Why Medicare Should Be Part of Your Retirement Strategy

Medicare takes a little time to understand.

As you approach age 65, familiarize yourself with its coverage options, costs, and limitations.

Certain features of Medicare can affect health care costs and coverage.

Some retirees may do okay with original Medicare (Parts A and B), others might find it lacking and decide to supplement original Medicare with Part C, Part D, or Medigap coverage. In some cases, that may mean paying more for health care than you initially figured.

How much do Medicare Part A and Part B cost, and what do they cover?

Part A is usually provided with no charge; Part B is not. Part A is hospital insurance and covers up to 100 days of hospital care, home health care, nursing home care, and hospice care. Part B covers doctor visits, outpatient procedures, and lab work. You pay for Part B with monthly premiums.¹

It’s best to prepare for the copays and deductibles linked to original Medicare. In addition, original Medicare does not cover dental, vision, or hearing care, nor prescription medicines or health care services outside the U.S. It pays for no more than 100 consecutive days of skilled nursing home care. These out-of-pocket costs may lead you to look for supplemental Medicare coverage as a way of paying for extended care.^2,3

Medigap policies help Medicare recipients with some of these copays and deductibles.

Sold by private companies, these health care policies can pay a share of certain out-of-pocket medical costs (i.e., costs greater than what original Medicare covers for you). You must have original Medicare coverage in place to purchase one. The Medigap policies being sold today do not offer prescription drug coverage.⁴

Part D plans cover some (but certainly, not all) prescription drug expenses.

Monthly premiums are averaging $33.37 this year for these standalone plans, which are offered by private insurers. Part D plans currently have yearly deductibles of no more than $480.⁵

Creating a Medicare strategy is integral to your retirement preparation.

Should you try original Medicare for a while? Should you enroll in a Part C HMO with the goal of managing your overall out-of-pocket health care expenses? There is also the matter of eldercare and the potential need for interim coverage if you retire prior to 65. Discuss your concerns about Medicare in your next conversation with your financial professional.

Care for a COLA with Your Social Security?

As you might have heard, people are talking about a big bump in Social Security benefits next year.

The Senior Citizens League says payments could rise by as much as 8.6 percent in 2023, compared to an increase of 5.9 percent in 2022. That would mean an average benefit of $1,658 for the 70 million Social Security recipients on January 1.

To arrive at the cost-of-living adjustment (COLA), the Social Security Administration looks at third-quarter prices and compares them to a year prior. According to the Bureau of Labor Statistics, living costs are up about 8 percent.

What does this mean for you? Stay tuned as these numbers become more clear in the coming months.

Your Changing Definition of Risk in Retirement

During your accumulation years, you may have categorized your risk as “conservative,” “moderate,” or “aggressive” and that guided how your portfolio was built. Maybe you concerned yourself with finding the “best-performing funds,” even though you knew past performance does not guarantee future results.

What occurs with many retirees is a change in mindset—it’s less about finding the “best-performing fund” and more about consistent performance. It may be less about a risk continuum—that stretches from conservative to aggressive—and more about balancing the objectives of maximizing your income and sustaining it for a lifetime.

You may even find yourself willing to forego return potential for steady income.

A change in your mindset may drive changes in how you shape your portfolio and the investments you choose to fill it.

Let’s examine how this might look at an individual level.

Still Believe

During your working years, you understood the short-term volatility of the stock market but accepted it for its growth potential over longer time periods. You’re now in retirement and still believe in that concept. In fact, you know stocks remain important to your financial strategy over a 30-year or more retirement period.¹

But you’ve also come to understand that withdrawals from your investment portfolio have the potential to accelerate the depletion of your assets when investment values are declining. How you define your risk tolerance may not have changed, but you understand the new risks introduced by retirement. Consequently, it’s not so much about managing your exposure to stocks, but considering new strategies that adapt to this new landscape.¹

Shift the Risk

For instance, it may mean that you hold more cash than you ever did when you were earning a paycheck. It also may mean that you consider investments that shift the risk of market uncertainty to another party, such as an insurance company. Many retirees choose annuities for just that reason.

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

The march of time affords us ever-changing perspectives on life, and that is never more true than during retirement

When Will the Stock Market Hit Bottom?

The number one question I’m hearing this week is, “When are we going to see the stock market reach a low point?” In spite of recent volatility, my answer remains the same: rather than timing the markets, focus on time IN the market.

Bears and bulls are locked in a cage match. Bears are saying that the Fed’s rate-increase cycle will lead to a recession, dragging stocks even lower. Bulls are finding reasons for optimism, such as lower used-car prices and generally solid first-quarter corporate earnings.

There’s no doubt that stocks have been gut-punched in the first half of 2022, and the bear bandwagon seems crowded. But Wall Street has a resilience all its own. Meanwhile, time IN the markets, not timing the markets, remains the wise way to go.

Happy Memorial Day

Memorial Day is a time for Americans to honor and remember those who lost their lives while serving in the armed forces. Veterans will think back on the men and women who served alongside them who gave the ultimate sacrifice for their country and know that we honor and remember them.

Let’s not forget the essential meaning of the holiday. The service and sacrifice of these men and women should always be remembered — on this day and every day.

Don’t Go It Alone

When markets cycle lower like they have been lately, perspective is critical. If you’re not connected to someone with experience, it can be easy to miss the big picture.

If you zoom out a bit in history, most investors haven’t lived through a prolonged price drawdown. For example, a bond fund manager would need to be around 80 years old today to have been working during the inflation of the 1970s (the last time we saw similar movements to what we’re seeing today). We are certainly living through unusual times.

But price swings aren’t surprising to those who are prepared, and you don’t have to figure things out on your own.

When we created your portfolio, we looked at your unique goals, time horizon, and risk profile. Our team has managed several market cycles, and we’ve seen plenty of ups and downs across the investing process.

Please reach out if today’s markets have you feeling uncertain. You don’t have to go it alone: we are here to help you keep things in perspective.

Comics, Collectibles, and Coping with Calamity

Rare collectibles can provide an entertaining form of alternative “investment,” and might seem particularly intriguing when markets are wobblier than Aunt Gertrude’s jello salad. Comic books can sell for millions of dollars, for example, depending on their rarity and condition. Just this week, a copy of Detective Comics #27 (the first appearance of Batman, recently returned to cinemas) is listed with bids at $1 million.

While you may not be into comic books, items like artwork, antiques, or baseball cards, can hold surprising monetary value, but collectibles can be affected by a number of factors, including liquidity. Here are some sensible steps to take with such items, if you have them.

• Educate Yourself. Books and price guides are a good place to start, as well as a good old-fashioned Google search.
• Ensure Insurance. A professional appraisal can help ensure your item’s value is protected in cases of calamity or theft.
• Consult Experts. Values can change depending on condition and scarcity. Shop owners and other collectors can provide context.
• Protect Valuables. Some types of items may require special storage or materials to preserve their condition.

Whether you’re looking to sell or hold onto your valuable items, the point is to have fun and enjoy what you have. They say you can’t take it with you, but if you do find a way, we’re certainly all ears.

Where Will Your Retirement Money Come From?

For many people, retirement income may come from a variety of sources. Here’s a quick review of the six main sources:

Social Security

Social Security is the government-administered retirement income program. Workers become eligible after paying Social Security taxes for 10 years. Benefits are based on each worker’s 35 highest earning years. If there are fewer than 35 years of earnings, non-earning years are averaged in as zero.¹ In 2021, the average monthly benefit was estimated at $1,543.²

Personal Savings and Investments

Personal savings and investments outside of retirement plans can provide income during retirement. Retirees often prefer to go for investments that offer monthly guaranteed income over potential returns.

Individual Retirement Account

Traditional IRAs have been around since 1974. Contributions you make to a traditional IRA may be fully or partially deductible, depending on your individual circumstances. Under the SECURE Act, in most circumstances, once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. You may continue to contribute to a Traditional IRA past age 70½ under the SECURE Act as long as you meet the earned-income requirement.

Roth IRAs were created in 1997. Roth IRA contributions cannot be made by taxpayers with high incomes. To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals also can be taken under certain other circumstances, such as a result of the owner’s death. The original Roth IRA owner is not required to take minimum annual withdrawals.

Defined Contribution Plans

Many workers are eligible to participate in a defined-contribution plan such as a 401(k), 403(b), or 457 plan. Eligible workers can set aside a portion of their pre-tax income into an account, which then accumulates, tax deferred.

Under the SECURE Act, in most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 72. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.

Defined Benefit Plans

Defined benefit plans are “traditional” pensions—employer–sponsored plans under which benefits, rather than contributions, are defined. Benefits are normally based on factors such as salary history and duration of employment. The number of traditional pension plans has dropped dramatically during the past 30 years.³

Continued Employment

In a recent survey, 71% of workers stated that they planned to keep working in retirement. In contrast, only 31% of retirees reported that continued employment was a major or minor source of retirement income.⁴

Important Birthdays Over 50

Most children stop being “and-a-half” somewhere around age 12. Kids add “and-a-half“ to make sure everyone knows they’re closer to the next age than the last.

When you are older, “and-a-half” birthdays start making a comeback. In fact, starting at age 50, several birthdays and “half-birthdays” are critical to understand because they have implications regarding your retirement income.

Age 50
At age 50, workers in certain qualified retirement plans are able to begin making annual catch-up contributions in addition to their normal contributions. Those who participate in 401(k), 403(b), and 457 plans can contribute an additional $6,500 per year in 2021.¹ Those who participate in Simple IRA or Simple 401(k) plans can make a catch-up contribution of up to $3,000 in 2021. And those who participate in traditional IRAs can set aside an additional $1,000 a year.^.2,3

Age 59½
At age 59½, workers are able to start making withdrawals from qualified retirement plans without incurring a 10% federal income-tax penalty. This applies to workers who have contributed to IRAs and employer-sponsored plans, such as 401(k) and 403(b) plans (457 plans are never subject to the 10% penalty). Keep in mind that distributions from traditional IRAs, 401(k) plans, and other employer-sponsored retirement plans are taxed as ordinary income.

Age 62
At age 62 workers are first able to draw Social Security retirement benefits. However, if a person continues to work, those benefits will be reduced. The Social Security Administration will deduct $1 in benefits for each $2 an individual earns above an annual limit. In 2021, the income limit is $18,960.⁴

Age 65
At age 65, individuals can qualify for Medicare. The Social Security Administration recommends applying three months before reaching age 65. It’s important to note that if you are already receiving Social Security benefits, you will automatically be enrolled in Medicare Part A (hospitalization) and Part B (medical insurance) without an additional application.⁵

Age 65 to 67
Between ages 65 and 67, individuals become eligible to receive 100% of their Social Security benefit. The age varies, depending on birth year. Individuals born in 1955, for example, become eligible to receive 100% of their benefits when they reach age 66 years and 2 months. Those born in 1960 or later need to reach age 67 before they’ll become eligible to receive full benefits.⁶

Age 70½
Under the SECURE Act, in most circumstances, once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA) and other defined contribution plans. You may continue to contribute to a Traditional IRA past age 70½ under the SECURE Act as long as you meet the earned-income requirement.

Understanding key birthdays may help you better prepare for certain retirement income and benefits. But perhaps more importantly, knowing key birthdays can help you avoid penalties that may be imposed if you miss the date.

Can Group, Private Disability Policies Work Together?

According to the Social Security Administration, a 20-year-old has a 25% chance of becoming disabled before reaching retirement age.¹

Loss of income for such a duration has the potential to cause significant financial hardship. And while Social Security Disability Insurance may help, it’s critical to understand that about two-thirds of initial applications are denied and the average SSDI payment is only $1,259 a month.^2,3

Disability coverage may be available through your employer, who may pay all or a portion of the cost for your coverage.

Employer plans typically pay up to 50% of your income. This limited coverage might not be enough to meet your bills, which is why you may want to supplement employer-based coverage with a personal policy. Supplemental policies may be purchased to cover up to about 70% of your income.⁴

Taxation of Disability Benefits

When you purchase a personal disability policy, the benefit payments are structured to be income tax-free. Consequently, you may not be eligible for coverage that equals your current salary since your take home pay is always less.

If your employer paid for your coverage, then the income you receive generally will be taxable. If you paid for a portion of the employer-provided coverage, then the pro rata amount of the benefits you receive are structured to be tax-free.

Choices, Choices, Choices

Consider the waiting period before disability payments begin. A longer waiting period saves you money, but it also means that you may have to live off your savings for a longer period. You are the best judge of how much of this risk you are comfortable assuming.

You also may want to coordinate the waiting period with any short-term disability benefits you could have. For example, if your short-term disability covers you for 90 days, look to have at least a 90-day waiting period so that you can potentially lower the cost on the long-term policy.

Ask how a policy defines an inability to work. Some policies will say “the inability to do any job or task;” others will say “own occupation.” You may prefer the latter definition so you’re not forced to perform some less-skilled, lower-paid work. That type of work may not help you meet your bills.