Retirement Planning Blog

It seems that the good times of the Target date funds are still on. Like its previous quarter, target date funds have again given stellar results in the third quarter. Of the 319 funds, the average target maturity fund gave a return of 14.3 percent during the quarter, comparing to a 15.6 percent growth for S&P Index. Target date funds play a major role in the planned retirement ages of the investors. In the course of time, these funds automatically regulate their mix of stocks, bonds and other holdings and create the risk profile for the investors that suits their changing age. And this is exactly the reason why the target date funds have become hugely popular as default option in the 401(k) plans of a number of employers.

In the second quarter, the target date funds saw a growth of 15.5 percent, comparing to 15.9 percent gain for S&P 500. However, due to an extensive meltdown of equity prices, the funds saw continuous declines in the past six quarters. As these funds have been designed for the retirement accounts, hence a number of critics became vociferous against the funds and opined that the funds should have been more cautiously managed.

The funds have about 12 existing maturity target years, which have been created in five-year increments for the investors turning 65 in a particular target year. The oldest as well as the most conservatively invested is the 2000 group of funds. On the other hand, the 2055 group of funds is for those who are going to start their career. It can be mentioned here that the 2055 group of funds gave a return of 17.5 percent, comparing to 9.8 percent by the 2000 group.

Finally coming to the funds for the younger investor, which invest greatly in stocks and other asset classes that give higher returns. These holdings have a good track record and have consistently outperformed other investments. However, they carry higher risk as well. During the third quarter, the best performer was the real estate holdings of target maturity funds with a return of 33.3 percent, followed by U.S. small-company value stocks with a return of 22.7 percent and emerging market stocks with a return of 21 percent. On the other hand, by contact, the U.S. short-term bonds gave a return of only 1.4 percent. The Treasury Inflation Protected Securities gave a return of 3.1 percent, while the U.S. longer-tern bonds gave a return of 3.7 percent.

The last year has seen the largest increase in Social Security checks in the past 25 years with a rate of 5.8 percent. At the same time, as per the present law, the enrollees are also not going to get any cost-of-living adjustment in the next three years. In fact, the increment in Social Security is linked to the Consumer Price Index for the urban workers. It can be recalled here that the Consumer Price Index has decreased last year due to the plunging prices.

It’s the new retirees born in 1947and signed for the Social Security this year, rather than the current beneficiaries, who are going to get affected by the impact of the lack of Social Security boost. These people didn’t reap any benefit from the increase of Social Security last year. Moreover, there is every possibility that their purchasing power may erode by inflation before the cost-of-living increases once again in 2012. Andrew Biggs, a former deputy commissioner of the Social Security Administration and a resident scholar at the American Enterprise Institute has done an analysis to find out the possible impact of it on the retirees. According to the analysis, the new retirees may face a permanent benefit reduction of about 5 percent, while the benefits of the current retirees will remain the same.

Owing to the inflation hitch in 2008, newly retired couples are going to get a monthly Social Security check of $2,235. According to the calculations of Biggs, they will lose almost $1,340 per year. The calculation also says that, if the couple survives until the age of 83, they would lose around $25,000 in their lifetime.

It is not possible to evade this financial loss by delaying your retirement either, unless the cost-of-living gets adjusted, which is again projected to resume in 2012.

Recently a bill was passed by the house, which would prevent the Medicare Part B premiums to get increased from this year. The legislation with 45 cosponsors passed the bill by a vote of 406 to 18 and provided a much needed relief to the seniors.

Though, there is already a law, which bars the Medicare Part B premium to get increased more than the annual increment in Social Security payment. About 75 percent of the seniors are already reaping the benefits of this and are protected from Medicare Part B premium increment. It can be stated here that the Social Security payments are hiked with the Consumer Price Index, which is not expected to go up in 2010. However, according to the Medicare Trustees, it is quite possible to increase the premiums of Medicare Part B for about 25 percent of the Medicare recipients, without the congressional action, from a monthly $96.40 this year to $104.20 in 2010 and again $120.20 in 2011.

This boost in payments is more than the usual rate, as the costs are dispersed over a small part of the recipients. According to the bill, the new Medicare enrollees as well as those existing high income recipients who have a modified adjusted gross income of over $85,000 ($170,000 for couples), need to pay higher premiums this year. The state and federally funded Medicaid will have to take in the major part of the Part B premiums for the low-income seniors, who are entitled to both the government programs.

The recent analysis report by Kaiser Family Foundation, Georgetown University, and the University of Chicago researchers are to believe, the average monthly premium of Medicare Part D is going to increase by 11 percent for those who are planning to stick to their current plan. Moreover, a number of plans will have deductibles in 2010. So, this is the right time to review your prescription drug plan, compare those with others available and take a decision whether you should stick to your current plan or should change to others.

Medicare’s annual open enrollment period is going to be quite useful for the beneficiaries. It will be a wonderful opportunity to shop around, go through the various prescription drug plans available, compare those and choose the right plan for you. As the features of the plans may change every year so as their premiums, a plan suitable for you last year may not suit that much in this year. So, you have got the opportunity to explore and choosing the plan that would suit you best in this year.

Now the question is, what to consider while choosing the right Medicare Part D prescription drug plan. There could be a lot to consider before you choose one. However, there are a few certain things that play major roles and you need to think upon those.

One of the most important factors that you need to consider is surely the premiums. A good number (about 1.2 millions) of the beneficiaries enrolled in Medicare Part D prescription drug plans will have to pay an increased premium of at least $10 per month unless they opt for a less expensive plan. This will also reduce the monthly Social Security checks for the beneficiaries whose premiums are deducted from their social Security payments, as there is not projected increment of Social Security cost-of-living in 2010.

Another important factor is the deduction. In the coming year, about 61% plans are going to have new deductions. It may happen that though the premiums remain the same, but for the new deductions, the beneficiaries may have to pay more.

And don’t miss to look out for the coverage gaps. These are the doughnut holes in your Medicare Part D plans, where you must pay full amount of your drug costs. Coverage gaps start when beneficiaries incur a total drug spending of $2,830 in 2010. In that case, seniors must have to pay the total amount until the total amount reach $6,440. According to the Kaiser Family Foundation, around 80% of the plans won’t have any coverage gaps.

So, analyze all the available plans and choose the plan that suits you the best. There is a tool provided by the Centers for Medicare and Medicaid Services, which you can use to compare the available plans.

2010 has arrived and you will have higher Medicare Part D deductible and coverage gaps as never before. There are also a few more changes in healthcare that will come into effect from this year. Now once a year, seniors can shop around for new prescription drug coverage. They can move in to a lower cost plan as well. From this  year onwards, each state will have the opportunity to choose from 39 or more prescription drug plans, each having different price tags and coverage options.

It will be for the first time since the launch of the benefit that most of the stand alone drug plans are going to have deductibles. People do focus mostly on the premiums, and the other factors sometimes go unnoticed or attract very little attention. But the current changes in Medicare Part D plans will certainly have effect on the yearly spending for the seniors on prescriptions. According to the results of the research at the Kaiser Family Foundation, Georgetown University and the University of Chicago, from 2010, nearly 61% of the drug plans are going to charge a deductible, comparing to 45% this year (2009). There will also have a coverage gap in almost 80% of the Part D plans, comparing to 75% this year.

So, as a number of changes are coming into effect this year, it is the high time you scrutinize your plan and if needed you may also shift to another. There are some tools available like Centers for Medicare and Medicaid Services tool, which will help you to compare estimated out-of-pocket costs under various Part D plans. So, go through the plans, scrutinize those and choose the right plan that suits you the best. If needed, don’t hesitate to switch over to another plan.