How to Balance Portfolio Risk and Reward as You Get Closer to Retirement

jeremy-thomas-75753-unsplash.jpg

As you approach retirement, it may be time to pay more attention to investment risk.

If you are an experienced investor, you have probably fine-tuned your portfolio through the years in response to market cycles or in pursuit of a better return. As you approach or enter retirement, is another adjustment necessary?

Some investors may think they can approach retirement without looking at their portfolios. Their investment allocations may be little changed from what they were 10 or 15 years ago. Because of that inattention (and this long bull market), their invested assets may be exposed to more risk than they would like.

Rebalancing your portfolio with your time horizon in mind is only practical.

Consider the nature of equity investments: they lose or gain value according to the market climate, which at times may be fear driven. The larger your equities position, the larger your losses could be in a bear market or market disruption. If this kind of calamity happens when you are newly retired or two or three years away from retiring, your portfolio could be hit hard if you are holding too much stock. What if it takes you several years to recoup your losses? Would those losses force you to compromise your retirement dreams?

As certain asset classes outperform others over time, a portfolio can veer off course.

The asset classes achieving the better returns come to represent a greater percentage of the portfolio assets. The intended asset allocations are thrown out of alignment.1

Just how much of your portfolio is held in equities today? Could the amount be 70%, 75%, 80%? It might be, given the way stocks have performed in this decade. As a StreetAuthority comparison notes, a hypothetical portfolio weighted 50/50 in equities and fixed-income investments at the end of February 2009 would have been weighted 74/26 in favor of stocks by the end of February 2018. (1)

Ideally, you reduce your risk exposure with time.

With that objective in mind, you regularly rebalance your portfolio to maintain or revise its allocations. You also may want to apportion your portfolio, so that you have some cash for distributions once you are retired.

Rebalancing could be a good idea for other reasons.

Perhaps you want to try and stay away from market sectors that seem overvalued. Or, perhaps you want to find opportunities. Maybe an asset class or sector is doing well and is underrepresented in your investment mix. Alternately, you may want to revise your portfolio in view of income or capital gains taxes.

Rebalancing is not about chasing the return, but reducing volatility.

The goal is to manage risk exposure, and with less risk, there may be less potential for a great return. When you reach a certain age, though, “playing defense” with your invested assets becomes a priority.

Sources

  1. nasdaq.com/article/how-to-prepare-your-income-portfolio-for-volatility-cm939499

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Why Medicare Should Be Part of Your Retirement Planning

person using black blood pressure monitor

Photo by rawpixel.com on Pexels.com

The premiums and coverages vary, and you must realize the differences.

Medicare takes a little time to understand.

As you approach age 65, familiarize yourself with its coverage options and their costs and limitations.

Certain features of Medicare can affect health care costs and coverage.

Some retirees may do okay with original Medicare (Parts A and B), others might find it lacking and decide to supplement original Medicare with Part C, Part D, or Medigap coverage. In some cases, that may mean paying more for senior health care per month than you initially figured.

How much do Medicare Part A and Part B cost, and what do they cover?

Part A is usually free; Part B is not. Part A is hospital insurance and covers up to 100 days of hospital care, home health care, nursing home care, and hospice care. Part B covers doctor visits, outpatient procedures, and lab work. You pay for Part B with monthly premiums, and your Part B premium is based on your income. In 2018, the basic monthly Part B premium is $134; higher-earning Medicare recipients pay more per month. You also typically shoulder 20% of Part B costs after paying the yearly deductible, which is $183 in 2018.(1)

The copays and deductibles linked to original Medicare can take a bite out of retirement income.

In addition, original Medicare does not cover dental, vision, or hearing care, or prescription medicines, or health care services outside the U.S. It pays for no more than 100 consecutive days of skilled nursing home care. These out-of-pocket costs may lead you to look for supplemental Medicare coverage and to plan other ways of paying for long-term care.(1,2)

Medigap policies help Medicare recipients with some of these copays and deductibles.

Sold by private companies, these health care policies will pay a share of certain out-of-pocket medical costs (i.e., costs greater than what original Medicare covers for you). You must have original Medicare coverage in place to purchase one. The Medigap policies being sold today do not offer prescription drug coverage. A monthly premium on a Medigap policy for a 65-year-old man may run from $150-250, so keep that cost range in mind if you are considering Medigap coverage.(2,3)

In 2020, the two most popular kinds of Medigap plans – Medigap C and Medigap F – will vanish.

These plans pay the Medicare Part B deductible, and Medigap policies of that type are being phased out due to the Medicare Access and CHIP Reauthorization Act. Come 2019, you will no longer be able to enroll in them.(4)

Part D plans cover some (certainly not all) prescription drug expenses.

Monthly premiums are averaging $33.50 this year for these standalone plans, which are offered by private insurers. Part D plans currently have yearly deductibles of less than $500.(2,5)

Some people choose a Part C (Medicare Advantage) plan over original Medicare.

These plans, offered by private insurers and approved by Medicare, combine Part A, Part B, and usually Part D coverage and often some vision, dental, and hearing benefits. You pay an additional, minor monthly premium besides your standard Medicare premium for Part C coverage. Some Medicare Advantage plans are health maintenance organizations (HMOs); others, preferred provider organizations (PPOs). (6)

If you want a Part C plan, should you select an HMO or PPO?

About two-thirds of Part C plan enrollees choose HMOs. There is a cost difference. In 2017, the average HMO monthly premium was $29. The average regional PPO monthly premium was $35, while the mean premium for a local PPO was $62.(6)

HMO plans usually restrict you to doctors within the plan network.

If you are a snowbird who travels frequently, you may be out of the Part C plan’s network area for weeks or months and risk paying out-of-network medical expenses from your savings. With PPO plans, you can see out-of-network providers and see specialists without referrals from primary care physicians.(6)

Now, what if you retire before age 65?

COBRA aside, you are looking at either arranging private health insurance coverage or going uninsured until you become eligible for Medicare. You must also factor this possible cost into your retirement planning. The earliest possible date you can arrange Medicare coverage is the first day of the month in which your birthday occurs.(5)

Medicare planning is integral to your retirement planning.

Should you try original Medicare for a while? Should you enroll in a Part C HMO with the goal of keeping your overall out-of-pocket health care expenses lower? There is also the matter of eldercare and the potential need for interim coverage (which will not be cheap) if you retire prior to 65. Discuss these matters with the financial professional you know and trust in your next conversation.

Sources

  1. medicare.gov/your-medicare-costs/costs-at-a-glance/costs-at-glance.html
  2. cnbc.com/2018/05/03/medicare-doesnt-cover-everything-heres-how-to-avoid-surprises.html
  3. medicare.gov/supplement-other-insurance/medigap/whats-medigap.html
  4. fool.com/retirement/2018/02/05/heads-up-the-most-popular-medigap-plans-are-disapp.aspx
  5. money.usnews.com/money/retirement/medicare/articles/your-guide-to-medicare-coverage
  6. cnbc.com/2017/10/18/heres-how-to-snag-the-best-medicare-advantage-plan.html 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Smart Strategies for Coping With Student Loan Debt

design desk display eyewear

Photo by energepic.com on Pexels.com

Paying them down and managing their financial impact.

Is student loan debt weighing on the economy?

Probably. Total student loan debt in America is now around $1.5 trillion, having tripled since 2008. The average indebted college graduate leaves campus owing nearly $40,000, and the mean monthly student loan payment for borrowers aged 30 and younger is about $350. (1,2)

The latest Federal Reserve snapshot shows 44.2 million Americans dealing with lingering education loans. The housing sector feels the strain: in a recent National Association of Realtors survey, 85% of non-homeowners aged 22-35 cited education loans as their main obstacle to buying a house. Eight percent of student loan holders fail to get home loans because of their credit scores, the NAR notes; that percentage could rise because the Brookings Institution forecasts that 40% of student loan borrowers will default on their education debts by 2023. (1,3)

If you carry sizable education debt, how can you plan to pay it off?

If you are young (or not so young), budgeting is key. Even if you get a second job, a promotion, or an inheritance, you won’t be able to erase any debt if your expenses consistently exceed your income. Smartphone apps and other online budget tools can help you live within your budget day to day or even at the point of purchase for goods and services.

After that first step, you can use a few different strategies to whittle away at college loans.

  1. The local economy permitting, a couple can live on one salary and use the wages of the other earner to pay off the loan balance(s).
  2. You could use your tax refund to attack the debt.
  3. You can hold off on a major purchase or two. (Yes, this is a sad effect of college debt, but it could also help you reduce it by freeing up more cash to apply to the loan.)
  4. You can sell something of significant value – a car or truck, a motorbike, jewelry, collectibles – and turn the cash on the debt.

Now in the big picture of your budget.

You could try the “snowball method” where you focus on paying off your smallest debt first, then the next smallest, etc., on to the largest. Or, you could try the “debt ladder” tactic, where you attack the debt(s) with the highest interest rate(s) to start. That will permit you to gradually devote more and more money toward the goal of wiping out that existing student loan balance.

Even just paying more than the minimum each month on your loan will help.

Making payments every two weeks rather than every month can also have a big impact.

If a lender presents you with a choice of repayment plans, weigh the one you currently use against the others; the others might be better. Signing up for automatic payments can help, too. You avoid the risk of penalty for late payment, and student loan issuers commonly reward the move by lowering the interest rate on a loan by a quarter-point. (4)

What if you have multiple outstanding college loans?

If one of them has a variable interest rate, try addressing that one first. Why? The interest rate on it may rise with time.

Also, how about combining multiple federal student loan balances into one? That is another option. While this requires a consolidation fee, it also leaves you with one payment, perhaps at a lower interest rate than some of the old loans had. If you have multiple private-sector loans, refinancing is an option. Refinancing could lower the interest rate and trim the monthly payment. The downside is that you may end up with variable interest rates. (5)

Maybe your boss could help you pay down the loan.

Some companies are doing just that for their workers, simply to be competitive today. According to the Society for Human Resource Management, 4% of employers offer this perk. Six percent of firms with 500-10,000 workers now provide some form of student loan repayment assistance. (6)

To reduce your student debt, live within your means and use your financial creativity. It may disappear faster than you think.

Need Additional Help?

Visit the Student Loan Borrowers Assistance website. The National Consumer Law Center’s Student Loan Borrower Assistance Project is a resource for borrowers, their families, and advocates representing student loan borrowers.

Sources

  1. studentloanhero.com/student-loan-debt-statistics/
  2. cnbc.com/2018/05/24/students-would-drop-out-of-college-to-avoid-more-debt.html
  3. cnbc.com/2018/04/19/student-loan-debt-can-make-buying-a-home-almost-impossible.html
  4. nerdwallet.com/blog/loans/student-loans/auto-pay-student-loans/
  5. investorplace.com/2017/06/how-to-navigate-your-student-loan-debt/
  6. shrm.org/resourcesandtools/hr-topics/benefits/pages/student-loan-assistance-benefit.aspx

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What Do Rising Interest Rates Mean for You? (The Upside and The Downside)

dollar-currency-money-us-dollar-47344.jpeg

Photo by Pixabay on Pexels.com

Interest rates are rising.

The Federal Reserve has hiked the benchmark interest rate twice this year, and it expects to make two more hikes before 2019 arrives. It projects the federal funds rate will approach 3.5% by 2020. (1)

Are you retired, or about to retire?

You will be happy to know rates of return are improving on fixed-income investments. Take 1-year certificates of deposit, for example. Back in 2015, most of them were yielding 0.25%. Now their return is around 2.3%. Money market funds and even deposit accounts should soon feature slightly higher interest rates. The downside of this? If fixed-income investments grow increasingly attractive, investors may pull money out of equities. (4)

Do you have a lot of credit card debt?

The APR on your credit cards should continue to rise in response to the Fed’s moves. (2)

Do you have a fixed-rate mortgage?

You are unaffected. If you have an adjustable-rate mortgage, your payments may reset higher at the start of the next adjustment period. (3)

Are you a business owner seeking a short-term loan?

Try to arrange financing now. The cost of short-term borrowing increases when the Fed hikes. (2)

Do you own a business that sells high-end merchandise?

Your sales may be impacted. Higher interest rates force consumers to put more money toward debt. That means less disposable income to spend on the good life.

Sources

  1. bondbuyer.com/articles/fed-raises-rates-officials-boost-outlook-to-four-hikes-in-2018
  2. smallbusiness.chron.com/interest-rates-affect-businesses-67152.html
  3. tinyurl.com/y74tqh6q
  4. marketwatch.com/story/rising-interest-rates-give-retirees-good-news-and-bad-news-2018-06-20

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.