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What You Should Know about Medicare if Turning 65
When one turns 65, must you join Medicare? Consider a married couple, Bob and Jane. Bob is under 65. Bob’s spouse, Jane, turns 65 this year. She is covered under his corporate medical plan. Must she join Medicare at 65? What are the pros and cons?
The short answer is no, there’s no penalty for delaying Medicare coverage when you’re eligible at age 65 – as long as you’re still insured through your own job or your spouse’s. But we have a few questions for Bob and Jane: Are they entirely certain that Bob’s wife’s coverage will stay the same when she turns 65? If they haven’t done so already, it would be worth checking with Bob’s benefits administrator to find out whether Medicare would become Jane’s primary or secondary insurance coverage. Second question: How much are they paying Bob’s company, if any, for Jane’s coverage?
Medicare is made up of four parts: Medicare Part A, which covers hospital care; Part B, covering outpatient care including doctor visits; Part D drug coverage; and supplemental policies to pay for bills the other pieces don’t cover.
There’s no charge for Jane’s Medicare Part A if she worked for at least 10 years in Medicare-covered employment, or if Bob has worked for 10 years in such a job and is at least 62 years old. Generally, an eligible participant is automatically enrolled in Part A if the participant is collecting Social Security. But if Jane hasn’t started those payments by her 65th birthday, she should sign up for Medicare separately. A month before Jane turns 65 she should get a copy of the Medicare handbook, “Medicare & You,” in the mail, which explains this further. There’s also information in the “Enrolling in Medicare” publication at http://www.medicare.gov, and enrollment information for Social Security is available at http://www.socialsecurity.gov.
Medicare Part B, which is optional, would be Bob and Jane’s main concern since it costs at least $93.50 a month. As noted above, as long as Bob is still working and his wife is covered under his employer’s health insurance, she can delay enrolling in Part B without being penalized.
If Bob decides to quit his job, his wife would need to sign up for Part B within eight months following the month in which Bob’s employer-provided coverage ends or his employment ends, whichever comes first. If she misses the deadline, Jane would have to wait for the next “general enrollment period,” which runs each year from Jan. 1 through March 31, and pay a penalty for waiting. Of course, it should be noted that most people want and need the Part B coverage, and they should enroll as soon as necessary to avoid a gap in coverage.
What about drug coverage? If Bob and Jane have it through Bob’s job, Jane should make sure she gets a letter from Bob’s employer saying the coverage is “creditable.” She’ll need it if she joins a Medicare drug plan at a later date. Otherwise, she would have to pay a penalty for enrolling after age 65.
Finally, there’s no need to consider a supplemental Medicare policy, also called “Medigap” coverage, until Jane is covered under Part B, because such policies are designed to fill in the gaps Part B doesn’t cover.
Understanding the Math Behind Compound Returns and Investment Losses
Most investors spend their lives focused on average annual returns. But
average returns hide the critical role of portfolio volatility. It’s compound returns that ultimately matter, and they are determined not only by average returns but also by the degree of portfolio ups and downs. And that’s where big investment losses really hurt.
Consider two portfolios. One loses 25% the first year, then surges back with a 75% gain the next. The other portfolio gains 20% the first year, and 30% the second. Where would you rather put your money? In terms of average annual returns over two years, both portfolios did equally well. The average of -25 and 75 is 25; so is the average of 20 and 30. But that doesn’t mean their performance was equal.
Suppose each portfolio starts with $100,000. After the first year, having lost 25%, Portfolio 1 is worth $75,000. Then, after the 75% gain, its value rises to $131,250. Meanwhile, Portfolio 2 returns 20% the first year, boosting its value to $120,000. Moving ahead an additional 30% the second year, it’s worth $156,000. Portfolio 1 has a compound cumulative return of about 31% - no match for the 56% of Portfolio 2.
Where did that extra $24,750 come from? It’s the bonus you get for avoiding investment losses. Though this example is an extreme case, it illustrates a basic principle of investing: To progress steadily toward your objectives, you need to minimize setbacks along the way. That’s why diversification is so important. By spreading your investment bets among several kinds of assets, you potentially reduce your portfolio’s volatility.
What makes losses so bad? A little more investment math shows that you need to earn more than you lose on a percentage basis to get back to even. Suppose you have $10,000 and lose 10%, leaving you with $9,000. To get back to where you started, you now need not a 10% gain on the $9,000 – that gives you only $900, for a total of $9,900. It takes an 11% return to restore the original value of your holdings. And the bigger the loss, the harder it is to get your money back. If you lose 40% of your $10,000, taking you to $6,000, you need a return of almost 67% to catch up. If you lose 50% of your investments, you have to double your money – a 100% return – to get back to even.
What’s unnerving about the math behind investment losses is that you may not realize how much risk you’re taking when putting your money in volatile investments. “This is a case where the risk is worse than people think,” says Donald Gjerdingen, a professor at Indiana University-Bloomington. During the technology stock boom of the late 1990’s, many investors couldn’t resist concentrating their portfolios in the high-risk sectors that had posted several years of phenomenal returns. It was reportedly a new paradigm, and more than one pundit was quoted as saying that stocks were no longer risky. Even diversified investors were reminded of the meaning of risk when major global indexes lost a cumulative 40% for 2000-2002, and non-diversified investors learned the absurdity of their risk assessments when the Nasdaq Composite Index (populated with many technology stocks) lost even more: 66% for the same three years. Other examples of underappreciated risk include high-yield bonds, start-up businesses, and leveraged or development-stage real estate.
The bottom line is the deeper the holes your portfolio has to crawl out of, the harder it is for you to achieve your financial goals. The more you can smooth out the ups and downs of your portfolio returns, the more money you’ll end up with in the long run.
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