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3 Things 4-29-24

Thing One


Last week we shared a list of five topics of lifelong use to people interested in personal finance and we discussed the first item on the list. Today we’ll touch on the second item. (See the full list below)



1) Credit cards are black holes.


2) Thirty years from now you'll wish you had invested more in stocks.


3) Put retirement first (not buying a house).


4) Insurance is a must.


5) You'll end up treasuring almost nothing you buy.



As for item 2, we first ask you to recall the Rule of 72. For those that need a refresher, the rule states that if you take any given rate of return and divide it into 72, the quotient represents the number of years it will take for the value of your investment to double. For example, if at age 21 you were gifted $100,000 from an insurance policy your deceased grandmother had taken out on herself and you decided to invest it all in an S&P 500 index fund, here's how the math could have worked out:



The 100-year average annual rate of return on the S&P 500 as of February 2024 is 10.56%.



72 divided by 10.56 equals 6.8 but let’s round that to 7 to keep the numbers neat.



7 equals the number of years it will take for your $100,000 to double if the S&P 500 index behaves going forward like it has behaved for the last 100 years.



That means by the time you are 28, your money doubled for the first time - from $100,000 to $200,000 - without you adding a single nickel to the pot. It also means that by the time you are 51 (in keeping with the original 30 years of investing in stocks declaration) your investment would have doubled 4.3 times (30 divided by 7). So again, without adding anything to the initial investment, $100,000 would grow to over $2 million. And you’d still be relatively young with at least two more “doubles” before retirement so your $2 million could become $8 million without you lifting a finger to help it.



Now granted, not everybody has a grandmother looking out for them like that, but the math is the math and the Rule of 72 applies to any investment amount from any source. The point is, you might not end up with $2 million but you could end up with much more than you would have otherwise accumulated if you heed and apply the rule to your specific situation.




Thing Two



When Medicare Advantage Becomes A Disadvantage



This post is not an advertisement for any specific kind of senior health plan. Rather it is a word of caution for those who are (or will soon be turning) sixty-five and becoming eligible for Medicare.



As any senior in that position will tell you, your phone starts ringing off the hook and your mailbox gets stuffed with solicitations from various insurance companies and agents. Many of those seeking to get you signed up are affiliated with insurers offering Medicare Advantage plans. Enrollment in such plans has doubled since 2010 and is expected to grow to 54% of the eligible population by 2030 according to KKF.org. The reason the plans are so popular is two-fold. First, many of the insurers who offer them do so without charging a monthly premium. They are able to do so because the federal government pays them a set amount for each person they sign up. Second, the plans come with lots of extra benefits like free gym memberships, dental coverage, and other inducements that traditional Medicare doesn’t offer. This all sounds good to a senior citizen as he considers his monthly budget in his golden years, but it doesn’t necessarily turn out so good as he ages and develops health conditions that necessitate unforeseen doctor and hospital visits and medical expenditures. Seniors who find themselves in this situation often wish they had chosen a Medicare Supplement (Medigap) plan instead at age 65 when they had a guaranteed issue right because their overall out of pocket costs would be lower. Out of pocket costs for Medicare Advantage plans, which are capped, are still significantly higher than the effective annual out of pocket costs for Medigap plans which are, in essence, equal to the Medicare Part B annual deductible of $240 (for calendar year 2024). This compares to Medicare Advantage MOOPS (maximum out-of-pocket costs), which are around $8000 annually in 2024 with the most economically advantageous plans. When you add to this the fact that most Medicare Advantage plans require you to stay within a restricted network of providers while a Medigap plan allows you to see any provider, in any state, who takes Medicare, you can see why the idea that you should consider more carefully which type of plan you want is not one that should be taken lightly.



The bottom line is there is no right answer as to which type of senior health insurance plan you should choose. And the good news is that even if you choose a Medicare Advantage plan and later decide to switch to a Medigap plan to reduce your annual out of pocket costs, you can do so, assuming your health hasn’t deteriorated to the point where you can’t pass the medical underwriting (you have a guaranteed issue right when you’re first turning 65 but after that you’ll have to pass a medical history test to qualify). Either way, you should talk to somebody who is qualified to help you understand it all like we are.




Thing Three


Just A Thought


"Your present circumstances don't determine where you can go. They merely determine where you start." - Nido Qubein

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