BitCoin is going crazy. But, what is it, and should you be invested in it? Also, new laws might increase how much you have to pay in Medicare premiums next year. Learn all about it in this episode.
Make It Last with Victor Medina is hosted by Victor J. Medina, an estate planning and elder law attorney and Certified Financial Planner™. Through his law firm and independent registered investment advisory company, Victor provides 360º Wealth Protection Strategies for individuals in or nearing retirement.
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Announcer: Welcome to “Make It Last,” helping you keep your legal ducks in a row and your nest egg secure, with your host Victor Medina, an estate planning and elder law attorney, and certified financial planner.
Victor J. Medina: Hey, everybody, welcome back to Make It Last. I am your host Victor Medina. I am so glad you could join us here this Saturday morning.
I am excited to be here for this show. I’m going to be talking about a brand‑new concept called Bitcoin. You might be hearing a lot about it in the news. I’m going to tell you what it’s all about, give you the skinny on that.
We are going to be covering some new rules about Medicare contribution rates because they could be going up next year. Depending on how much you make, that determines how much you’re going to be paying in Medicare. It’s a good one to listen to. Before we get started, I did want to talk a little bit about some recent news that had come out.
Now, you faithful listeners of the Make It Last show know how much I harp on the concept of having a fiduciary be the person that helps you with all of your investment advice and how you do your financial planning, because those are the only people that are looking out for your best interests.
If you work with somebody that’s one of the big wire houses, they are just brokers. By definition, their loyalty is to the company. They are registered representatives of the company. They represent the company. They do not represent you.
You want to be working with somebody who is a fiduciary. Now, on June 9th of this year, 2017, the Department of Labor had a set of rules go in effect that would essentially make it, or required, that someone be a fiduciary if they’re advising you on your retirement account.
Again, this is old news for all those people who have been listening from the very beginning. If you’re just joining us, hey, that’s what the law is right now. When we passed that law in June, or the regulations from the Department of Labor in June, they came with a ramp‑up period between June and January.
They were going to have one set of rules before they had the final set of rules. The final set of rules, essentially, made it a lot harder for people to sell you something that was conflicted advice, that something wasn’t in your best interest.
More importantly, it was a lot harder for them to sell you something where they got paid more to sell you that versus another investment. We thought, “Well, we’re going to sit tight between June and January. After that, we’ll have the good rules in place.”
At least, the people who are having their retirement money will have some avenue of re‑course if they get hosed on this. They could sue under class action. Anyway, we’re going to have the right rules come into place. Wouldn’t you know it? In fact, we have a delay of the rules.
That’s the new news. That what we have today, from June 9th, that was supposed to end in January has now been extended another 18 months. Another year‑and‑a‑half before the final rules are deemed to be the ones that were the law of the land.
The reason why that’s problematic is that if you think about what it takes for you to open up an account do investments, when you’re working with an advisor…I mean just think about opening a bank account. There’re all of these forms that gets spit out of the machine, and then you’re just told, and pointed like, “Sign here, and then sign here, and then sign here.”
You ask them, “What’s this form for?” They tell you, “Well, this is the opening account. This means that we can mail you something at your home. This means that we can look at your stuff online. This means that you can look online.” They can give you all kinds of…but you just sit there and you don’t read it. It’s printed out.
“How many signatures do I have? Can I be done yet and just go home?” Right now, when the fiduciary rule light? The one [laughs] that’s not really the important one. You can basically paper your way out of conflicted advice.
Because under a rule called PTE 84‑24, what it says you can do is as long as you advise somebody of the competition that you’re getting in the document and you let them know that you’re going to be paid something more than if you give a different advice, or that you’re receiving some benefit.
A lot of these insurance agents, they’re getting free trips to Hawaii and stuff like that for selling you certain level or product with a particular carrier. Anyway, if they just tell you that on a piece of paper and then you sign it, then that’s good enough. They didn’t actually have to act in your best interest. They just have to say that they did.
They sign off with this little piece of paper. That’s been the law since June, is that you can get around this new fiduciary rule. If you just use the paper that says, “Just going to let you know what I got paid,” then that’s what’s going to continue to happen for the next 18 months.
The consumer protections that were contemplated by putting in this fiduciary rule, they’re not there. They don’t exist, and they’re not going to exist for another 18 months. This doesn’t bother me in terms of my practice and what I do with my clients because we’ve always acted like a fiduciary. It’s what a lawyer is all the time.
My clients are never really worried that I’m not acting as a fiduciary. This is a radio show where I’m trying to spread the information wide. Most of the people aren’t going to listen to my show. Well, I would love to say that I keep the ratings that the biggest shows do. They don’t. Local show. We’ve got a handful of listeners.
We’re not going to be able to spread this information very wide, and people are going to continue to be susceptible to getting hosed under this old rule. Because a fiduciary rule, not only had this as a problem but it also had the fact that it only applied to money that you were dealing with in your retirement.
If you weren’t dealing with the money in the retirement, then they could still sell you anything they wanted for any reason.
The little protection that we thought we had was coming in this fiduciary rule. Even though we weren’t going to get the full‑blown rule because I don’t know if you remember but it was supposed to be a full‑blown rule in April. Well, then what they say is that they’re going to give you the rule but it’s going to be the light version of the rule.
That’s going to start in June, but then the real version of the rule is going to come in January. Here we come again and now we’re going to have to wait another 18 months before we’re able to get the good rule in place.
People have no idea. If you were paying attention in June, it was a bleep on the radar for the news and then gone again. It’s the same old, same old.
I’m sitting here reviewing clients’ statements and they’re asking a second opinion, “Hey, what do you think about this?” I’m reviewing real estate investment trust, that’s closed and investments that are locked, which I know pay an enormous amount of commission to the people that sell it, but which have no real need in somebody’s written portfolio.
The only reason why they’re there is essentially because they pay a lot of commissions. There’s a report that came out about a certain investment product that just plummeted by 84 percent.
84 percent, fewer use of this closed‑end products because they could see on the horizon that they weren’t going to be something that they could use going forward. For that reason, they stopped being sold.
That just tells you that that was a bad investment from the beginning. It only existed to pay the financial adviser and it didn’t exist to serve the client, which is why that since there’s a rule that says you have to serve the client, they stopped selling them.
It goes down, but it’s still in place. You look at these really expensive portfolios where they can share in the 12b‑1 fees as part of their compensation. You say, “Why are they here?”
There’s a couple set of options for a client in trying to give them investment advice about what to do in their company 401(k). It’s nothing that we could manage. It was something that they had to go with their company but they’re coming to us for advice.
We say, “OK, well, here’s what we can do for you for this other stuff that you have but for your company, let me take a look at your investments, your options, and I’ll tell you what you should invest in.” We essentially had two target date funds. Target date funds are basically funds that are managed by somebody.
You take all the thought away and you say, “Look, I am going to retire in the year 2050 and just manage it like I’m going to be retiring in 2050,” just one single fund. You had two of them. They were both key to the year 2050. One of them had an expense ratio of a quarter percent a year, so 0.25. The other one had an expense ratio of 1.25, a full percentage difference.
There’s arguably no strategically different value for one over the other, except for this. The one that charged more in fees was the one that shared those fees with the adviser and the adviser got a little kicked back for putting you in that. That was in there as an option. Obviously, we chose the cheaper one, but that just gives you an example. It’s still there.
Folks should…yeah, to be vigilant about this.
Victor: You’ve got to be asking about expense ratios. You’ve got to ask about compensation. You’ve got to ask people, “Are they getting compensated by some place other than you and your money, and what is that?”
All of those things get jumbled together because it’s clear that the regulations aren’t going to be there to protect you. You’ve got to protect yourself.
All right, that was the rant for the first one. Thanks for indulging that. Listen, when we come back, we’re going to talk a little bit about Bitcoin. I’m going to talk to you about Medicare reimbursement rates or premium rates. That will be it for the show. We will have 30 minutes flown by. Stick with us. We’ll back right on Make It Last.
Victor: All right, welcome back to Make It Last. I’ve ranted about fiduciary, which seems to be like if you’re playing the drinking game at home, bingo. [laughs] If Medina mentioned fiduciary, that’s like the center square. Everyone gets that one for free.
I want to talk to you about a newer investment, people considering investment in Bitcoin. It’s sexy and it’s on the news. People are talking about it, “Bitcoin hit 10,000 and it hit 11,000. It hit 9,000, and oh my goodness! Where could it go? Where could it go? Where could it go?”
I thought it might be important to talk a little bit about what Bitcoin is and have you understand that, and then talk a little bit about whether or not it is an investment that is something that you should be considering. Let’s first start with trying to figure out what Bitcoin is.
Bitcoin is essentially a form of a cryptocurrency. A cryptocurrency is a currency that is not issued by a particular country. It doesn’t have the backing of a company. That’s the way most currency works. Most currency, the dollar, and the value of the dollar is backed up by the strength of the promise of the United States Government to pay if you present a dollar.
A dollar is worth of something in there. It’s tender. It’s a promise by that country. Most currencies are linked to countries, but this Bitcoin is a cryptocurrency.
It is a currency that essentially has no country, it exists. If it has no country, the question becomes, “How do we determine its integrity? How do we know that the value of a Bitcoin is in fact something that is worth what we say it is?”
If you are the holder of a Bitcoin, someone has the confidence that what you are presenting to them is in fact enough Bitcoins of whatever says it is. The Bitcoin is essentially this currency. It’s used online as something to pay for something else. You can send somebody Bitcoins, and then they will send you package in the mail.
Cryptocurrencies have long been used by bad hombres, bad folks. They will be selling drugs and paying for it, black market stuff. It has gained more and more acceptance over time where even there’s banks now that will allow you to pay in Bitcoin because Bitcoin has got legitimate value outside of the black market of what it’s used for.
Bitcoin has been growing in value in large part because of the scarcity of it. It’s worth more and more if you hold on to it because people want it. People want the currency. They want to be able to use it, but there isn’t a lot available.
Understand how it’s made. Bitcoin is essentially something that is mined, like a jewel. It’s mined, and it’s mined using your computing cycles.
What you do is you give over your computer’s ability to do computations and you sit there and let it run computations. If you do that long enough, you mine Bitcoins that will allow you to get it. That’s one way for you to create new Bitcoins, is to mine them, is to give over your computing cycles so that they will give you a Bitcoin if you do that enough.
There is an algorithm that makes it harder and harder to get new Bitcoins. The algorithm is actually linked to the integrity of the value of the Bitcoin. What happens is that it relies on technology called Blockchain.
Blockchain is essentially a set of technologies that guarantees integrity, because each one of its made up parts is dependent on other parts that have to be checked back in with the part that created it. Let’s explain it in a way that might make a little bit more sense.
If you are somebody that held on to one piece of the code, you can now verify that if somebody presents to you this middle part and it’s the same which you hold, you are going to say, “Yeah, that’s right. That’s actually the code.”
When you add them all together, you essentially get a snapshot of something that you can absolutely guarantee was the thing that it’s saying that it is.
If it isn’t, you can reject it. It’s very hard. I’m going to say it’s mathematically impossible to present a Bitcoin that is false because it just won’t register as that. This idea of the Blockchain is the computing cycles that it takes in order for you to backtrack the little parts in there to make sure that you’ve verified that what it is is in fact what it says it is.
The security of that and the length of the time of these securities is part of the reason why, one, the chain is so secure, but also why it’s slow. It’s slow. In fact, one of the elements of the security is that they limit the number of the transactions that can happen in a day.
Sometimes, it takes days to complete a simple transaction of processing Bitcoin because you limit the number of it and there are so many that you need to make, and so because of that, this idea of a currency, it’s challenged a little bit.
You challenge the notion that’s the currency because a currency usually means that you can use the money very quickly to replace something of value, to show value so that you can go and buy something. People can make a very quick decision as to whether or not they are going to sell you that because they can see it immediately and process the transaction very quickly.
The convenience of it is one of the reasons why a currency is what it is. That’s why we don’t barter. That’s you don’t go to look at it. If I’ve got legal services to give and I need my money to buy groceries, I don’t bring my legal services to the groceries store and say, “I will trade these two.” The barter of that is to remove for it. That’s one of the reasons why we invented currencies in the first place.
We went from metal, it was written down on metal, and then went to paper and from paper to plastic. From plastic now to electronic bits. By the way, that’s really all money is these days. It’s electronic bits. It’s not Bitcoin. You look into an account and it has your money in there, all you are seeing is an electronic representation of what your money is.
This idea that it’s a currency is a little bit concept to challenge because it’s not something that we can use very quickly. By its nature, it has set the transaction to super slow.
That was great, Medina. Thank you some much for the education. Tell me, at the end of the day, is it something that we should buy? If we think that it’s not money that we can use, if it’s not a currency, then we’ve got to think about it like an asset. If it’s an asset, we have to figure out, is it something that is subject to intellectual rigor about what we can expect it do or is it speculation?
If it’s something that has some rigor to it, the way you can invest in small cap companies, because they tend to be more profitable over time. Their growth trajectory is preferable…For all those reasons, if you can apply math to it to get a model that gives you some reliability, then perhaps it’s worth something investing in.
Typically, something that is speculative is not a wise investment. No matter what you read in the news, you don’t buy a piece of art as an investment because you are speculating about whether or not it’s going to increase in value.
You have no model that says that it absolutely will. The moment that we now understand that Bitcoin is a speculative investment on an asset value that we cannot subject to any intellectual rigor, it comes off the table as something that we should invest in.
Same reason we don’t hold currency for the sake of currency as an investment. Normal currency is a hedge of your ability to buy something in the future, but you’re going to be using it to buy. You’re not going to be holding onto it like you would jewelry in the speculative hope that it’s going to increase, you don’t do that.
You wouldn’t do that with Bitcoin either. That’s the wrap up. Hope that has been informative for you in a way that can you understand this concept of Bitcoin. By the way, Bitcoin’s one of the four major cryptocurrencies.
Victor: It’s the one that’s growing the fastest. It’s the one that’s the original. I’m investing in none of them. Zero. Not a chance. Not a chance. If I wanted to go gamble, I actually go to the casino. They’ll cop me a stake, and then maybe I’ll feel like I paid for my stake with my gambling.
All right. When we come back, we’re going to talk about Medicare rules with limitations that have come up. We’ll cover those because they are going to affect how much you pay Medicare premium. We’ll hit at that when we come back from the break. This has been Make It Last, and we’ll be right back.
Victor: All right. Welcome back to Make It Last. First segment, we talked about the fiduciary rule again. We just talked about Bitcoin. Now, we’re going to talk about your Medicare premiums and why the government might be having you pay more for Medicare this year versus last year.
What I want to do is talk a little bit about how Medicare premiums are calculated, because most people are surprised to learn that it is done on the basis of your income, and it’s done actually on a basis of your income in the past. Those numbers are not static. They don’t change.
I’ve got to give you a couple of terms in order to be on the same page. There was a law passed in 2003, and it’s called the Medicare Modernization Act. Beginning in 2007, people who make a lot of income and who are in Medicare pay something called an income‑related monthly adjustment amount, or IRMAA.
These are surcharges to the Medicare Part B premium, which lifts the premium from covering just 25 percent of costs to upper size 80 percent of results, and increases the Medicare premiums by as much as 219 percent.
Since 2011, a similar charge has been applied to your Part D premiums. They’ll increase a surcharge. You can get as much as…highest level, there’s $914 per year in 2017.
The way that this works is this. The basic formula for it is that if you start to pay, make more than about $85,000 a year as a single individual, you move from paying 25 percent of your Medicare Part B premium to 35 percent.
It goes up to 80 percent once you exceed $214,000 of what’s known as modified AGI. That’s important because most people are aware that their taxes are owed on the basis of their adjusted gross income, or just AGI.
There’s a bigger number, a little further up on the tax filing called modified AGI. That number actually determines how much of your Medicare premiums you will owe, like how much you’re going to owe in Medicare premiums.
They do that, not on the basis of your income of the prior year, but they go back, two years to that. Two years. That’s been in place now for a couple of years. Just to give you an idea, for 2017, if you’re a single individual and you made less than $85,000, your Medicare Part B premium was $134.
Your Part D premium was whatever the plan premium was. You know that you can do that every year. In a prior show, we talked about Medicare open enrollment. I told you, you can select amongst different Medicare Part D plans.
Whatever that premium is, if you make less than $85,000, that’s what you pay. If you make between $85,000 and $107,000, your Medicare Part B premium goes from $134 to about $190, plus you pay an extra $13 per month for your Medicare Part D.
You’re going to pay $66 more per month, or almost $750 for the year. If you’re between 107 and 160, you’ll pay an additional 133. Your Medicare Part B premium is actually going to be $270 or so, plus an extra $34 for Part D. It goes up from 160 to 214, and then from 214 up.
I give you all the single numbers, but realize that the married joint modified, adjusted gross income is basically double all of those, because the Medicare Part B premium is actually per person. If you’re in social security, you’re paying your 134 per person.
If one person’s incomes drives you up above that 107 or the 214 number, and you have to pay $190 a month, you’re going to do that per person. As I said before, Medicare does, instead of their prior year, it’s their prior, prior year income for that.
For 2018, your Medicare Part B and D premium is going to be determined by that taxes owed on your 2016 year, what you filed in 2017. You filed it in 2017. Your file of this year, it’s for 2016 year. Essentially, it will be what you have to pay for the coming next year.
What ends up happening is that when we moved from 2017 to 2018, the tiers have changed for when you move from one to the other. We’re still at a point in time where if you make less than $85,000 per year, you have to pay just the plan premium.
We dropped down the next tier after that. If you make now $133,000, you’re now in the next tier that owes, essentially, $270 a month in Medicare part B premium, and that is down from 160 per person. We cut it a little chunk into that and we got to the higher tier faster.
In fact, if you make $160,000 a year, you go to owing almost $350 per month in Medicare part premium. Whereas, last year, you only owed 270, you’re up to 350. That’s a rule change that’s coming in, which is going to affect a lot of people, especially people who are relying on this income to live.
There in that $100,000‑$150,000 range, and all of a sudden, because they’ve tripped from 133 to 160, and now remember, that’s of modified AGI. That’s not the end number. Because they’ve slipped into that, they’re essentially going to owe more in Medicare premiums.
This is a big deal. It’s a deal that you probably weren’t aware of when you were setting up and managing your income in 2016. Now that you know that it’s a prior, prior year rule, we ought to be thinking about how you’re managing your income every year, especially if it’s going to determine your Medicare premium later.
If these thresholds continue to get changed and adjusted, it could significantly impact your cash flow, if all of a sudden, you have to pay two or three times as much in Medicare premiums as you did the year before.
This just goes a long way into that concept that I introduced many, many moons ago, that’s there in my book, called proactive income tax planning. The concept’s called productive income tax planning. The book is not, because no one would buy a book called proactive income tax planning. [laughs]
In the book “Make It last, Ensuring Your Nest Egg Is Around as Long As You Are,” there’s chapter five. Chapter five talks about proactive income tax planning and how you can manage your income taxes proactively to avoid problems like this.
That’s a good note to leave on, is that you should be thinking about your income. You should be thinking about how to manage your income so that you can make sure that you don’t run across one of these problems when it comes to your Medicare premiums later, because that can really factor your cash flow.
All right. That’s our show for today. I want to thank you. We hit a lot of hard topics. I hit my fiduciary rant. I talked to you all about Bitcoin. Now you can sound hip in front of your grandkids.
I talked to you about your Medicare premiums, and then you’re not going to talk about that at all to your grandkids, because that would make you tragically unhip.
Hopefully, you’ve stayed with us through the whole time and you’ve found something valuable. If you have, please do us a favor. We would really appreciate if you took this show and shared it with friends.
Share it with people that you know that could benefit from listening to this, and increase our listenership. Increase it beyond our regions, and say, “This is something you ought to listen to.”
We see those numbers continue to climb, so we know that you’re doing it. We just want to thank you for that and ask you to continue to do it. If you have any ideas for show topics, you can always send them to firstname.lastname@example.org.
You can email us, contact us at Medina Law Group. Let me know what you think. Other than that, I want to thank you for joining us. We tell you we’re here every Saturday. We’ll join you again next Saturday.
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Victor: This has been Make It Last. We help you keep your legal ducks in a row and your financial nest egg secure. We’ll catch up next Saturday. Bye‑bye.
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