December 2009
Greetings!
 
 
One month of winter down and just four to go! 
 
November turned in another positive month for the markets:
 
DJIA          +632 Points  (10,344 from 9,712)
S&P 500   + 59  Points   (1,095 from 1,036)
NASDAQ  + 99  Points   (2,144 from 2,045)
 
Expect December to be a light volume month as many investment managers and traders sit on the sidelines for fear of hurting an already great year.  And as far as the market is concerned, 2009 has been a great year. 
 
A typical Morningstar (tm) research report on a mutual fund lists the last ten years of returns in a chart form.  Depending on the asset class in that ten-year list there are usually a couple to three negative years with the rest are positive.  Of course, 2008 is one of the negative years--as is often 2001 and 2002. 
 
Inevitably 2003 and 2004, and now 2009 are strong years as the markets jump off the bottoms of the bad years.  
 
How nice it would be if somehow we could get one of these reports for the next ten years.  With a future report in hand we could put money into the market in the bad years and take money out when the market hit the top.
 
I think when we look back at 2008 and 2009 ten years from now we will wish we had put everything we had into the market at the end of 2008.  (Instead, quite a few people took money out of the market--just in time to miss what has turned out to be a spectacular 2009.)      
 
Mr. Hindsight has 20/20 vision.  We can look back all we want and think of what we could've done ahead of the market dips and before the market surges--but it doesn't help in our current planning.  It's too late to take an alternate route when you're stuck in traffic. 
 
The alternative to the timing-fantasy is to ride out the market swings with a high quality, diversified portfolio--re-balancing when asset classes move at different rates--and forget about what could've been.  This is a plan, a road map that will, unless we quit, eventually get us to our destination. 
 
Now, let's hope December passes as quickly as November. 
 
Marty
 
Medicare:  Did you know there is a penalty for not applying for Medicare when you turn 65?  That's right, a 10% penalty is added to your Part B premiums (for life) for each 12 months you fail to apply.  
 
We are talking about Medicare--which is like health insurance for those 65 years and above who have paid into the system; not Medicaid which is a needs based insurance plan--something totally different.
 
Medicare is coordinated with Social Security and at one point timing wasn't a big deal, when someone started Social Security they were automatically enrolled in Medicare--now, as we've mentioned in the sidebar article, people take their Social Security at different times--so it is up to the 65 year-old to initiate the process of enrolling into Medicare. 
 
Medicare Part A which pays for hospital care and skilled nursing facility, home health care and hospice care is free.  Part B which pays for your Doctor care, outpatient hospital care etc. in 2009 is $96.40 per month.  (If your income is above $85,000 for a single or $170,000 for a couple your premium is more.)  The $96.40 per month is going up in 2010 to $110.50 per month unless you have the premiums withheld directly by the Social Security Administration--in which case they stay the same.  (Avoid the extra hassle and money and just have them take it out of your SS check if you are receiving checks.) 
 
The important thing to remember is that if you or someone you know is approaching 65, start reading up on Medicare--and get enrolled.  The 10% penalty for not enrolling is a lifelong tax worth avoiding. 
 
It can't be stressed enough to start educating yourself on Medicare--since, like Social Security--Medicare has a lot of moving parts and the slightest misstep can cost you.  
 
 
Go to the Medicare website @ www.medicare.gov for more information.
 
Marty
Issue: 10

Concept of the Month:  Social Security

In last month's newsletter we wrote about how the Social Security Administration calculates your Average Indexed Monthly Earnings (AIME) and your Primary Insurance Amount (PIA).  Once you have an estimate of the PIA you can get a pretty good idea of what your actual monthly payment in retirement will be.  But not quite!
 
The next variable in the monthly benefit is the age when you start taking benefits, or your retirement age.  The PIA is calculated as your monthly payment upon reaching Full Retirement Age (FRA).  (So, we know that Social Security is a Government Program-just look at the acronyms; The OASDI uses the AIME to determine the PIA on your FRA provided you don't fall under the WEP or GPO-and then COLA's are added.)  If you understand that sentence-you don't need to read any further-you're an expert!

Since many people take their retirement at ages other than their FRA, the SS actuaries must adjust your monthly payments based on your actual age when you start taking them.  In short, they reduce them if you take them early, and increase them if you delay.  If you start taking your checks at age 62[i] your PIA is reduced by 25% and if you wait until you turn 70, your PIA is increased by 32%.  In between those bookends the percentages are graduated.
 
Taking benefits early causes an Actuarial Reduction of your payments which is equal to 5/9 of 1% for each month before your FRA.  That fraction of a percent per month adds up a 25% reduction if the retiree takes his check at the earliest chance (62). 
 
Incidentally, another disincentive to going early is that there is an earnings limit; for each two dollars of earnings over $14,160, Social Security benefits are reduced by one dollar.  See "How Working Affects your Benefits" at http://www.ssa.gov/pubs/10069.html.  The year before your FRA the earning limit rises and the reduction is one dollar for every three earned over the limit.  And happily, when you reach your FRA the earnings limit disappears forever.      
 
Now, for the incentives; if you delay taking your benefits you are compensated by an increase in your PIA of 8% per year up until the age of 70.  After 70 there is no benefit to delaying taking your check.  So, again assuming your FRA is 66, then waiting until your 70 increases your Primary Insurance Amount by 32%.
Let's look at an example; if your PIA is $1,000 and you decide to take the money at age 62, your monthly check would be about $750.  If you wait until age 70, your check would be around $1,320.  These numbers do not count the Cost Of Living Adjustments which are calculated into each year whether you wait or not.  But if you go early even the COLA's are disadvantaged by the actuarial reduction-the math is not really important, just realize that even the COLA is lower under an early retirement.    
 
Decisions made about when to take your Social Security payments last a lifetime and as we have seen can make a big difference in your monthly check.  There are certain strategies that couples can take that maximize their monthly checks-we'll talk about a few in the next newsletter.  (Of course, if you or a family member is trying to make a SS decision now please call me first-there are so many variables to consider that it helps to have an outside perspective.)  Marty
  
[i] This is the reduction for people born between 1943 and 1954-other ages differ slightly.  For people born 1960 or later the reduction is gradually increased to 30%.
Book I am reading now:  A Most Wanted Man. by John Le Carre
Simon & Schuster, Inc. New York NY. 2008
 
 
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 Martin Knight, MBA CFP®
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