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When Should I Annuitize My Wealth to Meet Retirement Income Needs

11/29/2013

Q. When should I annuitize my retirement assets to meet my retirement income needs?

A. There is an article from the Journal of Financial Planning that answers this question - Efficient Retirement Income Strategies and the Timing of Annuity Purchases - this article by Dr. Sam Pittman looks at, for those who wish to annuitize some or all of their wealth to meet their retirement income needs, what the timing of such annuitization decisions should be.

Building on the earlier work of Wade Pfau, which found that the most "efficient" frontier of retirement income products appear to be a combination of an all-equity stock portfolio paired with partial immediate annuitization (where, in essence, annuitization substitutes for the bond component of the portfolio), Pittman finds that for those who are going to annuitize, annuitizing some of the funds immediately at retirement and the remainder after 20 years (the maximum delay that Pittman studied) have almost the same efficiency as Pfau's prior research, but significantly improves bequest and liquidity goals during the interim time period.

Notably, Pittman also found that if equities are slightly less volatile going forward, the delayed annuitization strategies are even more efficient (presumably, the same would also be true if equities have better returns than the conservative 7.25% nominal equity return Pittman assumed); in essence, the more negative the equity outlook, the greater the upfront annuitization, and the better the long-term equity outlook, the more it would pay to delay annuitization.

Better to Put Stocks in Taxable Accounts or Tax-Deferred Accounts

11/29/2013

Q. Is it better to place equities in taxable accounts and bonds in IRAs, or vice versa?

A. While many studies have shown that the asset location decision depends upon specific assumptions about returns and tax rates in determining which location produces greater after-tax wealth in the end, there is a Journal of Financial Planning article that examines asset location by first adjusting the allocations to reflect their after-tax equivalents up front rather than merely adjusting at the end (since assets held in a retirement account essentially have a portion 'earmarked' for taxes). This in turn impacts not only how wealth compounds but also the "after-tax risk" of the investments (as losses in each account type also have different characteristics).

In the case of tax-deferred accounts, the government takes a portion of the entire account (principal and interest) but the taxpayer effectively enjoys the full growth rate on his/her after-tax share; by contrast, with a traditional investment account, the government effectively bears a portion of the risk (in the form of taxable losses). The study finds that when stocks in an IRA (with "full" risk) are compared to stocks in a brokerage account (with "shared" risk), the optimal allocation is virtually always to hold the stocks in the brokerage account, not merely for asset location tax efficiency, per se, but because the stocks-in-the-brokerage-account results in a more favorable mean-variance-optimized portfolio (because it effectively has a lower after-tax standard deviation).

Examples
Assume 30-year investment horizon, 30% ordinary income tax bracket, 15% capital gain tax bracket, 5% bond returns, and 8% stock returns in the form of capital gains that are realized each year. The after-tax ending wealth values for initial investments of $500,000 of pre-tax funds in TDAs and $500,000 of after-tax funds in taxable accounts are as follows:

Strategy 1: stocks in tax-deferred account, bonds in taxable account
Bonds in taxable account: $500,000 (1 + .05(1–0.3))^30 = $1,403,397
Stocks in TDA: $500,000 (1.08)^30* (1–0.3) = $3,521,930
Total: $4,925,327

Strategy 2: stocks in taxable account, bonds in tax-deferred account
Stocks in taxable account: $500,000 (1 + .08(1–0.15))^30 = $3,598,385
Bonds in TDA: $500,000 (1.05)^30*(1–0.3) = $1,512,680
Total: $5,111,065

Conclusion: it's better to put stocks in taxable account and bonds in tax-deferred account

Why My Bond Portfolio Performed So Poorly?

11/27/2013

Q: I thought invest in bonds is conservative, but why my bond investment's performance has been a lost worse than stocks investment so far?

A: Many investors hid from the stock market collapse of 2007-2009 by parking their investments in bonds. They continue to hide there today. And why not? The Barclays U.S. Aggregate Bonds Index (BABI), a closely watched broad based bond index, returned over 19% from 2007 to 2009 and almost 20% from 2010 to 2012. The problem is a large part of the return was from capital appreciation, not interest payments – a good bet when interest rates are falling, but a very risk bet in the face of today’s historically low interest rates. Since the principal of bonds move in the opposite direction of interest rates, a slight rise from historically low interest rates can be devastating to the principal of bonds. Even investments that are perceived to be conservative, like bonds, have risks.

The BABI lost over 2% in the fist half of 2013. As interest rates increased from May to June the BABI lost over 3%. Another closely watched bond index, the Barclays US Long Treasury Index (BLTI), fared even worse. It lost almost 8% in the first half of the year.

What Drove the Dismal Bond Performance?

Bond returns are driven by two factors, the interest rate they earn and fluctuation of their principal. The interest rate is fairly straight forward. Generally, riskier borrowers must pay higher interest rates on their bonds to compensate for the higher risk of defaulting on the bond. A company perceived to be safe, like IBM, may only have to pay 3% interest on its bonds. A company perceived to be risky, like Morgan Stanley, may have to pay 5% interest on its bonds. Let’s say you bought a bond from IBM that paid 3% interest per year and had a 10 year maturity. Each year IBM would pay 3% interest and return your principal at the end of year 10.

Credit Risk

With credit risk, from the time you buy the bond until the time it matures or you sell it, there is the risk the company defaults on the bond. The price of the bond moves inversely with the change in default risk. If there is an increasing risk that the bond will default the price of the bond will decrease.

Interest Rate Risk

With interest rate risk, from the time you buy the bond until the time it matures or you sell it, there is the risk that interest rates increase for similar bonds. Using the example of the IBM bond paying 3% interest, a 1% increase in interest rates for similar bonds to 4% makes the 3% bond unattractive.

The Solution

You need to invest in a well diversified bond portfolio, just like how you diversify a stock portfolio (not putting 100% of money in Apple). Diversifying a bond portfolio requires exposure to various levels of credit risk, borrowers with lower and higher risk of default. Generally, borrowers are less likely to default in an improving economy (like the one we are in now) and more likely to default in a deteriorating economy. It also requires exposure to various levels of interest rate risk, bonds with lower and higher modified durations. Generally, a higher modified duration is riskier in a low interest rate environment (as seen in the BLTI example above) since the risk of interest rates increasing is higher than them decreasing. A well diversified portfolio should also have domestic and international exposure. Restructure your bond portfolio if it does not reflect the level of risk you are comfortable accepting.

Is Term Life Policy Transferable to Another State?

11/26/2013

Q. If I bought a Term Life in my current state but next year I move to another state, is my Term life policy still effective?

A. Yes, it doesn't matter which state you live or move to, as long as you pay your premium, your Term life policy will be still effective.

How To Do Digital Estate Planning

11/26/2013

Examples of Digital Estate:

Tablet computers, laptop computers, desktop computers, flash drives, smart phones and all their contents
Web sites, blogs, Facebook accounts, Twitter accounts and e-mail accounts
Assets gathered in online payment systems like PayPal, commodities stored online on eBay or another web auction site.
Images and photos on Flickr, personal documents in Google Docs and videos on YouTube and subscriptions to paid online sites (like The Wall Street Journal or The New York Times.)
Online bank and other money management accounts, Internet-based medical data
Online shopping accounts that include credit card data and gaming sites (like poker and fantasy football) that have stored points toward financial reimbursement.

Four Steps to do Digital Estate Planning
1. Create an inventory
2. Collect all passwords
3. Establish an online executor
4. Generate written instructioins

Should I Buy Term Life Insurance From My Employer?

11/25/2013

Q. I am looking for $1 million term life insurance. Should I buy it from my employer during the annual benefits enrollment period?

A. If you have good health and want to save money, don't buy the additional term life coverage from your employer.

First, always take advantage of any free life insurance offer from your employer, but chances are, it has an upper limit, usually at $50K or 1 time of salary.

For the extra life insurance coverage you need, do NOT buy from your employer, for the following 3 reasons:

1. You are subsidizing other employees.
If you have good health, you will be subsidizing your colleagues who are smokers or with poor health. The reason is simple, group life insurance is not subject to physical exam, and it treats everyone the same.

2. Your total cost will be higher.
Unlike any term life insurance you purchase outside of work, which has fixed annual premium, the term life insurance you purchase from your employer will have its premium adjusted each year as you getting older. So when you look at total cost over the life time of the policy, you will end up paying more.

3. You will pay more when you change job.
When you leave your current job in the future, you will end up without an insurance coverage and if you want to buy at that time, you will be forced to pay more because you will be older at that time!

The Top Three Life Insurance Books

11/24/2013

With a plethora of information - some good, some not so good - it can be difficult to find books that will best contribute to a solid life insurance foundation. Here are some of the books that insurance professionals highly recommended.

1. Questions and Answers on Life Insurance: The Life Insurance Tool Book, by Tony Steuer
This book covers both the basics and the more advanced principles involved in life insurance. The book includes advice on pitfalls to avoid, keeping a policy in force, and company evaluations. It was written by a life insurance professional with years of experience.

2. Tools and Techniques of Life Insurance Planning, by Stephen Leimberg, J.R. Doyle, and Robert J.
This book talks about methods for determining one's life insurance needs. It includes charts, checklists, and case studies on applying sales methods and identifying the impact of new regulations on existing insurance models. Now in its 4th edition, this book covers a variety of topics, from life settlements to insurable interest to buy-sell agreements and charitable planning.

3. Confessions of a CPA: Why What I Was Taught To Be True Has Turned Out Not To Be, by Bryan Bloom
Bloom’s book is a compilation of eight commonly-held financial truths that are accepted as components of a sound financial plan. Bloom dismantles them within, and discusses the way that relying on accepted truths impacts one’s financial future.

How Does an Investor Manage Exposures to Market Risk?

11/22/2013

In our last blog, we discussed that insurers are hard to deal with a market catastrophe. So as an investor, how do you manage your exposures to risk?

There are two primary alternatives:
1) to just not take as much risk in the first place, managing risk not by trying to shift market risk to an insurance company, but just owning less risky stuff in the first place (i.e., having a more conservative portfolio); or
2) by simply spending conservatively enough that even if "bad stuff" happens in the portfolio, the retiree who in the end is only spending a few percent a year from the portfolio can allow the bulk of the assets to stay invested long enough for a recovery to occur.

After all, it's quite notable that in the end, this kind of safe withdrawal rate approach survived a Great Depression that many insurance companies did not, and those following a safe withdrawal rate approach since 2008 are doing fine (given the stupendous market rally that has occurred since the decline) while a large number of insurance companies had to permanently exit the marketplace.

In other words, notwithstanding how scary the ride can be at the time, the reality seems to be that just prudently managing a portfolio and drawing a conservative amount from it each year has had more success withstanding bear markets, economic turmoil, and "black swans" than the insurance companies some investors are looking to for protection. To be fair, not all insurance companies have left the business since 2008, and none have actually outright defaulted on their guarantees at this point. But we have seen a number of very consumer-unfriendly practices from insurance companies trying to get off the hook for their guarantees, from "buy-backs" to changing available investment options and constraining asset allocations and more, and we still don't know how the next bear market will play out either.

Can an Insurer Survive a Market Catastrophe?

11/21/2013

In last blog, we discussed how an insurer makes money. Now this blog will discuss how an insurer manages risks.

While insurance can be a highly effective way to manage risks that are highly uncertain individually but average out effectively in large numbers, the problem with trying to insure against a market catastrophe is that the risks don't "average out" over time; instead, they clump together. After all, the reality is that if a large number of people buy insurance against a market decline - e.g., through a variable annuity with a living benefit rider (GMWB, GMIB, etc.) - then nobody will have a potential insurance claim while the market is going up, but virtually everybody will be "in the money" at the same time when there's a severe bear market.

Of course, insurance companies had some acknowledgement of this risk, which is why policies that "insured" against market declines did not pay out an immediately liquid benefit, but instead merely allowed the policyowners to draw out lifetime income which meant, at some point, they may eventually deplete their own assets and then draw on the insurance company's guarantee. Nonetheless, where a severe market decline occurs, regulators require the insurance company to ensure it has reserves sufficient to pay out on its potential obligations, requiring a huge allocation to be set aside; thus, while the insurance company may ultimately be able to make good on its guarantees, avoiding a knockout punch default, the impact to profits for the reserve allocation is so severe the "technical" knockout punch leads the insurer to leave the business anyway (as occurred with several annuity guarantee providers after the financial crisis).

The challenge is compounded by the fact that, given market volatility, the sufficiency of reserves to back market guarantees themselves become highly volatile, as a base of hundreds of billions of dollars of assets are backed by guarantees funded by fairly tiny (relative to the assets) rider fees. If there is an extended bull market - and the insurer has many years to collect fees before facing a market decline that results in a significant insurance exposure - the consequences can be somewhat more contained. But the fundamental problem remains that - unlike virtually all other types of insurance - it's not feasible to slowly, steadily build reserves against a slowly, steadily rising base of guarantees; instead, because all the contracts are tied to the same underlying stock market risk, virtually all the policies become a potential claim at the same time. For instance, if $300B of guaranteed annuities experience a severe 25% market decline, the insurance company is suddenly exposed to as much as $75B of claims, for which gathering a 0.5%-of-$300B - which is "only" $1.5B of fees - just doesn't cut it.

Notably, in other insurance contexts, companies are very cautious not to back risks that could result in a mass number of claims all at once. This is the reason why most insurance policies have exclusions for terrorist attacks and war, and similarly why it's so difficult to get flood insurance in many parts of the country. It's a crucial aspect of insurance that in the end, its exposure to risk is well diversified (allowing the law of large numbers to work) and not be overly concentrated.

How Does Insurance Company Make Money?

11/20/2013

The basic principle of insurance is very straightforward - individuals pay premiums into a common pool of money with an insurance company, which the company invests for some growth (and subtracts a bit of cost for the overhead of the insurance company), and then uses a combination of the original premiums plus growth to pay out insurance claims.

To the extent there's money left over (claims are less than the premiums plus growth), the insurance company generates a profit, while if the claims exceed the premiums plus growth, the insurance company has a loss. Since insurance companies are a going concern, with a steady stream of new premiums coming in, claims being paid out, new policies being established, and old policies that are allowed to lapse, the ongoing management of the insurance company is a bit more complex, but the fundamental equation remains the same: premiums + growth - costs = claims + profit margin. The insurance company sets the premiums, manages the costs, invests for growth, and aims for a certain profit margin that will be left after anticipated claims.

Of course, this also means that being able to effectively anticipate claims is absolutely crucial for the effective function of a life insurance company, which is no small feat in a world where any individual insurance claim - from the death under a life insurance policy to a fire burning down the house under a homeowner's policy - can seem exceeding random on a case by case basis. Fortunately, though, what we see from the "law of large numbers" is that, given a large enough sample size, the actual number of incidents average amount remarkably close to the expected value (assuming, for the time being, we can make a reasonable estimate of the expected value in the first place). What is "random" at the individual level is remarkably stable in the aggregate.

Thus, for instance, while in any individual scenario, the person does or doesn't die and the house does or doesn't burn down - a very random, binary outcome - with a large pool of insured individuals (or properties), the frequency of claims becomes remarkably consistent, allowing the insurance company to be able to set an effective premium that allows the whole mechanism to work in the first place. In turn, this allows for the availability of everything from life insurance to homeowner's insurance; for some newer types of insurance coverage, we may not get the expected value right initially - such was the case early on for disability insurance, and more recently for long-term care insurance - but the principle remains the same: in large numbers, claims can occur with relative consistently.

Of course, with enough consistency, the outcome is essentially an assured loss for any individual insurance policy owner; on average, the policyowner's expected value is reduced by the costs (and profit margin) of the insurer. But access to insurance allows the individual to turn what could be a relatively extreme financial impact - like the loss of a family's primary breadwinner or the house that they live in - into a much smaller, manageable cost. While technically the expected value of the insurance transaction is financially diminished by insurance company overhead and profit margins, it provides a way for an individual facing a binary outcome - the event does or doesn't happen - to participate in the much steadier law-of-large-numbers outcomes instead.

THE MEDICAL SECOND OPINION PROGRAM

11/19/2013

Banner Life insurance company is a very competitive Term life insurance provider. But many people don't know it is also the ONLY company that offers a free program - the medical second opinion program.

This blog will introduce this program to you.

When you’re facing a serious illness, the feeling is nothing short of overwhelming. MediGuide’s medical second opinion program provides you the easiest and most comprehensive review with no out-of-pocket costs or travel requirements in just ten business days.

The medical second opinion program is a unique service available through MediGuide America, an international leader in second opinion services. Members who have been diagnosed with life threatening illnesses can have their diagnoses and treatment plans evaluated by disease specialists at world leading medical centers.

By giving you access to an independent review from a leading medical center, the program provides
you with comprehensive information and advice to help you make important decisions about your
health. And since time is of the essence, second opinions are typically provided in writing within ten
business days – complete with background information on the advising doctors and medical centers.
Take a moment to review the details of this program. Because with a serious illness at hand,
peace-of-mind may often be one of the best medicines.

FAQs About the Medical Second Opinion Program

When should I consider seeking a medical second opinion?
The necessity for a medical second opinion can be best determined through an open discussion between your primary care physician, you and your family members.

If I choose to receive a medical second opinion, is there any cost to me?
There are no out-of-pocket costs for requesting or receiving a medical second opinion. However some services and treatment options suggested in the second opinion may not be covered under your health benefit plan.

Who will collect my medical records and will they remain private?
MediGuide will work with your physician to collect relevant medical records and transmit them to the selected center. Be assured that MediGuide is HIPAA compliant and follows State and Federal guidelines governing disclosure of personal medical information.

Will I be seen by the doctor at the medical center I select for a medical second opinion?
No, your medical files will be forwarded to the selected center through MediGuide. Within ten business days you and your physician will receive an independent, written review of your diagnosis and recommended treatment plan.

What is the next step after I receive the medical second opinion?
You should discuss the recommendations with your doctor. The information contained in the medical second opinion
often provides important peace-of-mind to patients and their families. It may even lead to the pursuit of a new treatment plan administered locally.

What Is In-Plan Roth Conversion and How to Take Advantage of It?

11/18/2013

Q: Due to the new tax laws my 401(k) provider offered me the option of an In-Plan Roth Conversion. What is this and should I take advantage of it?

A: Until 2013, in-plan conversions were generally limited to plan participants that were 59 ½ years of age or older. The new law expands the conversion opportunity to all plan participants. Conversions are limited to plans that offer Roth deferrals and provide a conversion option.

The following is a list of Top 5 Most Frequently Asked In-Plan Roth Conversion questions:

1. What makes pre-tax contributions, Roth contributions and converted assets different from one another?

With pre-tax contributions, income taxes are avoided today. Upon withdrawal, contributions and earnings are subject to income taxes. With Roth 401(k)contributions, income taxes are paid today. Upon withdrawal, contributions and earnings are tax free. Once pre-tax contributions and earnings are converted, withdrawals of the converted amount and their earnings are tax free.

2. What are the primary tax implications of converting?

You may be subject to both federal and state income taxes on the conversion amount. The 10% penalty normally associated with a pre-age 59 ½ does not apply.

One of the most important considerations in evaluating a conversion is whether your income tax rate will be higher when you convert or when you withdraw the money. Recent increases in tax rates may be a foreshadowing of future increases in tax rates.

For many retirees their income tax rate is lower in retirement than in pre-retirement. But, as the cost of living continues to climb many 401(k) participants are contributing more so they can withdraw a larger amount to replace their income in retirement.

Generally, higher incomes are subject to higher income tax rates. For example, you may be subject to a 30% income tax rate today and a 40% rate in retirement. If your income is expected to be higher throughout your career and into retirement it may be advantageous to convert now, as it is better to pay 30% in taxes instead of 40%.

Since future tax rates are unknown, creating a tax free pool of retirement income is a form of tax diversification.

3. What are the secondary tax implications of converting?

The additional income from the conversion may trigger investment surtaxes on investment income, loss of tax credits and or deductions. Thus, a partial conversion may avoid any secondary tax implications.

4. What estate planning benefits are provided by a conversion?

Generally pre-tax contributions and earnings are subject to IRS mandated withdrawals, called Required Minimum Distributions “(RMDs”), beginning at age 70 ½. Although Roth 401(k)s balances are generally subject to RMDs, retirees can rollover the assets to a Roth IRA account and avoid RMDs.

Avoiding RMDs and the taxes associated with them preserves the estate. Like Traditional IRAs, beneficiaries of Roth IRAs are subject to RMDs (spouses are exempt if they assume the IRA). Unlike Traditional IRAs, beneficiaries of Roth IRAs are not subject to income taxes.

5. Can a conversion be reversed?

While the conversion of an IRA to a Roth IRA can be reversed (“recharacterized’), an in-plan Roth conversion cannot be reversed. This argues for delaying an in-plan Roth conversion until the end of the calendar year, when you can better determine your income and income tax rate.

Of course, this should be balanced with the risks of market timing (waiting until the end of the year, only to see a market run-up upon conversion).

Women Face Long Term Care Insurance Price Hikes

11/17/2013

The long-term care insurance industry has been undergoing some significant changes, many of them not so friendly to consumers, especially to women.

Two major carriers in the industry have begun rolling out policies with rates at least 40% higher for individual female policies than for individual male policies; other companies are expected to follow suit within months. The changes, which reflect the reality that women live longer and file more claims than men, complicate an already confusing market that’s diminished in recent years as carriers have exited the business.

Genworth, the biggest writer of long-term care insurance policies, and rival John Hancock have both introduced gender pricing across many states. As the new policies hit the market, they replace the prior policies that offered unisex pricing. Single women won’t be the only ones affected by the change; a married woman who doesn’t apply with her husband—say, because the husband is too ill to pass medical underwriting—will also be charged more.

The increases are substantial: Premium rates for a woman buying an individual policy with 3% annual compound inflation growth are now 42% to 63% higher than a comparable policy for a male, according to an analysis of Genworth and John Hancock policies done in May by the American Association for Long-Term Care Insurance. The average annual premiums for a 55-year-old female for a policy worth $164,000 over 3 years, including a 3% compound inflation growth option, are now $2,700 per year, versus $1,850 for a man the same age, according to the association. While consumers in recent years have faced premium hikes in many long-term care insurance policies, buyers of these new policies will likely see more price stability, experts say, as the industry has largely corrected for the miscalculations behind the increases.

How Do the Young Families Buy Insurance

11/16/2013

Millennials, also known as Gen-Yers, born between the early 1980s and early in this century, often fail to see insurance as part of their young-adult financial picture. Wrong: Despite saving fledgling paychecks, rookie investing and whittling student debt, insurance must figure highly in their financial planning. Here’s why.

Every person’s situation differs, so work with a financial planner to make sure you carry appropriate coverage. Many young adults unready to invest in a planner still benefit from learning basic insurance guidelines on where to start.

Health insurance
Sign up for coverage through your work, stay on your parents’ insurance through age 26 or buy an individual policy. Also, on the new health-care exchange, anyone under 30 qualifies to buy a catastrophic plan covering preventative care plus three primary-care visits.

During open enrollment for the new exchanges, shop for a policy on www.healthcare.gov. If you buy a policy on the exchange, you may qualify for a tax credit if your annual modified adjusted gross income falls below 400% of the federal poverty limit (meaning individuals making less than $44,960 or a family of four making less than $94,200 qualifies).

You can only purchase insurance on the exchange during open enrollment, which ends March 31, 2014. Open enrollment for health insurance this year runs longer than it next year, when it will just be a few months.

Property and casualty
We often think of auto, homeowner’s or renter’s insurance as unchanging expenses. Really? When did you last shop for an auto policy? Detail the coverage limits are on your homeowner’s insurance? Are your policies bundled?

If your policies gather dust in a drawer now or you are a first-time policy shopper, find a local independent insurance agent. They typically work with 10 to 20 carriers to bundle policies based on your situation – sometimes also more affordably.

Umbrella insurance or excess liability covers you beyond terms of your auto and homeowner’s policies. The minimum coverage of $1 million costs you about a couple hundred dollars a year and provides extra protection if you get into serious auto accident, contribute to someone’s personal injury on your property or if you get sued, to name three examples.

Term life
Even a Gen-Yer whose children or spouse depends on your income needs life insurance. Most need only a 20- or 30-year term life policy with coverage amounting to seven to 10 times your salary.

Often, you can get this insurance through your employer – meaning that if you lose your job, you also lose your life insurance. Consider such a policy independent of employment, which sometimes comes cheaper than group coverage if you’re young.

Other reasons you might need life insurance:

Unlike federal student loans, private student loans are often not forgiven at death. Carry a policy large enough to at least cover any of your private student loans.
If you own a home with a mortgage and want to pass that home to your heirs, purchase a life policy if your assets fall short of paying off the mortgage.
Life insurance can help fund children’s college education.
Stay-at-home parents need coverage, too: If you die and your spouse must go to work, he or she must hire a nanny or pay for other child care.

Supplemental disability
Income stream is a Gen-Yer’s most valuable asset. Take advantage of any group long-term disability policy through your employer. For some, the 40% to 60% coverage through such an employer plan falls short.

Supplemental disability insurance covers an additional amount, usually around 20% to 25% of your income. If you lack long-term disability, a supplemental policy becomes important.

And believe it or not, at your age, so does most insurance.

Should I Buy Retirement Income?

11/16/2013

Q. My employer doesn't offer pension. Should I buy retirement Income through Deferred-Income Annuities sold by insurance companies?

A. It requires lots of calculations and the answer most likely is NO.

Instead of purchasing the new breed of annuities offered by insurers to baby boomers hungry for retirement income, you might be able to build as good a stream of income—or better—on your own.

What is "Deferred-Income Annuity"?
It allows buyers to convert a lump sum into a pension-like series of payouts for life. In contrast to an "immediate" annuity, which starts issuing checks almost instantaneously, a deferred annuity requires owners to pick a start date for payments—typically from 13 months to 40 years or even longer in the future.

The Insurer's Pitch
Buy a deferred annuity in, say, your early 50s, and begin monthly payouts—your "pension"—when you retire.

The Downsides
As with most fixed annuities, you must surrender your principal to the insurer, which keeps the balance when you die. To ensure any remainder goes to heirs, most buyers elect to take a death benefit. But adding such a feature can reduce payouts by as much as 10%, leading policyholders to sacrifice much of the annuity's advantage.

An Example
A 55-year-old man who wants an income of $17,000 a year starting at age 65 can put $150,000 into a deferred-income annuity. His internal rate of return (annual return adjusted for waiting for his payments) based on his life expectancy is approximately 4% before taxes. A 65-year-old man who wants an income of $17,000 a year starting at age 65 can put $260,000 into an immediate annuity. His internal rate of return based on his life expectancy is approximately 3% before taxes.

The Conclusion
From 1926-2012, the internal rate of return of large company stocks has been approximately 10% and approximately 6% for government bonds. Can you earn a higher return outside of an annuity and still own your principal? In all likelihood, the answer is yes.

The 4% Rule

11/15/2013

The following is an article written by a Financial Planner discussing the 4% rule, worth a read for people considering retirement planning!

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I realize it’s most likely a lost cause, but I wish people would stop calling the “4% rule” a “rule.” I can’t recall the last time I met a financial planner that told clients the best way to manage their resources through their retirement would be to start by spending 4% of their nest egg and increasing that spending every year in lockstep with inflation.

Good planners are not keen on recommending the 4% methodology, primarily because they recognize there are too many variables that affect an individual client’s outcomes. They typically find value in it as a point of reference or perhaps a guideline, but as a “rule,” no way.

The biggest reason for rejecting the rule, at least in my experience, is that clients don’t want to comply with it. When we discuss with clients the sustainability of cash flow and the survivability of their portfolios, the 4% rule often looks attractive at first. After all, that figure came about because that level of spending never failed. Many people entering retirement gravitate toward conservative approaches. But the more deeply they think about the assumptions that gave birth to 4% as the optimal number, and the more they consider such a restricted spending plan, the more the approach loses luster.

The few clients I have worked with who at first intended to follow a steady spending plan all failed to stick to that plan. Talking with colleagues around the U.S. over the years has only validated my viewpoint that people don’t spend money in that way. Such a steady pace of spending is simply not reality.

There are a lot of reasons for this. Life happens, as they say. Whether it’s a new cost or a new opportunity, unexpected expenses pop up. When faced with really good or really bad portfolio performance, clients often change their spending. When times are tough, they reduce their expenses. When things are going well, they spend more. This is totally natural.

More than a few times, clients have started their retirement with the intent to spend at a steady, inflation-adjusted rate only to find that inflation was not eroding their purchasing power as much as they anticipated. In such cases, many stopped increasing the withdrawals.

Frequently, we find new retirees who simply don’t want to start off with such a low level of cash flow. In most cases, this is not a matter of them simply wanting to spend more money because they are want-it-all and want-it-now spendthrifts. Those exist, of course, but most people have more practical, personal reasons for wanting to spend more.

The 4% rule in most portfolio sustainability studies assumes the cash flow needs to be maintained for a minimum of 30 years. At first blush, this makes good sense and appeals to that initial conservatism that many new retirees have. However, after some contemplation, many retirees find the assumption to be overly conservative because they either don’t believe they will live that long or, more commonly, don’t believe they’ll be spending that much in their 90s.

The odds are good that they are correct. Actuarial tables differ slightly but offer very similar statistics. One tells me that a healthy couple, both aged 65, face an 18% probability that at least one of them will live to be 95. Eighteen percent is a big enough number that we can all accept it as a real possibility, but it also means that 82%—four out of five—couples that we plan for won’t need their money to last 30 years. That is a lot of money that they could have spent on themselves, people they love or causes they care about.

A pet peeve I have is that too often commentators suggest that if you spend more than 4%, or whatever percentage they advocate, you are instantly risking bankruptcy and that Cinderella’s carriage will turn into a pumpkin. Bill Bengen, the writer of the original paper that spawned the “4% rule” (he never called it that), was quoted in a Forbes.com piece saying, “It is a misconception that following a SAFEMAX leads to terminal poverty.” Fact is, even at a 4.5% rate, 96% of the time, the amount of assets at the end was more than the amount at the beginning of the 30-year period.

Most of us know someone who has lived at least into his or her mid-90s, but few of us know people that age who spend what they spent when they were 65, adjusted for inflation. The 95-year-old who still plays golf or travels the world is a rare exception, not the norm. It is a simple fact of life that as we get older, we slow down. The elderly tend to spend their time doing things that cost less.

By contrast, new retirees often want to do things early in their retirement that cost substantial amounts of money. The couple who retire and immediately take to knocking off the more elaborate and expensive items from their “bucket list” are not some kind of urban legend. They are a reality and, in many ways, a perfectly sensible reality. No one gives us tomorrow.

Recently, a new 70-year-old client had us examine how much he could spend over the next couple of years without forcing his wife to be “stuck at home” after he passes away. He has cancer, but his wife, 65, is healthy. They know the more they spend now, the less there will be later. The diagnosis made them believe that their time together is more valuable than the money. Who are we to disagree? But if we take 4% as a “rule,” that’s where the conversation is headed.

We don’t need a cancer diagnosis to find people interested in spending more early in their retirement. I find it actually quite common. Part of the reason for that is their increased vitality. My clients, the “Smiths,” are good examples.

For 40 years, they watched their spending and pinched their pennies, all to be able to retire one day with few financial concerns. They have no mortgage or debt and they have only modest committed expenses. They are taking art classes, they have learned to kayak, and they are frequently seen by smoking hogs at events for various civic groups. They are withdrawing about 5.5% of their assets and, man oh man, are they having fun!

The Smiths do not worry about running out of money. The reasons they do not worry may be instructive to anyone advising retirees and identifying clients who could truly handle more spending early in retirement.

First, the Smiths have owned investment assets during periods of bad economies and bad markets. They have made good decisions and bad decisions and learned why their choices were either good or bad. This gives them confidence in their investment plan and should allow them to maintain a balanced portfolio indefinitely.

Second, they have the ability to reduce their expenditures without having to limit their lifestyle. Most of their spending is truly discretionary. They can employ a dynamic spending plan rather than a rigid one—like that modeled under the 4% studies.

Third, because they have flexibility in their spending, they do not believe they need a high level of certainty to proceed with the spending they currently enjoy. Put in Monte Carlo terms, they do not need a super-high success rate to feel comfortable with what they are doing.

Fourth, we have done real financial planning with them. This helps them better understand the range of possibilities and the trade-offs that apply to their decisions. Planning is a collaborative process, not a onetime event. They know we will revisit our assumptions and incorporate whatever changes may come.

Lastly, what has garnered the most confidence is that we have identified the trigger points that would warrant a scaling back of their withdrawals. This will be important if the bear growls again, if the couple underestimate their spending or if future returns are as low as some believe they will be. We have also identified trigger points to resume higher spending levels should the couple experience better-than-expected results.

The planning work we have done doesn’t offer any of our analytics as a crystal ball. It simply identifies what can get out of whack and exactly what we should do about it. The client is prepared.

There is an adage in sports, “Pressure is something you feel when you are not prepared.” Well-prepared clients can enter the unknowable future with confidence that they can adapt to whatever may come.

What To Do With Bonds As Interest Rates Increase?

11/15/2013

Q. What should I do with bonds if I am worried about the prospects of rising interest rates in the future?

A. You are not alone and academicians are onto this topic right now. On the Financial Planning magazine website, there is an interesting article discusses investors' fears about the potential for rising interest rates in the coming years, and their adverse impact on bond prices and investments.

Although the end of QE "Infinity" is still unknown, a Wall Street Journal survey of 50 economists predicted the 10-year Treasury will rise nearly 100 basis points to 3.47% by the end of 2014 (with one economist projecting a rate as high as 5.20%). And that would potentially be the second year in-a-row for losses, as given how much rates have risen this year, the Barclays Aggregate Bond index is already down 1.1% year-to-date.

Of course, the reality is that economists are notoriously wrong about their predictions of both the directionality and magnitude of interest rate movements; nonetheless, for those who continue to fear an interest rate increase, what's to be done?

What will happen if rates increase
The author includes an interesting chart showing the impact over the next 10 years of an interest rate increase of anywhere from 1% to 10% in the coming year, from a base rate of a 2.3% yield for the Barclays Agg and the current 5.6-year duration; the forecasted 1% interest would result in a total return loss of about 2.8% next year, but a breakeven by year 2 (given the incoming yield return), and a 3% single-year increase would result in a 13% one-year loss and a breakeven by year 4. Even a 5 percentage point increase - which would be worse than anything in history - would result in a loss of "only" 23.2% in a year, which is painful but still far less than the 37% loss on the total return S&P 500 in 2008 alone, and would recover entirely within 5 years.

Benefits of owning short-term vs. intermediate-term bonds
The author also looks at the relative benefits of owning short-term versus intermediate-term bonds, generally finding that with modest (e.g., 1% - 3%) rate increases, intermediate-term bonds quickly prevail (even with their initial losses), though with severe interest rate changes (e.g., 5%+) it can take 10+ years for intermediate-term bonds to cumulatively outperform the shorter-duration alternative.

The bottom line
The bottom line - for those who fear severe interest rate movements, short-term bonds are better than intermediates, but even for relatively significant rate movements the intermediate bonds don't perform all that badly and recover relatively quickly; either way, both are still far superior to the prospective losses of an equity bear market, though.

Financial Planning is All About Setting Priorities and Follow Through

11/12/2013

Q. I recently met with a financial planner, he dumped me a long list of things I need to do, and I was really lost. Why it's so hard to get my financial house in order?

A. If we could simply accomplish everything they wanted, at once, with the resources we had, financial planning would be unnecessary. However, in the real world, we can't simply have anything/everything we want whenever we want. Resources are limited, and as a result financial planning is essentially about trade-offs. We must prioritize which goals are most important to achieve, and allocate resources to them.

Unfortunately, many financial planners, due to liability concerns, want to be thorough in their service by developing a long list of recommendations and dump to the clients, hoping the clients will implement them. The results are usually disappointing.

Getting your financial house in order doesn't have to be that hard!

You can work with a financial planner by making the choice of what's most important to YOU and take actions to implement the decisions, one at a time. The goal is not to get everything done immediately, but instead to begin a process of incrementally getting a little done before a target time.

When to Get the Best Holiday Deals

11/9/2013

Now through late-November

Early November is the time to buy candy and cookware, according to Credit Donkey.

Candy, of course, goes on sale the moment that Halloween is over, so if you've got a kid with a sweet tooth, now is the time to stock up on sugar-coated stocking stuffers. See's Candy is also offering discounted prices on holiday gift baskets on its website and, if you're thinking about buying candy for corporate clients or for just a lot of relatives, it provides even better discounts for those spending more than $675.

Cookware and kitchen accessories -- from blenders to bowls -- typically go on sale in November too. The deals last through December, says DealNews, a bargain-hunting web site. It's one of the few times you can pick up a discounted item when you need it the most. And, if you've got an avid cook on your gift list, the cookware deals can allow you to get a leg up on holiday shopping. Deals2Buy, another bargain-hunting site, has scoped out discounts on cookware sets andnesting bowls. If you've got plans to make holiday goodies for friends and relatives, you may also want to check out the steep discounts on food storage sets.

Wedding needs. Naturally, you're probably not thinking about weddings in mid-winter, but that's exactly why the deals get better at this time of year, according to the editors at Credit Donkey. If you plan a winter wedding -- held between January and March -- you're likely to see discounts ranging from 10 percent to 25 percent on everything from hall rentals to photography services and limousines. But even winter weddings need to be booked a few months in advance, so now is the time to make the calls, if you're so inclined.

Be careful, about buying a wedding gown for nuptials that are many months away, however. Most gowns are not returnable -- even before they're altered. Indeed, many stores have brides sign a contract that obligates them to pay for the gown, even if they change their mind with hours of the purchase. So never put a deposit on a wedding gown unless you're 100 percent certain it's the dress for you.

Turkey. If you play your cards right, your turkey just might be free, thanks to supermarket giveaways that reward customers who spend between $200 and $400 this month. So stock up on the items you know you'll be using over the holiday season -- whether that's Champagne for the New Year's gatherings or just day-to-day freezer staples -- and your Thanksgiving bird may well be gratis.

Smart phones are likely to go on sale a few days before Thanksgiving, according to DealNews. But if you want the best possible offer, you may need to buy on Thanksgiving Day. Last year, 42 percent of the best smart phone offers were launched right as the bird was getting popped in the oven.

Thanksgiving Day

Thanksgiving Day is also likely to be the best time to buy an HDTV. While Black Friday deals for television sets are also great, the deals are incrementally better the day before, according to Deal News.

And, as long as you're annoying your relatives by shopping your way through Thursday, pick up any gaming items you want too, the site says. There were 70 percent more gaming deals on the past two Thanksgiving Days than there were on Black Friday.

Black Friday

Wait until Black Friday, however, if you're in the market for a laptop computer, flash drives and memory cards.

Cameras are also likely to be offered at the best prices of the year on Black Friday.

Previous generation Apple products are also dropping in price this month, thanks to refresh cycles on both the iPhone and iPads. Retailers are providing discounts on the iPad 4 -- just one year old. Deal News expects them to go for $399 on Black Friday.

Cyber Monday

Cyber Monday is when you'll want to pick up clothing and shoes. There are traditionally 42 percent more discounts on clothing and shoes on Cyber Monday than Black Friday, according to Deal News. However, if you're in the market for sweaters and coats, prices will drop even further in January and February, when retailers start putting seasonal apparel on clearance sales to make room for spring merchandise.

Cyber Monday is also when you should start shopping for toys, according to Credit Donkey. However, don't be in a big rush. The toy deals keep getting better until about two weeks before Christmas.

Gift baskets and wine subscriptions are generally sold at their best prices in early December, too.

Prices for international travel also tend to come down in December, when few people are thinking about heading out to Europe. If you can travel off season in the winter months, you're likely to find everything from airfares to hotels discounted by as much as 50 percent.

January and February

However, if you can wait until after the holidays, post-season sales are where you're going to get the best bargains on (now much needed) exercise equipment, jewelry and watches, bedding and blankets.

3 New Ways to Fund College Costs

11/8/2013

There are three new ways for young students to finance their education now.

1. Find a company that offers loans in exchange for a stake of the student’s future earnings.
Funding comes from investors or from the firm itself. They commonly take between 3% and 10% of the student’s income for a set number of years, usually about 10 years. They may also provide some mentoring or support to the student to protect their investment.

Some examples of these types of firms are Pave and Upstart.

2. Fund education through micro-financing
Students can ask for small donations from friends, family or their local community.

Some examples of these firms include Give College and GradSave, which cater to parents, and Campus Slice and BrainFund, which help students solicit donations. Note that fees are expensive.

3. Secure loans from alumni
Students can try to secure loans from alumni.

Some firms, like SoFi and CommonBond, are connecting students with benevolent alumni who would rather directly finance student loans than contribute to the school’s general fund. Students can get a lower rate than they would at a private lender, and the scheme appeals to charitable investors who want to feel like they’re supporting a good cause.

Currently, those providers are only available at a few institutions.

4 Criteria When Seeking Financial Advice

11/7/2013

1. None of the advice should be based on the advisor's opinions.
Instead, the advisor should be able to demonstrate that his or her advice is based on what might be referred to as the "science of investing" or "evidence-based investing" -- evidence from peer-reviewed academic journals such as The Journal of Finance. The advisory firm should be able to cite evidence from peer-reviewed journals supporting their recommendations. And the advice should be easily understandable, transparent and make sense.

2. The firm also provide a fiduciary standard of care.
This requires the firm to provide advice that is based solely on what's in your best interests. This differs from the "suitability standard" present in many brokerage and insurance firms. That standard only requires that a product or service be suitable -- it doesn't have to be in your best interest. There's simply no reason why you should settle for anything less than a fiduciary standard. Not one. Unfortunately, most investors are unaware of the difference. They simply assume that an advisor is giving advice that's in their best interest. And that makes them vulnerable to being exploited.

3. Advisors should be "eating their own cooking."
This means investing in exactly the same investment vehicles they're recommending to you. The advisor should be willing to show you his own statement from the custodian holding his assets so that you can verify the veracity any claims. They should also be able to show you that the company's 401(k) or other retirement plans offer the same vehicles they are recommending to you. That doesn't mean that their asset allocations will be the same as they are recommending (because each person has a unique ability, willingness and need to take risk), but the vehicles offered should be identical. If they aren't, don't hire them.

4. The advisor should integrate an investment plan into an overall plan.
This is because financial plans can fail for reasons that have nothing to do with an investment plan, it's critical that the advisory firm integrates an investment plan into an overall estate, tax and risk management plan.

For example, an investment plan can fail because of a premature death or a disability that prevents one from working. It can also fail because of the lack of sufficient insurance, be it life insurance, property and casualty insurance (such as for homes, cars, boats, and for protection against floods and earthquakes), or personal liability insurance. It can also fail because of lack of creditor protection (an issue particularly true for medical professionals). Remember that even if you don't have a large enough estate to have to worry estate taxes, there are many other non-investment issues that should be addressed, such as the need for wills and durable powers of attorney for health and financial matters.

Does a Bad Credit Score Hurt Your Auto Insurance Rate?

11/6/2013

Q. My credit score is bad, will it hurt my auto insurance rate?

A. Unfortunately the answer is YES.

Based on a recent study, drivers with poor credit pay twice as much -- 91 percent more on average -- than those with excellent credit scores; those with average credit pay 24 percent more.

What can you do?

Pay on time: Pretty obvious, right? But paying your bills on time every time has the biggest impact on your credit score, accounting for about 35 percent of the final number, according to FICO, the nation's biggest credit scoring company.

Age: It may seem completely unfair to a youngster, who also suffers with higher insurance rates because they have less driving history, but the longer you manage your credit responsibly, the better your credit score. Young people might try to become "authorized users" on their parent's credit card accounts. That gives you a longer credit history than you can develop on your own. And, to be fair, if your parents are responsible about their credit, you're likely to be too. The length of your credit history accounts for about 15 percent of your score.

Borrow sparingly: A big piece of a credit score -- about 30 percent -- measures how much credit you use compared to how much credit you have available on revolving credit lines, such as credit cards. So, if you have 10 credit cards, which all boast $1,000 limits, you have a total of $10,000 in available credit. If you borrow the maximum on all of those cards, your usage is 100 percent -- and your credit score is toast. Try to use 10 percent or less of the credit you have available.

Manage your accounts: The other 20 percent of your score measures how many different types of credit -- credit cards, auto loans, student debt, mortgages -- you have. (The more types of credit you've managed well, the better.) And how much new credit you've applied for. If you're always in the market for loans, it will hurt your score. Add accounts when you need them, but be sparing about your new credit requests.

Check your report: Sometimes a bad score is not your fault. An identity thief could have hijacked your information and applied for credit in your name. Make sure your credit report only reports information about you by getting a free copy of your credit report at least once a year at annualcreditreport.com.

Follow These Used-Car Buying Steps to Save Big

11/4/2013

Find out the average retail price for sale by dealers by checking Kelley Blue Book and Edmunds.com. Then look up ads by dealers in your area on a site such as AutoTrader.com.
Get the average trade-in value on the pricing sites. If you are shopping at a new car dealership, the car may have been taken in trade on a new model. In that case, the acquisition price usually is even lower than the wholesale auction price.
Get the wholesale price. Download the free app developed by MyVinny.com from the Apple Store or Google Play, scan the VIN number on a car you are considering (usually on a plaque either on the dashboard on the driver's side or on the door post visible when the door is open.) Within a few seconds, you will get back the wholesale price.

Talk to the dealer salesperson, try to find out if the car is a trade-in. He or she might tell you it was traded in while trying to convince you the car is in good condition. If it was traded in, the dealership's cost basis was likely lower than the wholesale price.

An Example
Take the case of a top-selling midsize sedan, a 2011 Toyota Camry SE. Assuming it has 30,000 miles and typical options, Edmunds lists the dealer retail price at $17,038. The MyVinny average wholesale price for 2011 Camry is $14,765. And the trade-in value is $14,258. So the dealer stands to make around $2,780 if the car is a trade-in and $2,273 on an auction car.

Alternatively, let's say you are looking at an auction car (from auction sites such as Manheim.com). Set your aim at getting the Camry for $1,000 over the wholesale price while letting the salesperson know you are aware of that wholesale number. But start out bidding $500 over the wholesale price, with a goal of ending up at $1,000 over, or $15,765. That is still 8 percent profit for the dealer.

If the dealership won't meet your target, you have to decide how badly you want the car. But don't go much above $16,000 -- or about $1,000 off the original asking price. Especially with a popular car like the Camry, there is always another dealer to offer a competing price.

As with buying new cars, doing your research means saving money while still getting a used car you want.

Smart Use of Term Insurance Riders Could Save Money

11/2/2013

Q. I am considering purchasing a Term life insurance, should I buy any of the riders come with the Term insurance?

A. A rider is an additional benefit that you have to pay for it. Normally I don't recommend Term insurance purchasers to buy a rider because most riders are unnecessary.

However, there is a creative way of using riders to save money. I will use an example to illustrate:

An Example
You are considering Term life insurance, with the purposes to replace income $1M, payoff mortgage $300K in 25 years, cover kids' education expense of $200K within 10 years, total $1.5M.

Now, instead of outright purchase of $1.5M Term insurance, you can purchase an $1M Term insurance, plus a $300K 25-year rider, and $200K 10-year rider. Your total annual premium cost will be less than that of the $1.5M Term insurance.

However, not every life insurance companies offer such riders because they will end up making less money. If you want to know which Term life insurer offers such money saving riders, please contact me, so we can run some quotes for you.

Use Financial Advisors to Navigate Medicare Maze

11/1/2013

The following is an article appeared at MarketWatch about
how financial advisors are increasingly making themselves a resource for guidance on health insurance, especially Medicare for retirees, as the number of retirees covered by employer health insurance has declined from more than 60% in the 1980s to only about 25% today, and the trend is expected to continue (or even accelerate) as retirees are now assured of health insurance after retirement (on health insurance exchanges up to age 65, and via Medicare thereafter).

Retirees need to navigate the "Medicare maze" of Part A (hospital inpatient care), Part B (outpatient care, including doctors visits and diagnostic testing), and Part D (prescription drug plans), to understand what's covered, what's not, and what kinds of premiums (for Parts B and D, with higher means-tested premiums once AGI exceeds $85k for individuals or $170k for married couples) and out-of-pocket costs may be on the table.

In addition, retirees must decide whether to opt out of the 'traditional' Medicare Parts A and B to go with a Part C (Medicare Advantage) plan (which may have lower premiums but also more restrictive HMO-style benefits), or buy a Medigap supplemental plan for the gaps in Part A and B coverage.

Retirees unhappy with Medicare Advantage can switch from it back to the traditional Medicare system during the annual open enrollment period, but may have trouble getting a Medigap supplemental policy now (as those who apply outside of their initial Medicare window at age 65 must be medically underwritten and may be declined for coverage).

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Most financial advisers spend years developing expertise in the likes of asset allocation and investment fund selection. Until recently, they barely addressed the second-largest budget item of their older clients: health-related costs.

This is beginning to change, though, as demand for help with health-care planning drives more advisers to add another line to their resume: Medicare consultant.

Underlying this trend is the decline in employer-sponsored retirement health plans. “People didn’t used to have to worry about retirement health care,” said Katy Votava, president of Goodcare.com, a Rochester, N.Y., firm that works with financial advisers and their clients to help the latter save money on health care. But roughly 25% of employers that provide health insurance offer retiree health benefits, down from more than 60% in the 1980s, according to Bryce Williams, managing director of Exchange Solutions for Towers Watson.

And most of the retiree medical benefits that remain aren't as generous as in the past. In the plans of old, an employer would typically provide comprehensive drug benefits to accompany original Medicare for those 65 and over, leaving the retiree with low out-of-pocket costs and few decisions to make.

Retirees under the Medicare-eligibility age might have continued on the company’s regular medical plan. The Affordable Care Act is expected to accelerate the decline in companies providing this benefit, since retirees under 65 have a new option for guaranteed coverage on the state exchanges.

It’s no wonder consumers are clamoring for help planning for and managing health-care expenses. The price tag is enormous: For a married couple that wants a 90% chance of having enough money by age 65 to fund health-care expenses throughout retirement, and who both have drug expenses at the 90th percentile, the savings target is $360,000, according to a recent report by the Employee Benefit Research Institute. (The fact that that’s down from $387,000 in 2012 will likely come as cold comfort to most pre-retirees).

Navigating the Medicare mazeFor most advisers, experts say, educating their clients about Medicare is one of the most important factors in keeping those costs manageable.

For starters, savers need to know—well before they retire—that Medicare doesn’t cover everything. Needs that the original government program doesn’t cover include routine dental care, dentures, hearing aids, and—the biggie—long-term care. What’s more, Medicare isn’t free. While most beneficiaries don’t have to pay premiums for Part A (hospital inpatient care), people must pay premiums for Part B (outpatient, including doctors visits and diagnostic testing), Part D (drugs) and, usually, for Part C (Medicare Advantage plans, offered as an option in lieu of original Parts A and B.) Beneficiaries also incur out-of-pocket costs for copayments, coinsurance and deductibles.

But these basics are just the tip of the iceberg. Medicare coverage also requires complex decision-making. Enrollees must pick their type of coverage—original Medicare or a Medicare Advantage plan. Those who opt for original Medicare often choose to buy a Medigap supplement plan to help cover out-of-pocket expenses, as well as a separate drug plan.

This might seem straightforward enough, but the plan choices are many and the stakes are high. What’s more, there’s evidence that many consumers aren’t doing enough comparison-shopping. According to a study released last month by eHealth, which operates eHealthInsurance, the country’s largest private health insurance exchange, less than 6% of people who used eHealth’s online tools to compare prices in stand-alone Medicare prescription drug plans were in the plan with the lowest total out-of-pocket costs available to them. Users who switched to the plan with the lowest costs in 2013 could have saved an average of $649 for the year, eHealth found.

Many Medicare enrollees are drawn to Medicare Advantage for the plans’ affordable premiums. The average monthly premium for 2014 is projected to be $32.60, according to the Centers for Medicare & Medicaid Services, although some plans charge zero premiums, said David M. Anthony, founder of Anthony Capital in Broomfield, Colo. Yet they do this without fully understanding the trade-offs, he said; “They’re paying less and getting less.” Plans with zero premiums are often health maintenance organizations that have restricted choices of doctors, for example.

People who don’t like their Medicare Advantage plan have the option of switching during certain times of the year—now is one of those times, during the open enrollment period that lasts through December 7—but there’s a potential risk for those who have serious health issues: In most states, Medicare supplement plans require medical underwriting, and outside of certain special circumstances those in poor health can be denied coverage if they try to enroll outside their Medigap open enrollment period (the window around a person’s 65th birthday when coverage is guaranteed at the same price that someone in good health would pay). In other words, some people seeking to switch from a Medicare Advantage plan to original Medicare with supplemental insurance might find themselves paying more or even shut out of coverage.

Health-insurance helpAnthony offers a review of clients’ Medicare coverage as part of his financial planning services. He has more experience than most in the topic, having briefly sold Medicare supplement plans right out of college. But that didn’t stop Anthony from being “flabbergasted” by the array of choices when it came time to help his parents with their Medicare enrollment. That’s when he decided to add a separate division to his firm, which advises on and sells a wide range of Medicare plans and long-term care insurance. “We’ve got more business than we can handle right now,” he said.

Many advisers decide it isn’t cost-effective to develop that level of expertise in-house, and that’s when they tap experts like Votava of Goodcare.com, who has worked as a nurse practitioner and holds a Ph.D. in health economics and nursing. She will conduct a Medicare review and provide other consulting services for advisers’ clients, at an hourly rate of $195 with a two-hour minimum; she also offers smart-shopping webinars for $45 each.

Clients of Morgan Stanley Wealth Management have access to the services of PinnacleCare, a private health advisory firm based in Baltimore. The firm’s comprehensive Medicare evaluation costs $750 as a stand-alone service. The firm’s services aren’t available to the general public directly; they’re accessible to clients of partner advisers, to members who pay annual fees, and to those whose workplaces offer some of the firm’s services as a group benefit.

When PinnacleCare began, the company focused exclusively on helping clients manage the clinical aspects of their medical care—for example, by having on-staff researchers dig into scientific data on the medical procedures clients were considering. The firm didn’t tackle the financial aspects of health care at first. “We kind of said it’s someone else’s problem, then we realized we needed to embrace it,” said Bruce Spector, chairman.

One of the biggest mistakes that people make when it comes to retirement health care is simply failing to plan in advance, Votava said. One shock to higher-income people is the additional amount they’ll have to pay for certain parts of Medicare.

Individuals with modified adjusted gross incomes exceeding $85,000 and married couples filing jointly with incomes over $170,000 face higher premiums for Part B and prescription drug coverage (premiums rise on a sliding scale). Medicare’s MAGI is the total of adjusted gross income plus tax-exempt interest income. There may be ways to lower this amount and avoid paying more, but even if there aren’t people should understand their outlay in advance, Votava said. Otherwise, “That’s a bitter pill to swallow when you’re on the threshold of retirement,” she added.

Many advisers are unsure of how to broach health-care issues with their clients, said Dr. Carolyn McClanahan, the founder of Life Planning Partners, a financial advisory practice in Jacksonville, Fla. McClanahan regularly speaks to groups of advisers on health-care-related topics and has taught them the kind of open-ended questions they can use to initiate a discussion.

Because of her medical background—she keeps her credentials current volunteering her medical services at a homeless shelter—McClanahan sometimes even hears from clients looking for medical diagnoses. One called her with heart palpitations once, but she referred him on to the emergency room. She’ll help clients find specialists and get they kind of care they want, but when it comes to the clinical stuff, “I don’t practice medicine on my clients.”

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