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Monday, November 22, 2010

Hard Choices - Tackling the National Debt

“Hard Choices- Tackling the National Debt”

President Obama appointed a bipartisan National Commission on Fiscal Responsibility and Reform with instructions to develop recommendations to balance the budget, excluding interest on the national debt, by the year 2015. That commission issued its preliminary report earlier this month and what is painfully obvious is that there are no painless solutions. Proposals include:
• Raising the age of full Social Security eligibility from sixty-six to age sixty-eight by 2050 and sixty-nine by 2075.
• Cutting defense spending by $100 billion.
• Eliminating interest deductions on mortgages over $500,000.
• Limiting future Medicare benefits.
• Slashing the federal workforce by ten percent.
• Eliminating $3 billion in federal farm subsidies.
• Making more workers subject to income taxes while reducing the number of tax brackets to three: 9%, 15%, and 24%.
• Increase the gas tax by fifteen cents.
• Tax dividends and capital gains as ordinary income.

Just how big is the problem? Our national debt is currently $13.7 trillion and climbing at a pace of $1.3 trillion per year. Of the $3.5 trillion our federal government spends each year, more than 60% goes to Medicare/Medicaid benefits, Social Security benefits and defense spending. An additional 12% goes to welfare programs; 5% goes for interest on the national debt and another 5% for government pension payments. The total of all these items is more than 80%. I think you can see where this is headed. You are not going to solve this problem without significant cuts to many programs for which many Americans now feel that they are entitled.

I recently returned from a vacation in France where citizens held violent protests over the government’s plan to raise the minimum retirement age from sixty to sixty-two. How are American’s going to react to the massive cuts that will be required to solve the growing crisis of our growing national debt? You can bet it’s not going to be a celebration. The final decision will be made by a relatively small group of career politicians, most of whom have never had to meet a payroll and who have voted special benefits for themselves. They have their own pension plan versus Social Security and their own health insurance plan versus the one they want us to accept. Unfortunately, many career politicians see their primary job is to get re-elected. How do you get re-elected? You need to be popular with the voters. What makes you popular with the voters? You become popular by giving stuff away, not taking it away. My best guess is that, collectively, they lack the will and courage to make these difficult decisions until they are faced with a crisis that demands action.

We all know something must be done to solve our national debt problem before it turns into a disaster. Too often we want our congressional representatives to do what is necessary as long as it doesn’t affect our wallets. We too, need to muster the courage and be willing to make financial sacrifices while holding the politicians’ feet to the fire for the way they manage our money. It’s a job that must be done and the time is now.

Thursday, November 18, 2010

Choosing the Best Medicare Plan for You

If you are age 65 or older then you have likely been receiving a lot of correspondence from companies promoting their Medicare health and Medigap plans. Open enrollment period for the 2011 Medicare Health Plans, Medigap, and Part D Prescription Plans begins November 15. If you want to change to a different plan or you are choosing a plan for the first time, you must sign up by December 31. Many of the insurance providers have either eliminated certain plans or made substantial changes so now is the time to do your comparisons to ensure your getting the most benefit for your premium dollars. The Medicare Health Plans, Medigap plans, and Prescription Plans that you choose should be tailored to your specific needs and situation.

At age 65, you are eligible for Original Medicare which is Part A and Part B. Original Medicare pays 80% of your health care costs and you are responsible for the remaining 20%. You have two different insurance options that will help absorb the additional costs.

1. The first option is for you to maintain Original Medicare and buy a Medigap plan to cover the 20% which are copayments, coinsurance and deductibles. You pay a premium for the Medigap policy but do not have any additional cost throughout the year except for an annual deductible of $155. The premiums for Medigap policies range between $125 and $200 per month. These plans are for people who want to know exactly what their out-of-pocket costs will be throughout the year and/or have health issues with frequent doctor and hospital visits. A Medigap policy does not include prescription coverage and you must buy a plan for prescription related expenses if you want to avoid paying those costs directly out of your pocket. If you choose to purchase the Prescription Part D plan, you’ll want to carefully examine each plans coverage options and choose one that covers the medications you are using.
2. The second option is for you to purchase a Medicare Advantage Plan which provides your medical benefits and prescription benefits in one plan. A Medicare Advantage Plan combines Part A and Part B benefits with prescription drug coverage to give you lower out-of-pocket costs than if you only had Original Medicare. Medicare Advantage Plans work very well for people who want no to low premiums and are willing to pay the out-of-pocket costs when they go to the doctor or hospital. Essentially you ‘share the costs’ with the insurance company instead of being responsible for the entire 20% out-of-pocket expenses if you only had Original Medicare. Obviously no one can predict their future health but these plans work well for people who do not go to the doctor often and/or for people who want to self-insure a portion of the out-of-pocket costs.

Medicare has become very complex in the last few years with so many plans being offered. It is worth your time to research the plans to ensure you have the best plan for your current situation and you will want to check with your doctor to make sure they accept your plan.

My thanks to Kimberly Reynolds, CFP® for her contributions to this article.

Tuesday, November 9, 2010

Election Rout Suggests Stock Market Gains

Republicans gained sixty seats in the House of Representatives, the largest gain since 1938 while also gaining six seats in the Senate. If nothing else, the mid-term elections have sent a clear message to all of our congressional representatives, “We don’t like what we’ve been seeing!” Republicans now have control of the house while the Democrats maintain control of the Senate and Oval Office…in other words, ‘gridlock’. How will these changes impact the economy and your investments? Generally speaking, gridlock will be a good thing for both the economy and the stock market. Uncertainty has been one of the major roadblocks to economic recovery as corporations have been reluctant to invest in expansion, technology and people under the cloud of uncertainty regarding future regulation and taxation. Instead, they have focused on the pieces of the puzzle for which they have the most control…expenses. The results have included substantial layoffs and the storing up of cash. Gridlock tends to create greater certainty regarding future legislation because any changes must be worked out through a process of compromise. The new mix of congressional representatives will give corporations the confidence to use their resources to seek out opportunities.

How can you use gridlock to advance your own financial situation?
Invest in blue chip stocks. While the stock market will always remain volatile, now would be a good time to begin to shift some money from fixed income (CDs, bonds, bond mutual funds and money market funds) to stocks. An excellent choice is blue chip stocks that are paying a dividend. Many of these companies are paying a dividend that is substantially higher than the interest currently being offered on high quality bonds. Good examples include AT&T and Verizon who each pay a dividend of about 5.8%; Southern Company whose dividend is approximately 4.8%; and Eli Lilly paying a 5.5% dividend. As the fear that has driven the stock market over the past twenty-four months gives way to optimism, investors, particularly retirees, will begin searching for conservative investments with higher returns and blue chip stocks will be in that ‘sweet spot’.
Invest in small company stocks. Smaller company’s, while typically more volatile, may benefit more than the Fortune 500 companies as they are able to react and deploy resources more quickly. You’ll want to own a big basket of stocks for this category. Consider a no-load fund like Vanguard’s Small Cap Index Fund (VSCIX).
Invest in international stocks. As the U.S. economy goes, so goes the rest of the world. More undeveloped countries such as Brazil, Russia, India and China are likely to outperform the more developed countries of Europe, but all should benefit as the U.S. economy improves. Again, you’ll want a large basket of stocks so consider a fund like Vanguard Total International Stock Index (VGTSX) or Vanguard Emerging Markets Stock Index (VEIEX).

Your allocation between stocks and bonds will continue to be of vital importance and must be tailored to your particular facts and circumstances. Consider seeking professional counsel before making substantial changes to your investment strategy.