Christine Dugas, Money Watch columnist from USA Today answers reader questions about saving protecting and growing money.  On March 22, 2013, I answered this question.  Q: When my wife retires this year she will receive a lump sum retirement benefit. We are trying to decide what to do with it to provide a steady monthly income stream. Should we invest in a deferred annuity? Or are there other good vehicles? It’s hard to get information without being sold a product.

“One thing to consider before determining what to do with your wife’s retirement benefit is to look at your overall household retirement income needs. People often look at these decisions as separate events instead of looking at the big picture.

“When you are retired you will need current income. An immediate annuity, and not a deferred annuity, is recommended. But remember annuities are complicated and often rife with high, hidden fees and restrictions.

“Once you purchase an annuity, it cannot adapt to changing financial needs, and you will give up the opportunity to transfer money to your heirs when you die, although some may include an option for a survivor benefit. An annuity is purchased from an insurance company as a way to transfer longevity risk. And you would be counting on them to consistently make monthly payments.

“Without an annuity, you need to hold a cash reserve equal to two years of spending and invest the rest in a balanced portfolio. Each year, you should rebalance that portfolio to replenish your cash reserve, taking up to 4% from your portfolio to fund your additional annual expenses. This provides flexibility to handle different circumstances year to year while potentially leaving money to your heirs says Peggy Kessinger, a NAPFA-Registered Financial Advisor with Cedar Financial Advisors, Beaverton, Ore.

You can read the full article here How to invest a lump sum retirement benefit – USAtoday.com

That afternoon we were meeting with a prospective client, and she mentioned the same program and learned that “two thirds of your investment gains over a long period could be lost to high mutual fund fees”.  When you hear about a TV program from two different people in the same day, it’s a hint that the program is worthwhile viewing.

The recommendations are consistent with our approach to investing and helping clients reach their goals:

• Work with a Fiduciary, who is legally obligated to put your interests first

• Play the winners game, by investing using low cost passive mutual funds and ETFs

You can view the video online here: PBS Frontline – The Retirement Gamble

You can read the transcript here: PBS Frontline – The Retirement Gamble – Transcript

Some highlights of the documentary and report include:

Mutual Fund Fees

JOHN BOGLE, CEO, The Vanguard Group, 1974-96: Costs are a crucial part of the equation. It doesn’t take a genius to know that the bigger the profit of the management company, the smaller the profit that investors get. The money managers always want more, and that’s natural enough in most businesses, but it’s not right for this business.

Predicting Market returns

JOHN BOGLE: Good markets turn to bad markets, bad markets turn to good markets. So the system is almost rigged against human psychology that says if something has done well in the past, it will do well in the future. That is not true. And it’s categorically false. And the high likelihood is when you get to somebody at his peak, he’s about to go down to the valley. The last shall be first and the first shall be last.

Fiduciary Advisor

ZVI BODIE, Author, Risk Less and Prosper: A fiduciary is a professional who by law is supposed to put your interests ahead of their own. Broker-dealers are not under that obligation. They have to conform to a suitability standard, which means they can’t put you into something which is totally unsuitable for you.

RON LIEBER, The New York Times: It doesn’t have to be the best thing that you could pick out for them. It’s just something that’s suitable. It’s OK. I can’t believe that somebody would want to get into a business and then stay in the business of merely being suitable.

RON LIEBER: If you’re working with somebody who is trying to sell you financial advice, you say to them, “Are you acting in my best interest here? Would you be willing to sign a pledge that says that you’re going to act as my fiduciary at all times with all products? Because if you’re not, then I’m going to leave.” And it’s really just as simple as that.

Source: Frontline

If you are looking to work with an advisor who is willing to sign the Pledge that Ron mentions, contact us.

The data from St. Charles Hospital in Bend showed that 144 patients tended to use the emergency room the most. Taken together, they averaged 14.25 trips each over 12 months. These patients drove much of the area’s Medicaid spending.

The team focused on the small number of patients that are responsible for most of the spending, consistent with the Pareto principle, with a goal to lower their cost of care with an integrated approach.

The stakes are high.  A health care professional in rural eastern Oregon commented that now she can treat the root cause of problems such as tooth decay (yes, pun intended…)  by making a referral to a dentist, which was not possible until the recent changes.  She is “cautiously optimistic” that the changes will have a positive, lasting impact.  As an engineer by training, I share her cautious optimism that a data-driven approach, focused on the right outcomes, will be successful.

In the past, beneficiaries typically stayed with the company that they signed up with during their initial enrollment period. Switching Medigap policies required medical underwriting, and Some Medigap policies have a waiting period for coverage of pre-existing conditions if you wanted to switch companies because of a price increase in your policy.

Medigap plans provide standardized coverage for each policy type, which enables consumers to comparison shop. However, the cost of policies varies widely. For example, the 2013 monthly premium for a Medigap policy F in the Portland area ranges from $93 to $190.

Medigap Polices have three types of pricing: premiums either increase with your age (Attained-Age-Rated), premiums are based on your age when you buy the policy (Issue-Age-Rated) or the premium is the same for everyone who has the policy (Community-Rated).

The new Oregon Medigap “birthday rule” allows Medigap policy holders the opportunity to change Medicare Supplement plans (as long as the new policy has the same or lesser benefits) with guaranteed issue once per year for a period of thirty days beginning on the individual’s birth month.

The new rule allows enables cost comparison and competition on an ongoing basis for Oregon Medigap policies. If you are currently healthy and expect to remain healthy, you can consider a plan type with a lower premium.

The Oregon Senior Health Insurance Benefits Assistance Program (SHIBA) has provided these tips for comparing plans:

Find your insurance cards: You may need your red, white, and blue Medicare card to review benefit details or enroll in a new plan. If you have a Medicare Advantage or prescription drug plan, you may also need that card.

Update your list of prescription drugs: Check with your doctor to make sure you understand each prescription. Is a generic available? Can you eliminate any unneeded medications? Based on your list, do you have the right plan for you?

Use the Medicare.gov plan finder: The plan finder uses your prescription list to compare prescription drug and Medicare Advantage health plans in your area. Not all companies cover the same drugs so it’s important to have a complete list of your medications and dosages when using this tool.

Contact your doctor, hospital, and pharmacy before making changes: Not all health and drug plans contract or work with the same providers. If you switch plans, make sure you understand which providers you can see for the best price.  The plan finder uses your prescription list to compare prescription drug and Medicare Advantage health plans in your area. Not all companies cover the same drugs so it’s important to have a complete list of your medications and dosages when using this tool.

Contact your doctor, hospital, and pharmacy before making changes: Not all health and drug plans contract or work with the same providers. If you switch plans, make sure you understand which providers you can see for the best price.

source: oregonshiba.org

The 2010 Callan Periodic Table of Investment Returns was recently published. A link to the Periodic Table is here.  BlackRock has a periodic table tool, which supports the creation of customized reports.  I prefer the BlackRock tool because the table includes a Diversified Portfolio. A link to the BlackRock 2010 table is here.  You can also click on the thumbnail image below.

Some observations:

• Large Cap Core, AKA S&P 500 Index, continued the recovery from 2008 with a 15.06% gain in 2010, while fixed income, AKA Aggregate Bond Index, provided a steady return of 5.2% in 2008, 5.9% in 2009, and 6.5% in 2010.
• The Diversified Portfolio is composed of 35% of the Barclays Capital US Aggregate Bond Index, 10% of the MSCI EAFE Index, 10% of the Russell 2000 Index, 22.5% of the Russell 1000 Growth Index and 22.5% of the Russell 1000 Value Index.
• It’s impossible to predict with any certainty which asset class will “win” in 2011.
• The Diversified Portfolio returned 12.99% in 2010, or 86.25% of the S&P 500 all equity asset class.
• The Diversified Portfolio produced annualized returns of  8.89% , 97.26% of the S&P 500 all equity asset class.

The table is a pictorial view of the benefit of a diversified portfolio, which consistently provides relative returns in the middle of the pack.  It’s important to own a mix of stocks, bonds, and cash, diversified across multiple asset classes to reduce the volatility of returns in a portfolio.  You can see this by comparing the Diversified Portfolio returns to those of any single asset class over the years.

Cedar Financial Advisors charges a flat fee for Financial Planning Services, and provides Wealth Management Services (ongoing financial planning and investment management services) on a Retainer or Assets Under Management (AUM) basis.

Amy Buttell, a freelance writer and editor, describes creative strategies for saving money in retirement in an article for Fox Business. I provided background information and am quoted in the article.

“By the time people are ready to retire, or have already retired, they should have a very current picture of what their spending is,” says Tim Kober, a certified financial planner with Cedar Financial Advisors in Portland, Ore. “There’s the problem of spending going up in the initial part of retirement when people do all the deferred things that they’ve been wanting to, and it’s important that they don’t overdraw their nest egg to make all those nice things happen.”

Drive a Bargain

After housing, cars are one of a consumer’s biggest expenses. “People don’t think about operating costs and the total costs of owning a car, including repairs, insurance and maintenance,” Kober says.

Kober notes that couples can save money by cutting back to one vehicle. Also, retirees might employ other creative strategies like renting a cheap car for long trips instead of putting more wear and tear on their own set of wheels.

Oregon 2011 Medicare Fast Facts

• 32 Medicare Prescription Drug Plans (PDPs) available
• 85% of people with Medicare have prescription drug coverage (including 64% with Part D)
• 27% of people with Part D get Extra Help (also called the low-income subsidy, or LIS)
• 92% of people with Part D can pay a lower premium in 2011 than they did in 2010
• 81% of people with Medicare have access to a MA plan for a $0 premium
• 14 PDPs have $0 deductibles
• $14.80 is the lowest monthly premium for a PDP
• $42.90 is the lowest monthly premium for a PDP with any generic coverage in the Coverage Gap
• 8 PDPs have a premium of $0 for people who qualify for Extra Help

Source: CMS
Plan costs and coverage change each year, so all people with Medicare should check to make sure their plan still meets their needs and budget. There may be a Medicare health or drug plan available with better coverage or a lower deductible in 2011.

2011 Open Enrollment Important Dates

October
• Watch your mail for notices from Medicare, Social Security, and health and drug plans with information about changes in 2011
• Compare plans online at www.medicare.gov starting October 15
November
• “Medicare & You” 2011 arrives in your mail
• Open Enrollment starts November 15
December
• Open Enrollment ends December 31