Medicare Part D

If you’re a Medicare participant, get ready to be bombarded with offers from health insurance providers within the coming weeks. The first date that you can sign up for Part D is November 15, and you have until May 15, 2006 in order to choose a plan without penalty.

So far, there has not been a lot of solid information on your options, other than the “gobble-de-gook” of the governmental description of the plan. Expect for the insurers to have much better descriptions and comparable policies that you can review in order to make a good decision.

If you’re confused about all of the options, there are a few good resources on the internet that can help. One in particular that I’ve found quite helpful in researching Part D is Terry Savage’s columns from the Chicago Sun-Times, found at www.suntimes.com.

As always, if you have questions, don’t hesitate to call – I’m certain that I can help you make the right decision when it comes to this complicated plan.

Credit Card Changes

New Minimum Payment
Beginning with your November bill, you’ll notice that the minimum payment required by your credit card company has doubled. For some people, this may cause a problem – but hopefully you’re among the folks that have taken my advice and eliminated your credit card debt, keeping your account paid up each month.If you’re in the process of eliminating credit card debt, this might come as a nasty surprise for you!

Financial Aid Process

ATTENTION parents of students of the Class of 2006! The process has already begun for some families – that is, the Financial Aid process…

What does this mean? If you’re waiting, you’re losing ground. September 15 was the kickoff date for applying for the CSS-Profile information, and January 2 will be the first date to begin submitting your forms for consideration.

Remember, financial aid is given on a first-come, first-served basis!

Statistics show that approximately 90% of all financial aid applications have errors of some sort, and as a result you’re required to resubmit them, effectively “going to the end of the line” for aid. If you’d like some help with this process, give me a call.

Portfolio Discipline vs. Active "Timing"

This is an age-old debate, often fueled by the financial press. You see headlines about this stock or that stock or sector returning wildly huge returns. “Why can’t I do that?”, you ask yourself.
In reality, chasing the “wild” return most often leaves you with a depleted account, as many of you can attest, I’m sure.

Another problem is when you see a downturn in the market, like we saw between 2000 and 2002, and you decide you just can’t stomach it any more, so you pull out until its’ “safer” to invest. The problem is that by the time you’ve made your decision to go to the sidelines, you’ve already lost a bunch, and the reversal is right around the corner.

If you got out of the market by September 30, 2002, you missed out on a 20% return over the 12 months to come, using Vanguard’s Total Stock Market Index fund (VTSMX) as an example. But if you had simply stayed in the market, the fund that you purchased in October of 1995 would have, to date, returned a total of 103%, or about 10% a year. The total return for the investor that sold in 2002 would have been 29%, or about 4% for those seven years.

There are three items that make up the discipline I’m talking about here: Asset Allocation, Diversification, and Rebalancing.

Asset Allocation is probably the most important decision you can make with regard to investing, and should be based upon three factors: your risk tolerance; the number of years before you begin taking distributions from the portfolio; and the rate of return required for you to meet your goals. Asset allocation should only be changed when there is a significant change to one of these three factors.

Diversification among the asset classes (stocks, bonds, and money markets) can help reduce many kinds of risks that investors face. Diversification within asset classes can help to further reduce your exposure to risk. Recommending the mix is the job of your financial advisor.

Rebalancing is when you review your accounts once a year to make sure that the “mix” you developed is still on target. If any one asset class or single fund is housing less or more than you originally planned, you need to rebalance.

Manditory IRA withdrawals, Best way to invest manditory withdrawals

Question:
Soon to be 70 1/2 and required to start manditory IRA withdrawls. Presently I have a IRA Annuity and collect "ordinary income" interest monthly and the principal IRA investiment remains. I do not yet know the required withdrawl percentage, however I understand it can be significant, upward to 25% per year. I am not sure, so is the amount withdrawn annually also taxable?Are there any "financial investments" to consider to reduce the taxable portion applicable? Is is best to simply take the annual withdrawl and put it in savings? (I no longer wish to be involved in stocks, mutuals, etc.) Any advice will be welcomed.

My response:
For an individual aged 70 (in the year in which your age is 70 1/2), the IRS' table indicates the factor to be used is 27.4. In other words, the RMD for this particular year is equal to 1/27.4 (~3.6%) times your IRA balance(s). The number changes each year, so you'll update the percentage of withdrawal required every year. The table can be found in Pub 590 at www.IRS.gov.

Keep in mind that you must make the calculation for all of your IRA's and take a distribution equal to or greater than the RMD for each year. Consult your tax preparer or financial planner if you're unsure about how to do this.

Another response:
Look like we're talking about somewhere around 4% required distribution? If so, it looks like it IS possible then to protect the investment and still only live on the interest depending on annual return and lifestyle, even when RMD's are in force. I mean, is it feasible to assume 4-5% annual return, while in retirement and being in more of an assest preservation mode of investment risk, or atleast at the beginning years of the RMD's?

Thanks for the info!

My response:
That figure (~4%) works fine for a while, but the mortality table causes this figure to increase each year... just a quick look at the table shows that by age 80, you're up to 5%+ (divisor is 18.7), and the numbers just keep going up from there.

There is no requirement to spend the money, you can always reinvest it once you take it out, but you are required to take the distribution.