Should I Choose A Medicare Advantage Plan?

As you near retirement age, you may find yourself flooded with brochures and commercials about what Medicare option is right for you.

You know you need to sign up for something, but with so many choices how do you determine which healthcare plan will provide adequate coverage?

The Two Medicare Options

There are two ways you can acquire Medicare coverage. You can choose to have the Government as your primary source of insurance, known as Original Medicare. Or you can opt to have a private insurance company provide you with similar coverage through a Medicare Advantage plan.

The Original Medicare program (Parts A and B) is offered directly through the Government. Medicare Parts A and B typically offers limited protection for medical expenses during retirement, so many retirees opt to seek additional benefits in the form of a Medicare supplement (Medigap) policy.

A Medicare Advantage plan (Part C) on the other hand is a private health insurance policy, underwritten by a private health insurance company, which replaces your original Medicare coverage (Parts A & B). With Medicare Part C, only the private company is responsible for paying your medical claims – the government is no longer responsible for those expenses.

Legally, the private company has to provide you with “equal or better” coverage than what you would get with original Medicare. Some plans go above and beyond original Medicare by offering additional benefits, such as vision, dental, and prescription drugs (Part D).

Of course, these benefits can be purchased even if you have original Medicare, so it’s wise to compare the costs carefully.

Is A Medicare Advantage Plan Right For Me?

The first significant element in assessing if an Advantage plan is a fit for you is your health history.

If you expect your health care expenses to be high, you may consider an Advantage plan because most Advantage plans have a yearly limit on your out-of-pocket costs for medical expenses.

The limit is known as your out-of-pocket maximum, and after you reach it, you pay nothing for the rest of the year. With Original Medicare, there is no out-of-pocket maximum, meaning an extended stay in the hospital could leave you with the entire bill. Although, there are generally limits if you have a Medigap Policy.

Another key factor when determining whether or not an Advantage plan is right for you will be your travel plans during retirement. Medicare Advantage Plans are usually structured as HMOs, and therefore, you are limited to a network and geographic area that services are provided.

You may be limited to a selection of physicians that you can use, forcing you to stop seeing a long-time trusted physician who is not part of the network.

Also, if you plan to spend winter or summer months in another location, you may have limited coverage (except in emergency situations) forcing you to return home for treatment.

Keep in mind, these are only a few considerations for determining a coverage that is right for you. You should also consider your budget, medical needs, and coverage preferences when picking a plan.

How To Choose An Online Savings Account

If you have a sizable emergency reserve (or a chunk of cash you’re setting aside for a near-term goal) sitting in your savings account, you’ve probably had the thought that you wish it was actually doing something for you besides earning next to nothing.

I get it. Most brick-and-mortar banks offer a 0.01% interest rate on their savings accounts. That translates to earning $5 per year on a $50,000 account balance.

While it may be tempting to invest the money, that’s the last thing you want to do. There is a risk of having a considerable decline when your money is in the market, which could be when you need the money the most.

Fortunately, many online banks are offering high(er)-yield savings accounts that earn more interest than brick-and-mortar banks and still ensures that your money is there when you need it. 

Below are a few tips to finding the online savings account that is right for you.

shop the rates

I would start by comparing the current online savings account yields at http://www.bankrate.com/banking/savings/rates/.

As of writing this, the most well-known institutions (Synchrony, Ally, American Express, and Capital One) are paying about 0.60% interest which equates to roughly $300 in interest paid for a year. A whole lot better than $5 on a $50,000 account, that is for sure!

Speaking of rates, you’ll want to make sure you are using the Annual Percentage Yield (APY) when comparing them.

The APY indicates the total amount of interest you earn on a deposit account over one year, assuming you do not add or withdraw funds for the entire year. APY includes your interest rate and the frequency of compounding interest, which is the interest you earn on your principal plus the interest on your earnings.

APY gives you the most accurate idea of what your money could earn in a year.

insure the risk

The next thing you’ll want to do is look for banks whose deposits are backed by the Federal Deposit Insurance Corp. or credit unions whose deposits are secured by the National Credit Union Administration. Both federal agencies insure balances of up to $250,000 if the bank or credit union fails.

Read the fine print

After you’ve narrowed down the list to a few possible contenders, you’ll want to make sure you read the fine print for each. 

The most common ruse I see institutions use is advertising a higher rate than their peers, but it’s only an introductory rate for the first year. Afterward, it drops below what the other institutions were offering in the first place.

Another thing I always look for are the fees. I generally avoid a bank that imposes a maintenance fee simply because the majority of the banks offering these accounts don’t have them.

You’ll also want to see if there is a minimum balance required to obtain and maintain the rate. If the minimum balance isn’t kept, the rate could dramatically decrease. If you don’t think you’ll be able to stay above the minimum balance, it’s probably worth looking at a bank that doesn‘t have one.

Ease and accessibility

Once you’ve made your choice, you’ll follow the institution’s instructions to open the account. Depending on the bank, this could take less than 10 minutes. 

After your online savings account is opened, I would suggest linking it to your regular bank’s checking or savings account.

This link will allow you to sweep money between the accounts as needed. Just be aware that the transfer can take a few days so keep some money in your regular savings for immediate emergencies. 

Ways To Save For College

If you have a child, you’ve probably put some thought into their future. And a big part of that future, at least for many kids, will be a college education.

When I calculate the future cost of a four-year education at an in-state public institution for a newborn, I am finding that it’ll take nearly $250,000 for them to earn a bachelor’s degree. And the cost of attendance only continues to rise!

Luckily, children have multiple ways to fund education either through part-time jobs, grants, scholarships, or student loans and they have many earning years ahead of them to afford financing education.

However, you can begin saving toward their education now to help pay for some of those future expenses and reduce the amount of debt your child will have to incur.

Below are some of the ways you can begin saving for your kid’s education.

Side Note: Before you just begin saving, make sure you have a clear picture of what you are saving for. I have an education funding conversation with my clients before they open any type of account. We explore their philosophy toward funding education for their children, what type of college they want to save for (private vs. public), and how much they want to fund (50%, 100%, certain dollar amount). Then I run an education funding analysis which calculates how much they need to save to fund their education goal.

529 Savings Plan

A 529 is an education savings plan. It allows you to invest money into an account, let it grow tax-deferred, and then withdraw it for qualified education expenses without having to pay taxes on it. It’s a pretty sweet deal.

The funds in 529 accounts can be used for any eligible institution, in any state, so there won’t be any issues if your child decides to go to school somewhere other than the state your 529 is in.

In fact, the money can even be used for foreign schools or vocational schools if college isn’t right for them.

Some states even offer incentives for contributing to their 529. Indiana taxpayers can get a state income tax credit equal to 20% of their contributions to a CollegeChoice 529 account, up to $1,000 per year.

Usually, the amount you can contribute in total to a 529 plan is pretty high (up to $450,000 per beneficiary in Indiana) but will vary by state.

If you end up with unused funds in a 529 plan, these can easily be transferred to other children or any other family member to use for qualified education expenses.

However, if the funds aren’t for qualified education expenses, withdrawals will be subject to a 10% penalty, taxed as ordinary income, and any previously claimed tax credits may be owed back.

As a result of these tax implication, it is generally recommended to avoid over-funding 529 plans.

Roth IRA

I’m often asked if it makes sense to use a Roth IRA to save for college in case a child decides not to go to college. Yes, it is possible to use a Roth IRA as a combined college and retirement savings vehicle.

When needed to pay for college expenses, you simply limit withdrawals to the contributions in order to avoid paying any income taxes on the distribution. The earnings remain in the Roth IRA to pay for retirement.

Keep in mind there are limitations to using a Roth in this manner.

First, there are income limitations to contributing to a Roth IRA. In 2019, a couple that earns more than $193,000 ($122,000 for those who file single) begin to be phased out of making contributions. Above $203,000 ($137,000 for single) and you can’t contribute at all.

Secondly, those under age 50 can only contribute $6,000 to a Roth IRA each year (2019 limits).

The main problem with this approach though is the distributions count as untaxed income on the following year’s FAFSA, reducing eligibility for need-based financial aid.

It also reduces lifetime tax-free accumulations, which are particularly valuable in retirement.

Tax-Advantaged Account

Another funding option is to save to a tax-advantaged investment account (joint, individual, or trust) since these types of accounts don’t have contribution limits.

This would be similar to saving to a Roth IRA in that you could keep the money in the account and use it for retirement if your child does not attend college.

However, you still run into the possible financial aid issues that you do with the Roth IRA and you might miss out on your state’s tax incentive.

Optimal approach

In my opinion, the optimal approach would be to fund the 529 first, especially if there is a state tax incentive available. Once the 529 funding is deemed to be nearing an appropriate level based on your goals, you can save additional college funds via a Roth IRA and/or a tax-advantaged investment account (joint, individual, or trust) to ensure maximum flexibility among your various financial goals.

It is important to note that very few people fully fund their children’s education savings accounts, such as the 529, and you shouldn’t feel pressured into believing you have to in order for your child to succeed.

Like I mentioned above, children have a lot of ways of paying for their own education and — I can say from my own experience — working during college can help keep them on track.

Should I Adjust My Portfolio Before The Election?

I’ve been getting asked if people should be making changes to their portfolio in anticipation of the upcoming election.

In case you don’t want to read any further, the short answer is no.

Who is going to get elected?

It seems like everyone is worried about how the results of this election will impact their investments. But here’s the secret, someone voting for the other party is thinking the same exact thing as you, “If my party doesn’t get into office things are going to be terrible!”.

So, does a certain candidate getting elected actually have an impact on the stock markets? In reality, no it doesn’t.

NO impact

Here is a chart that shows the growth of the S&P 500 since 1926. As you might notice, it has been going up regardless of who is in office. Yes, there are dips here and there but that is just normal market cycles at work, not the President.

Now, keep in mind that there will be volatility in the markets for a short period but this is driven because of uncertainty (which the people and markets hate) rather than who is in office.

Don’t let short-term volatility derail your investment strategy though. You likely have years, if not decades, left to invest and it’s important to keep that long-term perspective in mind.

Should I Buy Life Insurance For My Children?

Should I get life insurance for my kids? I often get asked this question from clients who are parents. 

The most straightforward and easy answer is… of course not.

Life insurance is mainly purchased as an income replacement so your spouse or children can maintain their standard of living. Or it’s often used to cover an expense(s) that survivors wouldn’t be able to pay for otherwise like a mortgage or fully funding children’s education needs.

Since children don’t have an income to replace, there really isn’t any reason to insur their lives.

it’s not just about the death benefit

However, I was recently talking with an insurance agent who has been in the industry for over 30 years. He said that insurance companies are increasingly asking for the results of direct-to-consumer genetic tests as part of their application process. 

The concern is that as prenatal and newborn genetic testing becomes more prevalent, insurance companies will be able to get their hands on the results and deny these children coverage simply for having a higher likelihood of developing a disorder in the future.

Keep in mind this is all totally legal.

As you can imagine, this changes the game when it comes to life insurance for children. It’s no longer about simple income replacement, it’s about preserving a child’s insurability in the face of never being able to acquire it in the first place.

Insurability forever

So how can you go about acquiring insurance in a way that is actually going to preserve a child’s insurability?

A whole life policy.

Whole life insurance is a permanent form of life insurance. Once you have it, and if you continue paying for it, you have it forever. Well… until death. 

I’m not usually a fan of whole life policies (or at least the way they are sold to individuals) but they do serve a special purpose in insurance planning. This being one of them.

The strategY

The strategy is simple. Purchase a whole life policy for a child as soon as possible. Preferably before any genetic testing is done.

Although, the amount the insurance company will let you purchase for a newborn typically won’t be enough for what the child actually needs as an adult.

The solution is to add a rider (an additional option to the policy) that allows the child to buy additional coverage in the future.

The options have different names – depending on the insurance company who’s providing it – but will usually be along the lines of guaranteed insurability rider, future insurability option, etc. The name doesn’t really matter, it’s the option to buy more coverage in the future that’s important.

The rider guarantees a certain amount can be bought at various ages (25, 28,31 37, 40), allowing a child to increase their coverage if necessary without having to go through any medical underwriting. That means no health questions or tests, inquiries about vocation or avocation, or anything else that may prevent them from obtaining coverage in the future. 

I asked my insurance friend how much a typical policy like this costs. He said a $100,000 whole life policy with a $100,000 guaranteed insurability rider is $300-500 per year, depending on the child’s age.

The bottom line

This can be a smart strategy to ensure you, and your children, are in control of their insurability as they age, no matter what happens in life.

However, once the child is an adult and can purchase their own policy, it will probably make financial sense for them to explore term life insurance policies to cover their insurance needs at that time.

They can continue the whole life policy as well or they can simply stop paying the premium and let the protection expire if there isn’t a need for it anymore.