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Things 11-27-23

Thing One


Why Not Pick The Obvious Choice


Last week, we discussed the out-of-pocket cost difference for a person covered under the three senior health insurance coverage methods (Original Medicare-only, Medicare Supplement (aka Medigap), and Medicare Advantage).  We used the scenario of a very sick person who had been in the hospital for 5 months.  In the interest of keeping the example as simple as possible, we’ll assume that there was no consecutive 60-day period over the course of that five months that the insured was out of the hospital.  The chart below details the out-of-pocket impact under each scenario.


As you can see again, the Medigap plan is the obvious choice pocketbook-wise in this scenario.


So why don’t people pick what is obvious?  


They just don’t know.


No one has ever explained the various plans or the math to them, so they pick the option with the cheapest out-of-pocket premium without considering the total out of pocket cost.


They know but feel the package of benefits – which includes a zero-dollar monthly premium in many cases – is too good to pass up. 


Medicare Advantage plans come with lots of extra bells and whistles (including cash to be used for certain everyday items) for no extra cost to the beneficiary.  On top of that, insurance agents are compensated more to sell these plans than they are to sell Medigap plans, so there is a natural alignment of short-term interests here.


They know and would choose a Medigap plan if they could, but they can’t pass the underwriting requirements. 


When someone first becomes eligible for Medicare, they have a period during which they must be allowed to acquire a Medigap plan regardless of their medical history. This is called the Medigap Open Enrollment Period (OEP). It starts when they turn 65 (and are enrolled in Part B) and it lasts for 6 months.  Once they’re outside of this period, they can still get a Medigap plan, but they’ll have to answer medical underwriting questions.  If certain conditions are discovered during underwriting, they can be turned down. 


It is important to note that a person can try to obtain a Medigap plan at any age (after 65) and at any time of the year.  And, as you can see from the cost chart, it may make sense for some people to switch to one.  This contrasts with a Medicare Advantage plan which, assuming an individual doesn’t qualify for a special enrollment period, can only be acquired (or changed for the following year) during the annual enrollment period that runs from October 15 through December 7th. 


If you didn’t know, now you know. 




Thing Two


How Much Of Your Savings Can/Should You Spend In Retirement?


There is a long-held rule of thumb that suggests 4% per year is the appropriate answer to this question but, as the excerpts below from suggests, there are other factors that should be considered:


“…The 4% rule is a common rule of thumb, but we think you can do better by finding your personalized spending rate.  The 4% rule is relatively simple: You add up all of your investments and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the dollar amount you withdraw to account for inflation. By following this formula, you should have a very high probability of not outliving your money during a 30-year retirement, according to the rule.

For example, let's say your portfolio at retirement totals $1 million. You would withdraw $40,000 in your first year of retirement. If the cost of living rises 2% that year, you would give yourself a 2% raise the following year, withdrawing $40,800, and so on for the next 30 years…


…While the 4% rule is a reasonable place to start, it doesn't fit every investor's situation because:


It's a rigid rule.

It applies to a specific portfolio composition (50/50).

It uses historical market returns.

It assumes a 30-year time horizon.

It includes a very high level of confidence that your portfolio will last for a 30-year period.

It doesn't include taxes or investment fees


…However you slice it, the biggest mistake you can make with the 4% rule is thinking you have to follow it to the letter. It can be used as a starting point—and a basic guideline to help you save for retirement. If you want $40,000 from your portfolio in the first year of a 30-year retirement, increasing annually with inflation, with high confidence your savings will last, using the 4% rule would require you to have $1 million dollars in retirement. But after that, we suggest adopting a personalized spending rate, based on your situation, investments, and risk tolerance, and then regularly updating it. Further, our research suggests that, on average, spending decreases in retirement. It doesn't stay constant (adjusted for inflation) as suggested by the 4% rule…”


So, what's the bottom line on how much you should withdraw?  As always, it depends. 


Let us know if you need help figuring it all out.


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