| Show BUSLNTSS The Salt Lake Tribune SuntLty Febniat)- E5 12t4 THE WALL STREET JOURNAL gilif3H3 Getting Going Retirement Isn't a Time to Retreat - to most financial and they will tell you the stock-bonmix you hold In retirement shouldn't be radically different from the mix you held just before quitting the work force Yet most retirees sure don't feel that way Once we retire we are inclined to become much more conservative ditching our stocks and stashing much or all of our money in bonds and other investments Here's why we become so conservative—and retirees why should resist this impulse Talk S'' d V V ' I 0 - --- il :0 1 ill income-generatin- g ' 1 10 ' Mk NMI Jr I P I k 1 I I Defending Principal When we retire "there is this startling realization that there's no more money coming in says Meir Statman a finance professor at Santa Clara University in California "Now that nest egg is the only thing that stands between you q Ott : 1 I 41 t4 44- ' and starvation" Faced with this unnerving notion the temptation is to dump stocks and retreat into bonds Aftcr all tumbling share prices which seemed like an opportunity when we were regularly adding new savings to our portfolio are suddenly nothing but bad news But in reality you still have plenty of time to ride out stockmarket declines Suppose you retire at age 65 The tables suggest you will live until almost age 82 if you are a man and until almost age 85 if you are a woman And of course half of all will live longer than these averages suggest Our rush to bonds doesn't just reflect a new sense of caution It's also part of an effort to the income from our paycheck and to regulate our spending Prof Statman notes that while in the work force we use our paycheck as a guide to how much we can reasonably spend Once we retire that guideline disappears As a substitute we often fall back on the old rule that says we can spend our portfolio's income but we should never touch our capital "People have this wotTy that if they start dipping into capital they won't know when v 4:7 - fz---- 1 I A'-17- ' 1 '' A - - Y 1 '' ' ' i kla IV !?: By Stacey L Bradford Smnrtfiloney Jonathan Clements By i '''' ''"' N - t 0 d ' :'- - I aii-- ' : -- e'Wes 1''' 41- - 6 01'1141 begi- Combating Inflation The desire to ditch stocks and load up on bonds is understandable But it could also prove to be a colossal mistake The fact is if you try to live off the income from your bonds your standard of living will be whittled away by inflation Suppose consumer prices climb 2 a year Even at that modest rate the spending power of a fixed stream of interest will shrink by 33 over 20 years 'lb fend off this threat you need the higher long-rureturns that stocks offer I often suggest that retirees stash maybe 50 of their portfolio in stock funds 257 in riskier types of bond funds and 25 in a reserve consisting of short-tert bonds and a fund As many readers will immedi- ately realize this strategy has one big drawback: There will undoubtedly be years when stocks take a beating and thus you won't want to sell shares to replenish your cash reserve A huge threat? With 25 in your cash reserve you have enough set aside to cover five years of spending money Thus you should be in good shape provided a bear market doesn't drag n money-marke- e little-notice- d a drug-discou- e Jonathan Clements also writes the "Getting Going column that appears Wednesdays in The Wall Street Journal Write to him at: jonathanclementsewsjcom good news is that patients have ample time to decide Open enrollment won't start tin autumn 2005 In fact these new plans including drug benefits don't yet exist your spending Experts suggest keeping a log of doctor visits lab tests and prescriptions to help make informed decisions that can costs later cut your The Kaiser Family Foundation estimates that traditional Medicare covers only 56 of a senior's total health-car- e spending though the drug benefit could help Deal with the "doughnut" Suppose it's fall 2005 and you're finally able to buy Part D drug coverage Here's how it works Seniors must pay a $:15 monthly premium and the first S250 of annual costs Then the plan subsidizes l'59 of the next S2250 Seniors are responsible for 100' of the next $2850 (what some call the "doughnut" a hole in the drug plan) Outlays over $5100 considered are catastrophic picked up by Uncle Sam at 95 Rethink Medigap Vulnerable to costs many sebig niors now buy a supplemental or Medigap policy Under Medicare reform new beneficiaries won't be allowed to buy a Medigap plan that offers drug coverage The government would rather you sign up for Part D If you already have a Medigap plan with drug coverage you can keep it But think hard If your insurer raises premiums for this costly insurance so high that you cancel you'll face the I monthly penalty if you go to Part D Expect some higher costs The deductible for Part D the drug benefit is expected to rise from $250 to S415 by 2013 And the catastrophic threshold for drug coverage the part that covers 95 of costs is expected to climb to $9066 from S5100 Wealthier people's premium costs will rise fastest Watch out for scams until legitimate insurers start offering Medicare Part D and Medicare Advantage plans Avoid any insurer that offers you a policy now Con artists are already knocking on doors trying to exploit Medicare recipients a Track Stacey L Bradford is an associate editor of SmartMoneycorn lettersesmartmoneycom Historically low rates Get 1em while they last WI ADVANTA e me edicare has changed quite a bit in the past year Some of the changes you can't do much about The new drug benefit remains two years away The health-carplan for the elderly is still complex And Medicare bills are likely to escalate bebut imporcause of a tant change that calls for deductibles and premiums to be indexed to annual growth in Medicare spending Still there are things you can do—or help older people do—to prepare for the new Ikledicare Among them: Read everything you get in the mail from the Centers for MedThe icare & Medicaid Services new "comprehensive" drug benefit isn't available till 2006 But if you miss a deadline in the enrollment period next year it'll cost you That's because enrolling seniors must pay a penalty fee on top of the drug plan's monthly premium for each month they were eligible for coverage but didn't participate II Consider cards in the meantime Seniors with no drug coverage can get a little help by applying for a Medicare-endorsedrug discount card as soon as May 2004 The card will cost up to $30 a year and should mark down medications IC to 25 Some seniors might do better sticking with certain existing cards offered by drug makers and retailers like Sam's Club says Kirsten Sloan AARP's national coordinator for health issues A card should cover as many of your current drugs as possible Learn the new options Traditional Medicare may work well for some It's still going to be around with a new "Part D" for drugs But others may save more by signing up for a new Medicare Advantage policy the next generation in Medicare HMOs—adding a drug benefit and more freedom of choice Many Such plans are expected to look more like preferred provider orgaor PPOs nizations Formally these called Medicare-I-Choicnew plans will be run by private insurers under contract with Medicare (If you elect a Medicare Advantage plan there's no need to sign up for Medicare Part D) The on for years and years Even so you might suffer a few sleepless nights Don't like all the uncertainty? You aren't alone Consider a study by Constantijn Panis a senior economist at Rand Corp in &ha Monica Calif Mr Panis found that retirees who had some sort of steady lifetime income such as a traditional company pension were typically more satisfied with their retirement But that doesn't mean you are destined for unhappiness if you don't have a pension You could always invest a portion of your nest egg in an immediate fixed annuity that pays lifetime income thus effectively buying yourself a pension With an immediate annuity you hand over a wad of money to an insurance company in return for which you get a check every month for the rest of your life The amount of income received is usually significantly higher than the corporate yield on and government bonds As appealing as that might sound many retirees balk at buying immediate annuities The reason: If you buy a life annuity and die soon after your heirs won't get anything unless the annuity included some sort of guarantee "Lots of people see the purchase of an annuity as a risky thing rather than as an insurance product" Mr Panis says "They are more concerned about the risk of dying early rather than the risk of living too long" if folks can overcome Still these qualms I think they could end up with a far better retirement strategy Take the mix of 50 stocks 25 bonds and 25 cash reserve mentioned above You might tweak that mix by substituting an immediate fixed annuity for the 25 bond position That would give you the comforting stream of income you crave while also providing a safety net in case stocks suffer another prolonged rough spell high-qualit- Thereafter you can tap this cash reserve for spending money Meanwhile I would aim to sell part of your stocks and riskier bonds each year and use the proceeds to replenish the money you pulled out of your cash reserve How much can you reasonably spend? Each year dip into your cash reserve and withdraw a sum equal to 5 of your portfolio's nning-of-year value For instance if you start the you might withyear with draw S20000 This $20000 would include any dividends and interest kicked off by your investments Keep in mind that you won't be able to spend the entire $20000 because a portion will likely be owed in taxes to stop" Prof Statman says Problem is if we are determined to spend only income there isn't much incentive to hold stocks with their miserable I average dividend yield Instead we are almost inevitably driven to buy bonds and other investments that generate a fair amount of Facing the New Medicare I - fl: -- I Simple Interest Rate -4 : 4 4 5 YEAR cl 4: ) 1 1 4 i 653 -- 'k - It 1 i is 1 ! 1 ' zi 1 1 1 - I :t44 ' 4 YEAR 559'o 4 ' ''' I 464 ! 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