Archives for November 4, 2018

Each year, employers offer an open enrollment period — a window of time to select your benefits package for the coming year. It’s easy to overlook this opportunity and maintain the status quo, but this could be a costly mistake given the significant role benefits play in your financial life. This year, resolve to review your options with a fresh perspective. Consider the following six questions to get started:

1. Have you experienced a major life change recently?

If you’re on the verge of having a child, recently sent a college graduate off on financial independence or the job status of your spouse has changed, reconsider your health insurance options to accommodate your current situation. If you are experiencing or anticipating major health expenses, you might decide to choose a health plan with a lower deductible. Or, perhaps you may decide you are better off paying a lower monthly premium with a higher deductible.

2. How do your employer’s benefits selections compare to those offered to your spouse?

Employers change their offerings from time to time, so make it a priority to compare your options every year. If you’re considering changing healthcare providers or opting in for legal assistance, check to see if your current professionals are covered under the new plans. If not, consider the cost and whether you want to work with someone new as you make your decisions.

3. Is a Health Savings Account (HSA) worth considering?

If you choose a high deductible health plan, you may be able to set up a Health Savings Account (HSA). With an HSA, you defer pre-tax dollars into the account. The money can be used to pay out-of-pocket costs (such as deductibles and co-pays for medical services) that are not covered by your health insurance. The maximum amount you could contribute in 2018 was $3,450 for an individual and $6,900 for a family. Any unused dollars can be carried over to the following year.

4. Is there value in a Flexible Spending Account (FSA)?

Out-of-pocket costs not covered by insurance, ranging from deductibles and copays to prescription drugs, eyeglasses and dental work, can be reimbursed through an FSA. By directing pre-tax dollars into this account, you can reduce your net out-of-pocket costs. However, unlike HSAs, these dollars do not carry over from year to year. Any leftover money is lost, so you’ll want to plan in advance to determine an appropriate amount to save in the account.

5. Are there other benefits I should contemplate?

Benefit options vary by employer. Depending on where you work, you might have the ability to enroll in benefits such as dental coverage, eye exams, legal assistance, term life insurance or other specific services that may be useful. Carefully weigh these options to see if they are cost effective.

6. Consider your financial goals.

Kick off open enrollment season by reviewing your financial goals. If you’re married, talk to your spouse and realign on key priorities for the next year. Having a clear vision can help you evaluate benefit options with your lifestyle and financial situation for the coming year at the forefront. If you would like additional support, consult a financial advisor before you finalize your enrollment form.

When it comes to your financial health, one important factor can affect your short-term and long-term finances: the emergency fund.

An emergency fund is something that most people probably know they should have, but many don’t actually have one. In fact, 7 in 10 baby boomers say they have less than $5,000 stashed in an emergency fund, according to the Insured Retirement Institute — and that’s a problem.

Now, some people may think that saving for retirement or paying monthly bills is more important than establishing an emergency fund. And while those other financial priorities are crucial, if you’re not also putting money aside for a rainy day, a big unexpected expense could drain your bank account quickly.

While putting money toward an emergency fund is hard work and may seem to take money away from other priorities (like retirement saving) in the short term, it can actually help you save more in the long run — here’s how.

The consequences of skipping the emergency fund

If you don’t have much spare cash after you pay all your bills each month, it’s tempting to put whatever you do have toward bigger financial goals, like saving for retirement. And while it is always important to be saving for your golden years, you could be putting your retirement fund at risk if you don’t have an emergency fund.

For example, say you’re 40 years old with $50,000 in your retirement fund. You’re saving $250 per month and earning a 7% annual return on your investments. At this rate you’ll have around $460,000 in your retirement fund by the time you turn 65.

However, let’s say you get hit with an unexpected medical expense of $5,000. You don’t have an emergency fund, so to cover that bill, you take out a 401(k) loan. You pay back the $5,000 over two years at an annual interest rate of 5%, and over that time you end up paying around $265 in interest (which goes back into your account).

Meanwhile, you’re not making any additional contributions to your 401(k), but the rest of your money continues to grow. So after two years, when the loan is repaid, you have about $56,800 in your 401(k). If you then go back to saving $250 per month for another 23 years (still earning a 7% annual return), you’ll have around $429,000 saved total.

In other words, that $5,000 loan could end up costing you more than $30,000 in lost investment opportunity by the time you retire.

Balancing goals: Saving for rainy days and retirement

It’s important to be saving for retirement and putting money aside into an emergency fund. And even if you don’t have much money to spare, it is possible to do both at the same time.

Using the previous example, let’s say you’re 40 years old with $50,000 saved for retirement. But instead of putting the full $250 per month toward your 401(k), you put $150 toward retirement and $100 toward your emergency fund each month.

For your emergency fund, it’s best to aim for enough money to cover at least six months’ worth of expenses. If you typically spend, say, $2,000 per month, that’s a goal of $12,000. If you’re saving $100 per month, it will take roughly 10 years to reach that goal.

In the meantime, you’re still contributing $150 to your retirement fund each month. After 10 years, assuming you’re still earning an annual 7% return on your investments, you’d have around $123,000 saved. Then, once your emergency fund is sufficient, you go back to saving $250 per month for another 15 years, giving you a total of $414,000.

While that total isn’t as much as you’d have saved by foregoing the emergency fund, keep in mind that you also have that $12,000 on hand in case an unexpected expense pops up. So if the car breaks down, your kid takes a tumble during football practice, or you lose your job, your retirement funds should remain untouched — which will help them grow more over time.

There’s a lot to know about your money. Unfortunately, many Americans don’t know some of the basics that are important to making sound financial decisions. In fact, the Federal Reserve reported recently on how well Americans did when answering four basic financial literacy questions — and there were a surprising number of incorrect answers.

Can you correctly answer the questions that 30% or more of your fellow Americans could not? Read on to find out.

1. Can housing prices in the U.S. ever go down?

When asked whether it was true that housing prices in America could ever fall, just 60% got the answer correct; 19% percent got it wrong, and the rest said they didn’t know or failed to answer.

The correct answer, of course, is that housing prices can fall — sometimes dramatically. In fact, from 2005 to 2008, the average price of existing single-family homes in the United States dropped by around 26%.

While it is true that over time, real estate prices tend to rise, the increase has only slightly beaten the level of economic inflation. Plus, while your home value may increase slowly over many decades, that doesn’t help you much if you bought at the height of a housing bubble and have to sell two years later.

Knowing housing prices can do down is essential to understand the importance of a home down payment. If you buy a house with no down payment and prices fall, you’ll be trapped in your home unless you come up with cash to pay off any balance remaining on your mortgage above what your home sells for. Otherwise, you would have to get the bank to agree to a short sale, and would ruin your credit rating — and you don’t want that.

2. Is it safer to buy a company stock or a mutual fund?

When asked whether buying a company stock provides a safer return than a stock mutual fund, just 46% of survey-takers answered correctly, compared with 4% who were incorrect and 50% who said they just didn’t know or chose not to answer.

The answer: buying mutual funds provides a safer return. With a mutual fund, your money is pooled with cash from other investors, and all that money is invested in many different assets. For example, a mutual fund might buy stocks of many large or small U.S. or foreign companies.

By spreading your cash around among different companies, you ensure you don’t lose everything if one of the companies goes bust. Since it’s impossible to predict with 100% certainty that the company you’re investing in will never fail, spreading around your cash is a safer move.

3. How will inflation affect your buying power?

Survey participants were told the interest rate on a savings account was 1% annually and inflation was 2% annually. They then had to answer: Would you be able to buy more than today, the same as today, or less than today, after keeping your money in the account for one year?

Sixty-two percent got this one correct, compared with 12% who got it wrong, and roughly a quarter who didn’t know or didn’t answer. You would be able to buy less than today because prices went up 2% thanks to inflation while you earned only 1% on your invested funds.

Understanding the impact of inflation is important. Inflation is a general increase in prices that causes a decline in purchasing power. Because of inflation, $1 sitting in your wallet today won’t buy you as much tomorrow.

You need to know this because it can guide your investment decisions. If you leave your money under your mattress or invest it in anything that doesn’t earn at least as much as the inflation rate, your purchasing power will continually erode. You may think you’re keeping your money safe, but you’re actually getting a little bit poorer every day.

4. How will interest affect you?

Finally, survey respondents were asked a question aimed at determining if they understand how interest works. They were told they had $100 in a savings account paying 2% annually and asked how much they’d have in the account after 5 years.

Seventy-one percent correctly said they’d have more than $102, but 12% incorrectly guessed they’d have $102 or less, and the rest didn’t know or didn’t answer.

When an account pays interest, the interest payments are added onto your principal balance — thus your account balance grows. The frequency at which interest payments are added onto your balance depends how often interest compounds.

• If interest compounds daily, 1/365th of your annual interest is added onto your principal balance each day.
• If interest compounds monthly, 1/12 of your annual interest is added onto your principal balance every month.
• If interest compounds annually, annual interest is added onto your principal balance each year.

Once interest compounds, you’re paid interest on the interest. That would mean each day, month, or year, you’d earn interest on a slightly higher principal amount. After 5 years, your $100 initial investment would always have grown to more than $102 if you’re paid 2% interest because you’d earn 2% interest every one of those five years. The exact amount, though, would depend on how often interest compounds.

Understanding how this works is important not only so you can better understand how much you stand to earn from an investment, but also so you can see how damaging it can be to get into debt and owe interest. If you carry a credit card balance and interest compounds daily, the amount you owe goes up a little bit every day.

Understanding the basics is key to financial success

Understanding basic concepts about investing, interest, and inflation is essential so you can make informed choices about your funds. Hopefully, now you know the answers to these questions if you didn’t before. You can learn more about personal finance and money management by checking out some of our guides, including our guide to investing for beginners.

IT’S OPEN ENROLLMENT season – the period when Medicare beneficiaries across the country can change their health insurance plan through Dec. 7. While making smart choices and comparison-shopping is key to maximize benefits and savings, the process of reviewing new coverage options and existing policies can be daunting.

“A lot of seniors tell us it’s almost impossible to feel confident they are making the right decision,” says Ryan McCostlin, head of healthcare financial planning for benefits brokerage Bernard Health. The government’s Medicare.gov website has a tool to compare options or a financial planner may be able to help, McCostlin says.

To dodge costly missteps and help ease the enrollment process, experts recommend keeping the following factors and policies in mind.

There are increasing out-of-pocket costs. While Medicare costs are going up in 2019, increases will be minimal for most people.

Standard Part B premiums are increasing from $134 per month (or higher, based on your income) in 2018 to $135.50 per month (or higher, based on your income) in 2019. The Part B deductible, which applies to outpatient care, is rising from $183 to $185 next year. Meanwhile, the deductible for Part A, which covers inpatient services, is increasing from $1,340 to $1,364. Coinsurance payments for extended hospital stays are going up as well.

People may likely see the biggest change in the availability of zero-deductible Medicare Advantage plans. These policies are offered by private insurers and can have different deductibles and copayments than original Medicare, which comes directly from the government.

“Last year, we could find a lot of plans without a deductible,” says John Hill, president of independent insurance agency Gateway Retirement Inc. in Rock Hill, South Carolina. “This year, it’s very hard to find a plan without a deductible.”

The Part D ‘donut hole’ is closing. Medicare Part D was founded in 2003 to provide prescription drug coverage. As originally created, it included a coverage gap in benefits, commonly known as the “donut hole.” After initial benefits were exhausted, beneficiaries would need to pay thousands of dollars out of pocket before a plan’s catastrophic coverage kicked in.

In 2019, the coverage limit for initial Part D benefits will be $3,820, up from $3,750 in 2018. Hill says beneficiaries often confuse how costs are calculated for the coverage limit. “It’s not what they pay,” Hill says. Instead, it includes the insurance portion of the price as well. “It’s the total drug cost.”

The government has been slowly phasing in changes to minimize out-of-pocket costs in the coverage gap. Next year, those in the gap will pay no more than 25 percent of the cost of a brand-name drug or 37 percent of the cost of a generic drug. Those numbers are down from 35 percent and 44 percent, respectively, in 2018.

There are drug updates for Part D. Whether you get your prescription drug coverage through a separate Part D plan or have it wrapped into a Medicare Advantage policy, don’t renew without double-checking covered drugs and costs.

“There are so many changes every year when it comes to the drug plans,” McCostlin says. Formularies, which dictate which medications are covered at what copay level, are commonly adjusted. Pharmacy networks can also change, meaning you’ll pay more if your preferred location no longer participates with the plan.

Because Part D plans are so variable, McCostlin calls them low-hanging fruit when it comes to comparison shopping. Competition by insurers can mean lower prices can often be found.

With Medicare Advantage, you can benefit from trial runs. Medicare beneficiaries have two main ways to receive their benefits. Original Medicare means receiving benefits directly from the government while Medicare Advantage plans are sold by private insurers. A Medicare Advantage plan includes all the benefits of original Medicare and often adds other coverage such as vision or dental.

During open enrollment, beneficiaries can switch between original Medicare and Medicare Advantage. Previously, the government provided a 45-day period in which people who elected Medicare Advantage could switch back to original Medicare. However, in 2019, a new system will be in place.

Medicare Advantage enrollees will have a special period, from Jan. 1 to March 31, in which they can switch back to original Medicare or change to a different Medicare Advantage plan. This provides seniors with a chance to try a policy without locking themselves in for the entire year. “If it’s not a good fit, they’ll be able to switch back,” McCostlin says.

Access to supplemental plans may be limited. Those switching from Medicare Advantage to original Medicare may be subject to medical underwriting if they want to buy a supplemental policy.

Supplemental Medigap plans cover costs not paid by original Medicare. Those signing up for Medicare for the first time are guaranteed the right to purchase a Medigap plan, but individuals enrolling later may be denied. It can be an expensive mistake to drop a Medicare Advantage plan before getting approval for Medigap first.

“You should never disenroll from Medicare Advantage without having a supplement,” says Chris Alberta president and senior financial advisor for advisory firm Principium Tactical Wealth Management in Brighton, Michigan.

Medigap plans are being discontinued. Medigap plans are labeled A through N, with each letter representing a different, standardized set of benefits. In 2020, they will no longer be allowed to cover the Part B deductible. As a result, Medigap Plans C and F will not be sold after this year.

Those currently enrolled will be able to continue their coverage, but without new members entering the plans, Alberta says premium costs could increase significantly. “There are a lot of folks scrambling to find another plan,” he says.

Since supplemental policies can be purchased at any time, people who want to switch can take their time shopping for a new Medigap plan. Alberta recommends looking at a high-deductible version of Plan F.

“Agents hate selling this plan because they earn a percentage of the premium,” he says. The plan premiums are low enough that, even when balanced against the deductibles, consumers often come out ahead financially by selecting this option.

There are network changes for Medicare Advantage. Medicare beneficiaries shouldn’t assume their current plan will keep the same network in 2019. Hill says using an out-of-network provider could cost consumers anywhere from two to 10 times more than an in-network provider.

Seniors should double-check plan networks to make sure their existing providers participate and also to ensure there aren’t better policies available. In some cases, competing insurers may move into a new area and provide lower prices.

That’s been the case in Michigan, according to Alberta. “Our networks have gotten so much better,” he says. While the east side of Michigan has long been dominated by Blue Cross Blue Shield, insurer Priority Health expanded east in recent years, offering new competition and savings for those on Medicare.

Plans are rated by Medicare. Hill recommends those shopping for Medicare coverage use the plan finder service on Medicare.gov/find-a-plan. “They will tell you the good and the bad of every plan,” Hill says.

In addition to out-of-pocket costs and prescription drug coverage, Medicare.gov assigns a star rating to each plan. This rating takes into account factors such as a policy’s ability to manage chronic conditions, deliver preventive care and offer customer service. These are all important aspects to selecting the right plan. “Medicare should be like buying shoes,” Hill says. “It should fit and it should be comfortable.”