September Client Newsletter
Oh, the Fed
The recent decision by the Federal Reserve to cut interest rates is a big deal because it aims to boost the economy, which has been showing signs of slowing down. By lowering the federal funds rate by 0.50 percentage points, the Fed wants to make borrowing cheaper for both consumers and businesses. This means it could be easier and less expensive to get loans for things like homes, cars, and business investments, which can help increase spending and economic activity. However, it also means that the interest you earn on savings accounts might be lower, which isn’t great for savers.
On the flip side, there are some concerns about this rate cut. Some people worry that such a significant reduction might indicate that the economy is weaker than it appears, which could make consumers less confident about spending money. Additionally, while lower rates can encourage borrowing, they might not be enough to solve bigger problems like high inflation or global political issues. The mixed reactions from the stock market show that there’s a lot of uncertainty about how this policy change will play out in the long run. Everyone, from investors to policymakers, and as we have been discussing since 2021 we will be keeping a close eye on the Fed’s next moves.
A counter-seasonal Rally
Last month, we cautioned you about a calendar quirk that sometimes surfaces in August and September. Briefly, “Since 1970, the average monthly return for the S&P 500 Index (excluding dividends) has been +0.09% during August and -0.96% in September, according to S&P 500 data provided by the St. Louis Federal Reserve.”
On the first day of August (Thursday), investors began to fret about the economic outlook, and stocks began to slide. At the close on Monday the 5th, the S&P 500 Index hit a near-term bottom, shedding 6.1% in three days of trading, according to S&P 500 data from the St. Louis Federal Reserve. Almost half of the selloff occurred on Monday Safter what can only be described as a washout in Japan. According to Reuters, Japan’s best-known market gauge fell 12% that day, the worst one-day selloff since 1987.
We won’t blame the month of August for the brief bout of volatility. Markets may react to various events in any season. Notably, from its peak on July 16, the S&P 500 Index gave up 8.5% through August 5. According to LPL Research, the S&P 500 averages a 10% correction or more every 12 months. The last such 10% pullback occurred almost a year ago. What happened in the three weeks between July 16 and August 5 is not unusual. Although they are difficult to predict, market pullbacks are to be expected. What would be unusual? A calendar year in which we experience very little volatility.
Intuitively, investors understand that market corrections are a part of the investing landscape. However, when a pullback occurs, it can lead to anxiety.
Source: MSCI.com, Bloomberg, MarketWatch
MTD returns: July 31, 2024–August 30, 2024
YTD returns: December 29, 2023–August 30, 2024
**in US dollars
Health Care In Retirement
It’s not surprising that a survey last year by T. Rowe Price found that health care costs are the biggest financial worry among retirees.
On the surface, the numbers are unsettling. According to a 2022 analysis by the Employee Benefit Research Institute, a couple with average Medicare premiums and out-of-pocket expenses could find that they need $212,000 to $318,000 in savings to cover their health expenses throughout retirement. Fidelity confirmed the findings by the Employee Benefit Research Institute. On average, according to the 2024 Fidelity Retiree Health Care Cost Estimate, a 65-year-old individual may need $165,000 in after-tax savings to cover health care expenses.
While such numbers sound daunting, it’s not as simple as the headline suggests. Let’s dig a little deeper.
According to Fidelity, Medicare Part B (doctors) and Part D (prescription) premiums will account for about 43% of the dollars you spend on health care in retirement. In other words, almost half of your annual health care expenses are planned expenses. They are budgeted and paid from monthly income. When we share this with clients, we find that it eases some of their financial trepidations.
Of the remaining 57%, 47% will flow into co-payments, co-insurance, and other deductibles used to pay your doctor and for hospital visits. The remaining 10% will be spent on prescription drugs. Be that as it may, we want to stress that health care costs tend to rise in retirement. As we get older, our use of health care typically rises.
Medicare Primer
If you are approaching retirement, here are the basics. Did you know that there is a penalty if you miss Medicare’s initial enrollment period (IEP)? And it’s not just a one-time penalty. It’s permanent, and it’s tacked on to your monthly premium. Let’s explain.
Your IEP is a seven-month window—three months prior and three months after your 65th birthday. Miss the window for Medicare Part B, and your monthly Part B premiums could go up 10% for every 12-month period you go without coverage. There’s also a 1% penalty per month for each month you delay enrolling in Part D prescription drug coverage.
Now that we’ve explained the penalty, what is Medicare Part B? Part B helps cover:
- Services from doctors and other healthcare providers
- Outpatient care
- Home health care
- Durable medical equipment
- Many preventive services
But what if you are 65 and insured by your employer? That’s great! You’ll have the opportunity to enroll in Medicare penalty-free when you leave your employer through a Special Enrollment Period. Starting this year, your chance to join lasts for two months after the month your coverage ends.
We’ve touched on Part B, so let’s review Part A. Part A helps cover inpatient care in hospitals, skilled nursing facility care (SNF), hospice care, and home health care. It’s free for most folks as you or a spouse paid Medicare taxes long enough while working—generally at least 10 years. Medicare doesn’t generally cover long-term care in a nursing home.
Your liability:
- Days 1-20: $0.
- Days 21-100: $204 each day.
- Days 101 and beyond: You pay all costs.
Medicare Part A may provide coverage for SNF care that’s medically necessary. Medicare Part C, or Medicare Advantage, provides for Part A, Part B, and most include Part D. Medicare Advantage Plans may offer extra coverage, such as vision, hearing, dental, and/or health and wellness programs. It is like a PPO or HMO, so check that your doctors are a part of your network before you purchase a Part C plan. If you use in-network facilities, you will have a maximum out-of-pocket of $8,850 for approved in-network services this year. Traditional Medicare does not have an out-of-pocket limit for covered services, and a Medigap policy is needed to limit your out-of-pocket liability.
Paying for Health Care—Be Proactive
- Consider various retirement accounts, such as IRAs and Roth IRAs. The IRA catch-up contribution limit for individuals aged 50 and over was amended under the SECURE 2.0 Act of 2022 to include an annual cost-of-living adjustment. It remains $1,000 for 2024, according to the IRS. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans is $7,500 for 2024. Therefore, participants in 401(k), 403(b), and most 457 plans who are 50 and older can contribute up to $30,500 starting in 2024. Take advantage of these catch-up provisions.
- If you are enrolled in a high-deductible health plan and it offers a health savings account (HSA), you have an excellent vehicle to accumulate and save for eligible health-related expenses. These accounts are not subject to income tax, and you may use them for eligible health-related expenses. Funds roll over year after year.
- Should I buy long-term care insurance? Medicare Part A (Hospital Insurance) may cover care in a certified SNF. But it must be medically necessary for you to have skilled care. Medicare doesn’t cover custodial care (such as nursing homes) if that’s the only care you need. Medicare.gov defines custodial care as activities of daily living (like bathing, dressing, using the bathroom, and eating) or personal needs that could be done safely and reasonably without professional skills or training.
One option that may help absorb long-term care costs, such as assisted living or a nursing home, is a long-term care policy. But it won’t come cheap. Long-term care insurance policies reimburse policyholders a daily amount (up to a pre-selected limit) for services to assist them with activities of daily living. You can select a range of care options. According to LongTermCare.gov, the cost of a policy is based on:
- How old you are when you buy the policy
- The maximum amount that a policy will pay per day, and
- The maximum number of days a policy will pay.
The maximum amount per day times the number of days determines the lifetime maximum you will receive. You may not qualify for long-term care insurance if you are in poor health. Before you purchase a policy, please be aware that the insurance company may raise the premium on your policy. Therefore, we encourage you to contact your insurance professional for additional information and request data on the company’s premium rate history.
We know that options may feel overwhelming. Please let us know if you have any questions, and we’d be happy to assist in any way we can. I will be hosting a webinar next month on Medicare as October is open enrollment, for those who would like to attend. I will send out the link, as well as posting it on my website. www.raymondjames.com/cherylmyler
Final thoughts
As we stressed last month, your strategy should align with your financial goals, investment timeline, and risk tolerance. We would never discount the possibility of volatility as we enter the fall (for that matter, we’d never dismiss the possibility of a pullback in any season), and we encourage you to keep your focus on your long-term financial goals.
A recent remark by Liz Ann Sonders, Chief Investment Strategist for Charles Schwab, sums up our views. “One of the beliefs I (Liz Ann) share with Chuck (Schwab) is the inability to time markets with any precision. Too many investors believe the key to success is knowing what's going to happen in the market and then positioning accordingly. But the reality is that it’s not what we know that makes us successful investors; it’s what we do.
“In his memoir, Invested, Chuck wrote: ‘If I had learned anything after years in the business, it was how little I could ever know about what the market would do tomorrow.’”
I trust you have found this review to be informative. If you have any questions or wish to discuss any other matters, please don’t hesitate to contact me or any team member.
As always, thank you for choosing us as your financial advisor. We are honored and humbled by your trust.
Sincerely,
Cheryl L. Myler, CRPC
Vice President – Wealth Management
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The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI ACWI ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries*. With 6,211 constituents, the index covers approximately 99% of the global equity opportunity set outside the US. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
