Medicare Advantage or Disadvantage?

You may have seen the ads on TV for Medicare Advantage Plans. I've noticed several in the past couple of weeks. Insurance companies want to provide you better and less expensive coverage than Medicare. The chances of you seeing these ads has a lot to do with where you live.

Medicare Advantage Plans (HMO's and PPO's) and a subset Private Fee-for-Service plans work for the insurance companies in places where the payments they receive from Medicare are generally greater than the costs of providing those services. So the marketing is generally targeted to the most profitable areas for the insurance companies.

Many plans will advertise broad acceptance, but you should check with your personal physicians and other health care providers before you make a decision, sometimes the delivery is less than the promise.

The New York Times reported recently that the GAO has questioned the effectiveness of Medicare Advantage plans:

"But, the report said, certain costs are not counted toward the out-of-pocket limits established by some insurers. Thus, it said, among Medicare plans with out-of-pocket limits, 29 percent exclude the cost of some cancer drugs, 23 percent exclude the cost of some mental health services and 21 percent exclude home health care expenses."

The plans can be cost effective by reducing your total premium payments or increasing your benefits. If you choose a PFFS plan your medigap policy becomes unnecessary, but the should you decide to go back to traditional Medicare coverage a new medigap policy may cost more. You generally sign up for these plans November 15 through December 31 of each year. Once you have enrolled you remain in the plan for at least the next calendar year.

If you did not select a medigap policy during the guaranteed acceptance window one of these plans could be a good choice for you, but check for any restrictions on access before you move outside of the traditional Medicare coverage.

Kitchen Table Planning - Real Rate of Return

When you are working on your kitchen table plans, you will need to understand real rates of return. Your real rate of return is simply your investment return less the anticipated inflation rate.

For example if you have calculated your expected portfolio return at 8% and you anticipate that inflation will average 3% then your real rate of return is 5%.

This is important because over long periods of time inflation will erode the value of the dollars you have available to pay for a financial goal. If you are planning for retirement the dollars you will need to provide a certain level of income 20 years from now will be significantly higher than the dollars you need to retire today. If in fact inflation averaged just 3% over the next 20 years then todays dollar would only buy $0.55 worth of groceries when you reach retirement.

I see this often. Someone will say 'I have $500,000, I think I should be able to earn 8%, so I should be able to spend $40,000 each year.' Unfortunately this isn't how to achieve a worry free retirement. If you earned 8% you would have to reinvest 3% to offset inflation leaving you with 5% to spend. So the couple in the above example could only take an income of $25,000 from their $500,000 nest egg.

Or you may say 'I will need $1,000,000 to provide extra income in my retirement. How much should I be saving each year to end up with $1,000,000 when I retire?' Here you must use your real rate of return to calculate the payments required to reach your goal because you want to achieve the purchasing power of $1,000,000 today at some point in the future.

It is sometimes hard for folks to grasp this concept, but to come up with any real financial plan you must understand and know when to use real rates of return.