Financial Frontlines®

I’ve written about annuities and posted USAA content about annuities on this site several times. Annuities are confusing financial products because they come in so many varieties and every insurance company puts their own features on their products. In this post, I’m limiting the topic to “income annuities” only.

An “income annuity” is the simplest of all annuities. You make a one-time, lump-sum deposit into the annuity and it provides you income. You can structure the income to meet your needs. A common income option is a monthly lifetime payment for you and your survivor.

There is a very good USAA video on this site that discusses income annuities in general but this post is specifically meant for you military retirees. It’s worth 6 minutes to watch the USAA video just to provide a foundation of knowledge on income annuities.

Income annuities have received a good deal of press lately because of the turbulent stock and bond markets and the lack of guaranteed interest-bearing accounts that pay decent rates of interest. The sales pitch is that an income annuity will guarantee you a stable income for life while your other stock and bond investments are not dependable.

Generally I believe a military retiree has no need for an income annuity. I would have to see a unique situation in a military retiree’s financial situation to recommend an income annuity.

A military retiree already has an income annuity; your military retirement check. In fact, you have two annuities when you add Social Security. Both of these income annuities offer cost-of-living increases to boot.

Why would you consider another source of steady income with an income annuity? Well…

• Maybe you want another source of steady, guaranteed income to help meet your fixed liability needs—bills, debts, mortgage, etc.
• If you didn’t enroll in the Survivor Benefit Program (SBP) to continue your military retirement pay, you may want another plan to compensate for the lack of SBP. You could purchase an income annuity now with a continuing survivor benefit. Or, your survivor could use life insurance proceeds to purchase an income annuity. Or, your survivor could use other investment assets to purchase an income annuity. Point being, survivors often prefer steady, guaranteed income instead of managing investments and dealing with the unknown nature of the economy and the markets.
• If you took Social Security early, you may want to compensate for the decrease in monthly or survivor’s Social Security income.
• You may get a better payout with an income annuity than with interest rates on CDs, bonds and money market accounts.

Shop carefully for an income annuity. The amount of income differs so shop around. Some offer cost of living adjustments or refunds of principal in case of early deaths but your income amount will suffer.

It is easier to avoid a big loss than it is to recover from one, so successful investing is as much about steering clear of bad investments as it is about finding good ones.  Here are some common sense rules to avoid trouble.

 Be skeptical.  Ask yourself, “Why am I being offered such a great opportunity.”  Would a real investment genius advertise on late-night TV or share his money-making secrets with you for the price of a book? 

 Do not be rushed into a commitment.  There is a reason why auto sales events only last for a few days.  Yet they always seem to be followed by another once-in-a-lifetime promotion.  Investment opportunities are like streetcars.  If you miss one another will come by in a few minutes.

 Get a reality check.  Do not take investment opportunities at face value.  Good salesmen only pitch the benefits not the fees or the risks.  When making a significant investment, seek a second opinion from an objective expert.

 Do not invest in anything you don’t understand.  Investing is more common sense than rocket science.  If the representative can’t explain it to your satisfaction then you should pass it up.  Chances are he may not completely understand it either.

 Don’t get greedy or envious.  Schemes with big pay-offs appeal more to our human nature than to our intellect.  The lottery is attractive because it has a huge prize even though the chances of winning are basically the same whether you buy a ticket or not.  And if your neighbor brags about getting rich from some dubious investment strategy, do not get snookered yourself.  That’s exactly how Bernie Madoff lured in so many suckers who should have known better.

 Diversify.  The old adage “don’t put all of your eggs in one basket” is classic advice that requires no further explanation.

Tricare to Offer Credit Monitoring in Wake of Data Theft

While Tricare Management Activity maintains that there is no evidence that sensitive personal patient information stolen in September has been accessed by a third party, the insurer now says it will take “proactive measures” to ensure that patients are protected.

On Sept. 12, an employee of Tricare contactor Science Applications International Corp. reported the theft of computer tapes containing personal health information of 4.9 million Texas patients. While the tapes contain no financial data, they do include patients’ names, Social Security numbers, addresses, phone numbers and personal health data.
TMA, which has insisted that information on the tapes would be difficult to access, has been criticized for not providing free credit monitoring in the wake of the theft.

But on Nov. 4, TMA announced that it has directed SAIC to provide one year of credit monitoring and restoration services to “patients who express concern about their credit.”

“We take this incident very seriously,” said Brig. Gen, W. Bryan Gamble, TMA deputy director. “The risk to our patients is low, but the Department of Defense is taking steps to keep affected patients informed and protected.” Gamble said the measures “exceed the industry standard to protect against the risk of identity theft.”

TMA said concerned individuals can contact the SAIC Incident Response Call Center on weekdays from 9 a.m. to 6 p.m. ET at (855) 366-0140 (toll free) in the United States, and (952) 556-8312 (collect) internationally.

Medicare Open Enrollment – Making Informed Choices

Some MOAA members have been inundated recently with information from insurance companies regarding enrollment in Medicare Supplemental Insurance (Medigap plans) or Medicare Advantage plans. These can be confusing, so let’s review.

Bottom Line Up Front: If you’re happy with your health care situation, you don’t need to do anything. All the marketing materials can go directly to your recycling bin, and your current enrollment will continue into 2012. Don’t throw out your Medicare & You guide however; it contains a lot of information you’ll want to keep on hand throughout the year.

Original Medicare consists of Part A (Hospital Insurance) and Part B (Medical Insurance). Most retirees or their spouses paid Medicare taxes during their working years and don’t have to pay a monthly premium for Part A. Part B does require a monthly premium, which is means tested. To retain eligibility for Tricare beyond age 65, military retirees must be entitled to Part A and enrolled in Part B.

Medicare Supplements or Medigap plans help cover out of pocket expenses of Medicare beneficiaries. Tricare for Life acts as a Medigap plan for military retirees and spouses. You need no other supplements.

Part D is Prescription Drug Coverage. Most military retirees don’t need to join a Medicare Prescription Drug Plan. The drug plans are run by private companies approved by Medicare. Monthly fees vary by plan.

Sidebar: Surviving spouses who may lose their Tricare coverage due to remarriage, and anyone whose limited income qualifies them for Medicaid, should consider Medicare Part D coverage.

Medicare Advantage (MA) Plans, sometimes called “Part C”, combine Parts A and B, and usually Part D. Private insurance companies approved by Medicare offer these plans. The plans are run like a Health Maintenance Organization (HMO) or Preferred Provider Organization (PPO), and can have a yearly deductible, co-payments, additional monthly premiums above Part B premiums, and restrictions on referrals to out of plan providers, as well as yearly limits on out-of-pocket expenses. MA plans must include the coverage obtainable from Original Medicare, except hospice care (Original Medicare covers hospice care even if you’re enrolled in a MA plan). MA plans usually offer additional services such as vision, hearing, dental and/or wellness programs to make them more attractive to some retirees. The insurance companies providing these plans are heavily subsidized by the federal government, though those subsidies are being squeezed by tightening budgets and by changes in health care policy expected to go into effect in the next few years.

When a MOAA member contacts me regarding whether or not to enroll in a Medicare Advantage plan, I always ask first if Part D coverage is required to join that plan. If it is, I advise them to look for another plan, or choose Original Medicare. If a Medicare Advantage plan’s network pharmacy is also a Tricare network pharmacy, the plans may coordinate benefits. However, the potential savings or additional services obtainable from a MA plan rarely offset the added premiums required for Part D coverage (average $30/mo in 2011) and the potential hassle of coordinating drug benefits. If a plan does not require Part D enrollment, proceed with caution. Tricare for Life will back up either Original Medicare or a Medicare Advantage plan, but on the whole, MA plans should be considered as standalone plans.

Once the Part D requirement is determined, the member should carefully evaluate and compare the features of the MA plans under consideration. If the plan offers features that you will likely never need or use, or cover in another way, then it isn’t worth paying any additional money to belong to that plan.

Next, if you want to use your own health care providers, determine whether or not your provider is a member of that MA plan. The best way is simply to ask your doctor if he or she participates in any Medicare Advantage plans. Some MA plans require that you get all of your care from providers in their network (emergencies are usually exceptions). Some MA plans require referrals from a primary care doctor. Some plans allow greater choice of providers, but will charge you extra if you get care from someone outside the network.

Finally, Medicare Advantage plans are offered regionally, and can vary widely around the country of even your state. If you live in more than one place in retirement, a MA plan might not be good choice.

With all the different rules from plan to plan, many retirees decide to keep things simple and stay with Original Medicare. That’s not a bad choice. Tricare-eligible retirees can use Original Medicare and Tricare for Life to great advantage.

We’re nearing the end of Medicare’s Open Season, which closes December 7, 2011.  Whatever decision you make isn’t permanent; plans have open enrollment periods each year. You may be stuck with your decision for an entire year though, so choose carefully.

For more information, see Medicare’s Plan Finder tool at www.medicare.gov/find-a-plan

Source: Medicare & You, Centers for Medicare and Medicaid Services, 2011