a retirement plan that may be established by employers, including self-employed individuals (sole proprietorships and partnerships), for the benefit of their employees. The SIMPLE IRA allows eligible employees to make pretax contributions to the plan. Employers are required to make either matching contributions – based only on the contributions made by the employees – or nonelective contributions, which are paid to each eligible employee regardless of whether or not the employee participates in the plan. The SIMPLE IRA allows employers and employees a tax deduction for their respective contributions. The individual employee accounts are similar to a traditional IRA and are subject to many of the traditional IRA rules.
• 401(k): a qualified employer-sponsored retirement plan that eligible employees may make salary-deferral contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings in a traditional 401(k) plan accrue on a tax-deferred basis. Earnings in a Roth 401(k) plan accrue tax free. There is a 10% early withdrawal penalty on withdrawals taken prior to age 59½ if no special exceptions apply. You may continue to contribute to a 401(k) plan past age 70½ (avoiding the Required Minimum Distribution) as long as you continue to work for the same employer that sponsors the plan, and do not own 5% or more of the company.
• Solo 401(k): also known as a Self Employed 401(k) or Individual 401(k) is a qualified retirement plan that was designed specifically for employers with no full-time employees other than the business owner(s) and their spouse(s). Those that qualify for the Solo 401(k) can receive the same tax benefits as a general 401(k) plan, but without the employer being subject to the complex ERISA rules.
• 403(b)/ TSA: a retirement plan similar to a traditional 401(k), used by nonprofit companies, religious groups, school districts, and governmental organizations. Participants often include teachers, school administrators, professors, government employees, nurses, doctors and librarians. Employee contributions into the plan are made before income tax is paid and allowed to grow tax-deferred until the money is withdrawn. Participants often have the option of investing in either annuity contracts, bought through an insurance company or purchasing mutual funds directly through a custodial account.
• Thrift Savings Plan (TSP): a retirement plan for United States civil service and function similarly to a 401(k). In a traditional TSP, you make pre-tax contributions and pay tax on withdrawals of your money in retirement. If you elect the Roth option, you would contribute post-tax income and would not pay tax on withdrawals. Different TSP accounts may have some slight differences, depending on if you’re in the military or a civilian government worker:
  • Federal Workers

    Federal Employees' Retirement System (FERS): Federal civilian employees who were hired on or after January 1, 1984, are FERS employees. FERS employees hired after July 31, 2010, are automatically enrolled in a traditional TSP, and 3% of their basic pay is deducted and deposited into the account unless you elect to change or stop your contributions. FERS employees hired before August, 1, 2010, have TSPs that get a 1% contribution from their agency, and they can choose to contribute more as well.

    Civil Service Retirement System (CSRS): This is the retirement system for federal civilian employees who were hired before January 1, 1984. CSRS employees’ accounts are established by your agency after you make a contribution election.

  • Military: Because 80% of uniformed military members don’t remain in the military for the 20 years needed to be eligible for a pension, many were walking away from their service with nothing for retirement. The Blended Retirement System (BRS) was enacted to change that. It allows you to choose a pension, a TSP, or both, and the best option for you depends on your current years of service.
• Profit Sharing Plan: an option that may be added to a normal 401(k) plan, whereby the employer makes discretionary pre-tax contributions to eligible participants’ retirement accounts. The employer has control for determining when and how much the company contributes to the plan, although the allocation amongst employee accounts is usually based on the employee’s salary or level within the organization. A profit-sharing plan is available for businesses of any size, and a company can establish one even if it already has other retirement plans in place. Furthermore, a company has a lot of flexibility in how it can implement a profit-sharing plan, as long as it does not discriminate in favor of highly compensated employees or the owners of the company. Contributions made to a profit sharing plan can have an employee vesting schedule attached.
• Money Purchase Plan: a plan that is similar to a profit-sharing plan but with fixed (not variable) contributions. The employer makes annual contributions according to a required percentage whether or not the business makes a profit. For example, a plan with a contribution of 5% of each eligible employee’s pay means the employer contributes 5% of each eligible employee’s pay to their separate account annually.

  An employee with a money-purchase pension plan may participate in additional retirement plans, or contribute to other retirement accounts. As long as contribution amounts remain within annual limits, employer contributions and employee funds remain tax-deferred.

  Employers typically adopt a vesting schedule which outlines when an employee may withdraw funds from the plan. After being fully vested, an employee may start taking out funds at age 59½ without a tax penalty. Withdrawals as a lump sum or as minimum annual installments based on life expectancy are taxed as ordinary income and must start by the time the account owner reaches age 70½.

• Health Savings Account (HSA): a tax-advantaged medical savings account for individuals who are covered under a high-deductible health plan to save for medical expenses that the plan does not cover. Pre-tax contributions are made into an HSA account by the individual and are limited to a maximum amount each year. The contributions are invested over time and as long as withdrawals are used to pay for qualified medical expenses, the amount withdrawn will not be taxed. Qualified medical expenses include deductibles, dental services, vision care, prescription drugs, co-pays, psychiatric treatments, and other qualified medical expenses not covered by a health insurance plan. Insurance Premiums usually don’t count towards qualified medical expenses unless the premiums are for Medicare or other healthcare coverage if 65 years or more, for healthcare insurance while unemployed and receiving unemployment compensation, and for long-term care insurance.

  If distributions are made from an HSA for reasons other than paying for medical expenses, the amount withdrawn will be subject to both income tax and an additional 20% tax penalty. Individuals who are 65 years old or older will no longer be able to contribute to an HSA, but can withdraw any funds accumulated in the account for any expense without incurring the 20% penalty. However, income tax will still apply to any non-medical usage.

Defined Benefit Plans

• Pension Plan / Qualified-Benefit Plans: An employer-sponsored retirement plan that promises the employee a specific monthly benefit payable at the retirement age specified in the plan. Defined benefit plans are usually funded entirely by the employer. The employer is responsible for contributing enough funds to the plan to pay the promised benefits, regardless of profits and earnings.

  The plan has a specific formula for determining a fixed monthly retirement benefit. Benefits are usually based on the employee's compensation and years of service which rewards long term employees. Benefits may be integrated with Social Security, which reduces the plan's benefit payments based upon the employee's Social Security benefits. The maximum benefit allowable is 100% of compensation (based on the highest consecutive three-year average) to an indexed maximum annual benefit. A defined benefit plan may permit employees to elect to receive the benefit in a form other than monthly benefits, such as a lump sum payment.

  An actuary determines yearly employer contributions based on each employee's projected retirement benefit and assumptions about investment performance, years until retirement, employee turnover and life expectancy at retirement. Employer contributions to fund the promised benefits are mandatory. Investment gains and losses cause employer contributions to decrease or increase. Non-vested accrued benefits forfeited by terminating employees are used to reduce employer contributions.

• Cash Balance Plan: A type of hybrid plan that promises a fixed monthly benefit at retirement that is usually based upon a formula that takes into account the employee's compensation and years of service. A cash balance plan looks like a defined contribution plan because the employee's benefit is expressed as a hypothetical account balance instead of a monthly benefit.

  Each employee's "account" receives an annual contribution credit. Employees appreciate this design because they can see their "accounts" grow, but they are still protected against fluctuations in the market. In addition, a cash balance plan is more portable than a traditional defined benefit plan since most plans permit employees to take their cash balance and roll it into an Individual Retirement Account (IRA) when they terminate employment or retire. As in a traditional defined benefit plan, the employer bears the investment risks and rewards in a cash balance plan. An actuary determines the contribution to be made to the plan.

When it comes to retirement, it seems there are a ton of “rules” to understand. There are many different perspectives on what one needs to do in order to thrive in retirement and make their savings last a lifetime. To determine the amount you need to have in saved, we must first consider the retirement income desired. For this, we use the 4% rule.

Using this rule, a retiree would draw 4% of their portfolio the first year and then adjust for inflation in the years remaining. For example, let’s say you have a portfolio of $1.5 million and inflation is 2%. Upon your first year of retirement, you would take out $60,000. Then your second year you would take out $61,200. Then your third year you would take out $62,400 and so on. The 4% percent rule is a popular formula for figuring out how much you should save for retirement. Let’s say for example you wish to retire on $80K a year income, then you would need to save $2 million dollars.

Tip: An easy way to determine how much you will need to save using the 4% rule is it to multiply your desired income by 25. (i.e. $80k times 25 = $2,000,000).

In a recent study, the 4% rule was determined to have the highest probability of not running out of money based on historical market conditions. It showed that if a retiree used the 4% rule with a portfolio invested in 60% stocks and 40% bonds, they would end up with double the amount they started with after 30 years (source: Kitces, 2012). It is of course impossible to predict stock market returns, and past performance does not guarantee future results. Because of this, it’s critically important to develop a plan that regularly monitors your withdraw rate relative to your portfolio value. Remember that the 4% rule doesn’t guarantee you won’t run out of money or that your retirement savings will last. However, if you stick to a pre-determined withdrawal rate, it can provide a level of confidence that your portfolio will support you at least 30 years. Of course each client’s situation is unique, and many factors must be considered when determining a sustainable withdraw rate.

Other Retirement Income Considerations

• Consider the timing of your Social Security benefits. Maximizing your benefits involves many factors beyond just your age.
• Consider a tax plan to minimize taxes in retirement. Every dollar you can avoid in taxes is less money that needs to be withdrawn from your portfolio.
• Invest in ways to reduce costs and minimize expenses. Saving money is often times more efficient than trying to earn more money.
• Invest differently. Consider using alternatives to bonds in a portfolio to limit risk. There are many kinds of vehicles that generate income or damper market swings, with less drag on portfolio performance when markets appreciate.
• Diversify your income sources. Consider alternative ways to increase your income in retirement; such as passive income opportunities, real estate rentals, even a hobby, farm or side business.
• The most significant risk to your retirement is a financial emergency dictating that you withdraw funds at an inopportune time. The more prepared you are, the more likely your portfolio will last throughout your life.

Source: Kitces, Michael. What Returns Are Safe Withdrawal Rates Really Based Upon? (2012, August 15). In Nerd’s Eye View. Retrieved February 15, 2018 from www.kitces.com

Paying for health insurance has become a huge financial drag for American employers, so very few companies still offer retiree benefits. Be careful about relying on your employer's promise to provide health care benefits once you retire. Even those that pledge such care may find it hard to fulfill their promise when you hit retirement. More and more companies are reducing or rescinding health insurance benefits once promised to their retirees. Even public-sector employees are seeing reductions in benefits as states and local governments attempt to balance their budgets.

What is COBRA? When your employment terminates, you will have the option of continuing on your employer's health plan for at least 18 months, thanks to a federal law called the Consolidated Omnibus Budget Reconciliation Act (COBRA). It says that when you leave your job, your employer must allow you to keep your coverage for up to 18 months. Generally, this law applies to firms with at least 20 employees. If you do continue the company plan under COBRA, you are responsible for the entire premium (including what your employer paid when you were working). Moreover, the insurance company can tack on an extra 2% to cover administrative fees.

How much will health insurance cost me? Individual policies vary depending upon the type of coverage. Data shows that individual health insurance is, on average, more affordable than group coverage, however it may not feel that way since you will no longer have an employer subsidizing some of your premium costs. Since the passage of the Affordable Care Act, insurance companies can no longer discriminate against you because of a preexisting condition, but you will likely still pay more if you are older, and plan pricing varies widely from state to state. If you're buying insurance on your own, we recommend that you speak with an insurance broker. They offer insurance coverage from many different carriers and will help you find the best policy for you. You can also shop the federal health exchange created under the Affordable Care Act, or find your state exchange, by going to Healthcare.gov. Most states have various plan options available at different prices. What's more, the federal government offers subsidies to people with income below a certain level. Medicare does kick in at 65, but there are costs for that coverage as well. Many retirees choose to buy so-called Medigap policies that provide coverage above and beyond what is offered through Medicare, or Medicare Part D prescription drug coverage. Add it all up, and you need to get serious saving money today to help cover your health costs in retirement. Even when you are covered by Medicare and any other health insurance, you still are going to pay for some costs, including premiums, deductibles, co-pays and - most importantly for many retirees - prescription drugs.

What if I retire and have no health plan? It depends how old you are. If you're 65, then you’re eligible for Medicare. If you're not yet 65, you must find - and pay for - your own health insurance coverage until then. Don't ever let your health coverage lapse. If you suddenly have an accident and become ill, you could burn through your entire retirement savings in very little time.

How can I keep my health costs down in retirement? You can start saving now, earmarking money specifically for future health costs. Once you turn 65 you’ll be eligible for Medicare, and that will take care of much of your medical expenses, but probably not all. You will be required to pay a premium for some of your Medicare coverage, and you will probably want to purchase a private Medigap policy to cover all the costs that Medicare doesn't cover. Fidelity Investments estimates that a 65-year-old couple who retired in 2015 would need $245,000 of their own savings to handle 20 years of out-of-pocket retirement health costs.

What is the best way to save for health care? First, max-out any and all tax-deferred retirement savings plans for which you're eligible, such as 401(k)s or IRAs. Many retirement vehicles can be accessed for qualified medical expenses. Once you’ve contributed the maximum amount to your tax-deferred accounts, consider adding one of the following plans:

• Health Savings Account (HSA): a tax-advantaged medical savings account for individuals who are covered under a high-deductible health plan to save for medical expenses that the plan does not cover. Pre-tax contributions are made into an HSA account by the individual and are limited to a maximum amount each year. The contributions are invested over time and as long as withdrawals are used to pay for qualified medical expenses, the amount withdrawn will not be taxed.

  Qualified medical expenses include deductibles, dental services, vision care, prescription drugs, co-pays, psychiatric treatments, and other qualified medical expenses not covered by a health insurance plan. Insurance Premiums usually don’t count towards qualified medical expenses unless the premiums are for Medicare or other healthcare coverage if 65 years or more, for healthcare insurance while unemployed and receiving unemployment compensation, and for long-term care insurance.

  If distributions are made from an HSA for reasons other than paying for medical expenses, the amount withdrawn will be subject to both income tax and an additional 20% tax penalty. Individuals who are 65 years old or older will no longer be able to contribute to an HSA, but can withdraw any funds accumulated in the account for any expense without incurring the 20% penalty. However, income tax will still apply to any non-medical usage.

  The Health Savings Account (HSA) is often compared with the Flexible Savings Account (FSA). While both accounts can be used for medical expenses, there are some key differences that exist between them. For example, unused funds in the FSA during a given tax year are forfeited once the year ends. Also, while the elected contribution amount for the year can be changed by an employee with an HSA anytime during the year, the elected contribution amount for an FSA is fixed, and can only be changed at the beginning of the following tax year.

• Flexible Spending Accounts (FSAs):An account funded with pre-tax voluntary employee contributions. FSAs are established to pay for specific health care expenses that are not reimbursed by a group health plan such as eyeglasses, dental work, deductibles and co-payments. Your expenses and the expenses of your spouse, dependent children, and any other qualified tax dependent can be paid for using your flexible spending account.

  Employers may offer FSAs as part of a cafeteria plan and have complete flexibility to offer various combinations of benefits in designing their plan. Based on previous IRS regulations, contributions remaining at the end of the plan year were forfeited under the IRS "use it or lose it" rule.

  Even though the IRS has extended the allowable period to beyond the end of the plan year, the "use it or lose it" rule remains an integral component of any FSA. Employers must amend their plans to include the time extension beyond the end of the plan year now permitted by the IRS. The extension is not automatic. At the end of the extension period, unused funds are still forfeited.

  Some employers may even contribute to the FSA, but this is not an IRS requirement. So that requests for reimbursement can be paid, employers must receive verification of the medical claims. You do not have to be covered under the employer/sponsor's health care plan, or any other health care plan to participate in an FSA. Self-employed individuals are not eligible for an FSA.

• Medical Savings Accounts (MSAs):Medical Savings Accounts were established before HSAs and are also known as Archer MSAs. They were made available in 1996 to self-employed individuals and employees of smaller businesses. If you have an MSA, you may transfer your funds to your HSA. You may choose to keep both an MSA and an HSA.

  If you contribute to your MSA, your HSA maximum annual contribution limit will be reduced by the amount of contributions to your MSA each year. At age 65, you may spend your MSA or HSA monies on whatever you choose, penalty free, but you will have to pay tax on non-qualified distributions.

• Health Reimbursement Accounts or Health Reimbursement Arrangements (HRAs):Employer-owned accounts administered on a "pay-as-you-go" basis. Bookkeeping entries or accounts are established and maintained by employers on behalf of each covered employee for the purpose of paying for unreimbursed medical expenses. Often employers will allow you to roll over the money remaining in your HRA at the end of the year to your HRA for the next year. However, if you leave your employer, your account generally cannot be taken with you and you may not have future access to the remaining balance. With the Tax Relief and Health Care Act of 2006, employers may transfer HRA balances to open HSAs. Individuals may not execute a transfer on their own.

Social Security is designed to provide retirement support for American workers who pay into the system. It is funded through FICA taxes (Federal Insurance Contributions Act). You can collect Social Security once you reach a certain age or become disabled. You may also be able to collect survivor benefits if you're the spouse or child of a recipient who has passed away.

In order to be eligible for Social Security benefits, you must earn enough "credits" during your working years. These credits will count toward your future eligibility even if you switch jobs or take a break from the workforce. The dollar amount needed to earn one credit is usually raised annually. If you were born in 1929 or later, you need 40 credits, or 10 years of work, to qualify for retirement benefits. You typically need fewer credits to obtain disability benefits.

When should I take Social Security? Even if you've accumulated your 40 credits, you can't claim retirement benefits until you're 62 or older. The longer you wait to start collecting benefits, the larger the payout will be. If you wait to claim Social Security until you reach your "full retirement age" -- which is determined by the SSA and is 67 if you were born in 1960 or later -- then you'll receive your "primary benefit amount," which is the full monthly benefit you're entitled to based on your earnings record. The earlier you claim your Social Security benefits, the lower your monthly payment will be.

Example: If your full retirement age is 67 and you opt to claim benefits at age 62, then you'll get just 70% of your primary insurance amount. If you begin collecting at 65, you'll get 86.7% of your monthly benefit. On the flip side, you can earn delayed-retirement credits for waiting past your full retirement age. For every extra year you wait to claim Social Security benefits, your eventual payout will increase by 8%. Your benefits max out at age 70, though, so there's no reason to delay benefits beyond that point.

How much will my benefit be? Your Social Security retirement benefits will depend on how much money you earned during your working years and your age at the time you start collecting benefits. Similarly, your Social Security disability benefits are based on your eligible lifetime average earnings.

The Social Security Administration sends out annual benefit statements to those who are 60 and older who aren’t yet receiving Social Security benefits. You can also use the Social Security online benefits calculator to estimate your monthly benefits. Keep in mind that the younger you are, the less accurate your estimate is likely to be, since your future earnings could affect your overall payout.

Your Social Security benefits are only designed to replace about 40% of your pre-retirement income. Common practice estimates you'll need 70% to 80% of your pre-retirement income to live comfortably in retirement, so you have to take steps to bridge that 30% gap (or an even larger gap depending upon your lifestyle). That means you'll need to create supplemental streams of retirement income.

Will Social Security even be around by the time I retire? According to the Social Security Administration's latest report, the combined funds used to pay retirement and disability benefits are likely to be depleted by 2034. The report also states that once those funds are gone, ongoing taxes should be sufficient to pay about 79% of benefits. Still, with the future of Social Security on relatively shaky ground, if you're nowhere close to retirement at this point, your best bet is to take matters into your own hands. Save aggressively, invest wisely, and think of your Social Security benefits as an added bonus. This way, you're less likely to be thrown for a financial loop if they don't end up coming through.

Click here to visit the Social Security Administration website

Medicare is the national health insurance program in the United States for Americans aged 65 and older. It also provides health insurance to younger people with disability status as determined by the Social Security Administration.

Medicare is divided into four Parts.

• Medicare Part A: providing hospitalization (inpatient, formally admitted only), skilled nursing (only after being formally admitted to a hospital for three days and not for custodial care), and hospice services. Medicare Part A is "free" - meaning you pay no premiums.
• Medicare Part B: provides coverage for doctor visits and other "outpatient" costs such as medical equipment and physical therapy. It also covers some preventive costs such as diabetes testing, glaucoma screening, and colon and prostate cancer screening. You must pay a monthly premium for Medicare Part B. The premium is based on your adjusted gross income.
• Medicare Part C: known as Medicare Advantage. These are private plans run through Medicare that, by law, must at least be "equivalent" to regular Part A and Part B coverage. But there's lots of variation among Part C plans. Some Part C plans provide significant coverage beyond what you get with Medicare Parts A and B - including, in some cases, prescription drug coverage - but not all. The better ones basically function like Medigap policies but are administered by Medicare rather than being wholly run by private insurance companies. If you have a Medicare Advantage plan, any Medigap policy you may have is redundant; Medigap won't pay if you are covered by Medicare Part C.

  The monthly premium varies widely depending on your state and the private insurer you choose, as well as whether you choose an HMO or PPO for your Medicare Advantage coverage.

  Click here for more Information: Medicare Advantage Plans

• Medicare Part D: provides prescription drug coverage. It is actually a separate policy you buy from a private insurer. Each private insurer has its own plan, but the general rules work like this: You pay a monthly premium for Part D coverage and may also have an annual deductible of no more than a few hundred dollars a year, if there is any deductible at all. Once you cover the deductible, your plan will then pay some - or all - of your drug costs, but only for the first $2,510 in total drug costs per year.

  Once you hit $2,510 you are in officially in the donut-hole. You do not receive any prescription drug coverage for annual costs that fall between $2,510 and $4,050. That's right: You pay 100% of costs that fall within that dollar range. Once your annual costs push past $4,050 you are covered again: you will pay just 5% of costs above $4,050 with Medicare picking up the other 95%.

• What is Medigap insurance? Medicare provides a lot of coverage, but it doesn't cover everything. So some people choose to buy a separate policy to provide coverage for the areas Medicare falls short on. This is known as Medigap insurance. You buy Medigap from a private insurance company.

  You can also use your Medigap policy to cover expenses you have under Medicare, such as annual co-pays and deductibles. It’s important to note, that if you opt for a Medicare Advantage Plan (Medicare Part C), any Medigap policy you have won't pay out. So if you decide to move into a Medicare Advantage Plan and you already have a Medigap policy, drop the Medigap.

  Click here for more information: Medicare Supplement Insurance

• Which Medigap policy should I buy? There are 12 standard Medigap policies to choose from (A through L). Medigap A is the most basic "core" policy. As you move through the alphabet, the plans add more coverage. For example, Medigap E will offer something that is not included in Medigap D, but will lack a coverage provided in Medicare F.

  There is no difference in plans offered by different insurers; plan details are all set by the government. (Important caveat: If you live in Massachusetts, Minnesota or Wisconsin, check with your state insurance company or a private insurer who operates in your state. Medigap policies in these states offer coverage different than the plans followed by the 47 other states.)

  If you and your spouse want Medigap coverage, you'll need to buy separate policies; spouses aren't covered together. The cost will vary depending on where you live, your health and, of course, the specific plan you choose.

  How to compare Medigap Policies

  Click here to visit the Medicare website