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.

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

This content is provided courtesy of  USAA

Want to know more about annuities?  Call us at MOAA if you have questions at (800) 234-6622 and ask to speak with a financial counselor.

Views and opinions expressed in this webinar are provided for informational purposes only and are subject to change. This discussion is not tax, legal, estate planning or USAA product advice and is unique to the member only. The law concerning tax and retirement plans is complex, penalties are severe, and the laws of your state may differ. Consult with your tax, legal or estate planning professional regarding your specific situation.

Investments/Insurance: Not FDIC Insured • Not Bank Issued, Guaranteed or Underwritten • May Lose Value

This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.

USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor.

Examples given are hypothetical illustrations and not necessarily an indication of the benefits or features of any USAA product.

Withdrawals made before age 59½ may be subject to a 10% federal penalty and ordinary income taxes.

Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.

Life insurance and annuities provided by USAA Life Insurance Company, San Antonio, TX, and in New York by USAA Life Insurance Company of New York, Highland Falls, NY. Each company has sole financial responsibility for its own products.

USAA means United Services Automobile Association and its insurance, banking, investment and other companies. Banks Member FDIC. Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.

Due to the 2011 NDAA retirees will be paid 13 times in 2011 (after 2011 it will return to 12 times per year). Basically what happened is the law was changed to require that the 1 Jan 2012 retiree payment be made on 30 Dec 2011.  This will increase your taxable income by one month’s pay for 2011.

But wait. Some of you are saying that your January retiree paycheck always hits the bank on the last business day of December. That was true for me. But when I cross checked against my 2010 1099R, I confirmed that the January paycheck (paid in December) was not included in my 2010 income.

So, what does it mean? Well, you may owe more taxes this year. Your withholding should take care of the additional tax unless the additional paycheck puts you into a higher bracket. The other “bad” scenario is if the additional paycheck puts your Adjusted Gross Income (AGI) above cut-off limits (For example cut-offs for IRA deductions, Rental Real Estate loss deductions, Medicare Part B premiums, or college expense deductions/credits). Finally, the extra paycheck will also reduce any itemized deductions you can take that are limited by AGI (medical expenses, some miscellaneous expenses).

There is still time to plan or adjust your withholding.

See this site for more details. http://www.dfas.mil/dms/dfas/aboutdfas/pdf/DFASRelease091102_RetPay.pdf

This content is provided courtesy of USAA.
By Joseph Montanaro, USAA Certified Financial Planner™ Practitioner

U.S. investors had more than $300 billion invested in target retirement date funds as of the end of the third quarter last year, according to the Investment Company Institute. With that type of participation, you’d think the funds would be better understood, but unfortunately, that’s not the case.

All things considered, I think this type of investment can be an excellent choice for investors who are unwilling, unable or uninterested in spending a significant amount of time managing their investment portfolio. Note that I’m not saying these investments don’t require time and attention — just not an extreme amount.

Overview

A target retirement date fund is a professionally managed mutual fund that allocates your investment among a variety of different types of assets: stocks, bonds, cash, etc. The portfolio is rebalanced by the fund managers and becomes more conservative as the target date nears. This type of fund is designed to be a one-stop shop — invest in this type of fund and you should have a diversified portfolio. The Lifecycle or “L” funds available within the Thrift Savings Plan are a good example of this type of investment.

Low Maintenance

Being a glass-half-full guy, let’s first look at some of the potential benefits of target retirement funds. You invest in a single fund and get a variety of investments that are managed for you. Since the portfolio of investments is picked, automatically rebalanced and designed to become more conservative as you approach the target date, this type of fund offers the advantage of allowing you to build and maintain a diversified portfolio. Then, keep your investments going and bump them up with each pay raise or promotion.

Look Under the Hood

You should understand that not all target retirement funds are created equal, even if they have the same target date. An informal survey of data available at www.morningstar.com reveals some sharp discrepancies between different funds with the same date. For example, when I looked at a few funds with a target date of 2020, I found the stock component of the portfolios varied from a low of 38 percent all the way up to 72 percent. And, expense ratios ranged from a paltry 0.18 percent to a whopping 1.96 percent. These differences impact the bottom line for you, the investor, and the returns reflect just that.

In both years, the performance varied substantially. In fact, in each year there was more than an 11% difference between the best and worst performers. That’s huge! What do you take from all this? You do need to do your homework. Look for a fund with low expenses, an equity weighting that won’t keep you up at night and performance. While past performance does not guarantee future results it can be a good indicator, so look before you leap.

No Guarantees

Target retirement funds do not offer a guarantee and are certainly not without risk. Unfortunately, some folks didn’t understand that and may have been shocked when their funds took a beating in 2008.

Any fund is just an investment tool and not a cure-all. You still have to figure out how much you need to save to meet your goals, monitor your overall portfolio and progress towards those goals, as well as set aside money for your short-term needs. But, if you’re looking for a convenient way to invest for retirement, a target date retirement fund may be worth considering.

Consider the investment objectives, risks, charges and expenses of the USAA mutual funds carefully before investing. Download a prospectus containing this and other information about the funds from USAA Investment Management Company, Distributor. Read it carefully before investing.
Diversification and rebalancing does not protect against losses or guarantee that an investor’s goal will be met.
This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
The risks of the Target Retirement Funds reflect the risks of the underlying funds in which the Funds invest. The target date is the approximate date when investors plan to start withdrawing their money for retirement purposes. In general, the Target Retirement Funds’ investment program assumes funds will start being withdrawn for retirement purposes at age 65. The principal value of the Target Retirement Funds is not guaranteed at any time, including at the target date. The Funds’ objectives do not change over time.
Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.