Examples of How Retirement Plans Can Work - IV

Conclusion
The more you know about what you have, what you are entitled to, and what you want out of retirement, the better off you are. Every woman can take charge of her financial future. The best place to start is by knowing your financial facts so you can make your pension, your Social Security benefits and your savings plan work for you.

Examples of How Retirement Plans Can Work - III

Social Security
When you create your retirement plan, you should include your Social Security benefits. (For most women, Social Security will be their primary source of retirement income.) The chapter in this book, “Six Things You Need To Know About Social Security,” will provide you with the information you need to get started.

Examples of How Retirement Plans Can Work - II

Jessica
Jessica, age 38, is just divorced after 15 years of marriage. During her marriage, Jessica worked on a part-time basis to supplement the family income. Under the terms of the divorce, Jessica will get half of the value of the pension plan assets that were earned during the 15 years of the marriage. She was able to get this benefit because the judge in the divorce proceeding issued a Qualified Domestic Relations Order (QDRO), a very important, and sometimes overlooked, piece of paperwork. The assets accumulated in pension plans during a marriage can be divided through negotiation as part of the divorce process. Determining the value of assets earned during the marriage can be complicated, and you may need to get professional help to figure it out. It is important for the attorneys to have access to the retirement plan provisions as soon as possible so that they can determine just what the plan will permit and finalize the agreement in a QDRO.

Examples of How Retirement Plans Can Work - I

In order to understand these plans and to help you see how they may fit into your retirement planning needs, here are three examples of how these plans worked for some people we know. 

Rose and Dick

Rose and Dick lived a modest lifestyle in a rented apartment during their lives. Rose did not enter the workforce until she was 51. Even though she worked for low wages in a state agency, she was covered by a pension plan, an employer-paid retirement health care program and 

Medicare at retirement.

Dick ran a very small business. He did not have a formal pension plan, but managed to build a nest egg by investing in the stock market. He did not have health insurance when he retired, but was covered by Social Security and Medicare.

They both retired when Rose was age 66. Their retirement income was not much, but with Rose’s pension, coupled with the income from Dick’s investments and their Social Security benefits, they managed to live somewhat comfortably.

Rose was not always in good health during her retirement. Nearly all of her health care costs were covered by Medicare or her employer-provided health care program. 

Susan

Susan, age 42 and unmarried, has worked in retail since she graduated from college many years ago. Her current employer of six years, a good-sized department store chain, provides her with a 401(k) plan. Her previous employers did not. However, during the years she was not covered by a 401(k) plan, she set aside money in an IRA account, and she continues her retirement savings by setting aside as much as she can in her 401(k) plan.

As a participant in her employer’s 401(k) plan, she contributes enough to earn the employer’s match (dollar for dollar up to six percent of her pay) and she tries to save beyond that amount. 

She also chooses the way her funds are invested within the plan. Few employees focus on how to invest their money to meet a certain retirement income goal. Susan is making the best of her situation, and will be far better off than her colleagues who aren’t saving anything.

Guidelines for Making Good Use of Employer Plans

For many women, pensions are just not available. The realities of family life are such that women spend on average only 27 years in the workforce, compared to 40 years for men. Our current retirement system wasn’t designed with working women in mind: Their part-time and intermittent employment due to family caregiving responsibilities can mean that they aren’t eligible or can’t vest in the plan. If you or your spouse have a choice about employment, and other things are equal, look for an organization with good retirement benefits. Most of all protect your future security by making the best use of what is available to you.

Here are some things you can do to make the best use of the benefits you do have:

• Check on whether your employer is doing well to increase the chances of a good outlook for continued employment and continued benefits.

• Save at least the amount matched by your employer in 401(k) plans and other defined contribution plans.

• When investing funds, don’t put all your eggs in one basket—diversify.

• Don't use retirement money for non-retirement purposes.

• If you are thinking about switching jobs, remember to look at the vesting schedule where you are and stay at least that long.

• If you are self-employed, don’t forget to save—you need retirement income too.

• Remember that plan funds are an asset at the time of a divorce, and in the long run, might be the most important asset you have.

• Don't retire too early, and remember that your money needs to last a lifetime.

Three more tips:

• File and save all your plan information, including benefit statements and Summary Plan Descriptions.

• Keep track of any pensions or 401(k) account balances that you earned with prior employers, either by saving your latest statements or by rolling over the funds into an IRA that you control. If you lose contact with a former employer whose defined benefit pension plan covers you, the PBGC may be helpful. Their booklet “Finding A Lost Pension” is available at http://www.pbgc.gov/docs/Finding_A_Lost_Pension.pdf.

• When leaving a job before retirement, be careful about cashing out any lump sum benefit. You can avoid IRS penalties and preserve the money for retirement by taking a direct rollover to an IRA or to another employer’s plan.

Employer-Sponsored Pension and Savings Plans

Let’s take a closer look at employment-based pension and retirement savings plans, and cover ways you can make the most of them. For those companies sponsoring pension plans, there are two basic types:

Examine Your Financial Issues

Once you have a handle on what resources will be available to you in retirement, think through what financial needs you might have. Realize that the longer you work, the more money you can accumulate and the less money you will need. Your key financial issues include:

• Your needs at the time of retirement.

• The impact of retirement timing on Social Security benefits for you and your spouse.

• Your willingness to keep some money in the stock market.

• The cost of health insurance to supplement Medicare.
• Future inflation that will make everything cost more over time, especially medical care.
• For couples, the needs of the survivor after one partner dies.
• Potential expenses if one or both spouses need special care or become frail.
• Potential requests for help from parents, children and other family members.
• The need for a financial cushion to absorb unexpected costs, such as rising property taxes.
• Your retirement dreams, including special travel wishes and the desire to add a seasonal or vacation home.

Evaluate Your Assets and Retirement Resources

As you plan for your retirement, try to take all of your potential retirement resources into
account. These could include:
• Your Social Security benefits, as well as those of your spouse.
• Your Medicare benefits, as well as those of your spouse.
• Personal savings through a 401(k), Individual Retirement Account (IRA), or similar plan.
• Your pension benefits as well as those of your spouse and other family members.
• Income that could come from part-time work or starting a new business from home.
• Money from selling your home and moving to a smaller one or to a less expensive area.
• Taking out a reverse mortgage on your home.
• Money saved by cutting down on your expenses.
• Any continued medical benefits available through your or your spouse’s employer.
• Income from selling certain personal property that you will no longer need in retirement, such as second homes, extra family cars, jewelry, clothing, tools used for work, etc.
• Any long-term care insurance that you currently own.
• Life insurance policies that could be converted to cash or monthly income, or used to provide cash for your survivor.

Chapter Six: Where Will Your Retirement Money Come From?

By members of the Consumer Education Committee of the Actuarial Foundation, Morton

M. Dickstein, FCA, MAAA; Stanley Freilich, FCA, FSA, MAAA; Anna Rappaport, FSA,

MAAA; Vinaya K. Sharma, FSA, MAAA; and C. Eugene Steuerle, Ph.D.

www.actuarialfoundation.org and www.annarappaport.com.

Your retirement may be a lot different than it was for earlier generations of women. For one thing, you’re likely to live longer, given increases in life expectancies. Half of all women who are now 65 will live beyond age 85. A longer life often means a longer retirement—and a more costly one.

Some fortunate women who are now retired spent their careers working for employers who offered a traditional pension plan—monthly income for life in retirement—or were married to men who were covered by this type of plan.

You are more likely to participate in a retirement savings plan, such as a 401(k). With savings plans, you must decide how much to save and how to invest the money. Your decisions have a direct effect on how financially secure you will be in retirement. It’s a big responsibility.

Typically, your 401(k) retirement money will come to you as one lump sum when you retire, rather than as a steady stream of monthly payments for life the way a traditional pension would. You are responsible for managing the lump sum. Like it or not, your retirement income security is up to you.

Unfortunately, many workers do not understand the wide range of financial choices now available to them. If you’re like most people, you may not know enough about how to get ready for retirement. It is important that you have a good understanding of how to plan, budget, save, and invest for retirement. It is also a good idea to seek information and guidance from your employer and/or outside experts about when you could afford to retire, how much income you will have, what your expected monthly Social Security benefit will be, where the money will come from, and how to make it last.

Many financial planning professionals say a good target is to try to have enough money to replace 80 percent of your pre-retirement income. Because many of us have not saved enough for retirement, we may have to retire at a later age, accept a more modest lifestyle, or both. 

The first step to creating a retirement plan that will work for you is understanding what you’ll have from pension benefits, personal savings and other assets, and Social Security. This chapter will help you figure this out.

WISER FACT SHEET - II

6. Is the maximum benefit period one year or more?

The benefit period can vary from one year to a lifetime. You may also be able to choose to have coverage for a maximum number of days or maximum amount of benefits paid. 

7. Is the deductible affordable and does the policy have a waiting period of 100 days or less?

The deductible period is also called the waiting or elimination period. Most policies require that you pay for needed care from your own money for a certain number of days before the policy starts to pay for the services.

8. Once approved for coverage, will the policy cover pre-existing conditions or limit coverage for certain conditions?

Some policies exclude preexisting conditions, or certain diseases like Alzheimer’s disease. Since Alzheimer’s is a major reason for nursing home admissions, make sure you know if your policy will cover you or your spouse if you develop Alzheimer’s disease. 

9. Will you be able to keep up on the premium payments?

Important provisions, such as inflation protection and non-forfeiture, increase the cost of the benefit but also increase the value of the policy.

10. Have you learned as much as you can about the insurance company?

Try to choose a company that will be financially sound in the future, has an excellent reputation, and has a strong customer service record. Ratings by independent companies such as Standard and Poor’s, Moody’s or A.M. Best are available at public libraries.

WISER FACT SHEET - I

10 Questions to Ask Before You Buy Long-Term Care Insurance

1. Does the policy include protection against inflation?

The benefits paid by the policy should increase with the rate of inflation; otherwise, your policy may be worth very little by the time you want to use it.

2. Does the policy guarantee that premiums remain level?

If you bought your policy at age 60, the insurance company will always charge you the same rate as other 60-year old policyholders. Once you buy the policy, the company can’t raise your rates because of your age (but it can raise rates for an entire class of insured individuals). Some policies guarantee that the rate will not change for a specific period of time.

3. Does the policy cover home health care benefits and all levels of nursing home care including skilled, intermediate and custodial care?

Classic policies cover nursing home care and can have a rider to cover home health care. Integrated policies provide a pool of funds that can be used for a range of long-term care services.

4. Does it provide comprehensive benefits for both home care and nursing home care?

Make sure that the policy covers less severe impairments and provides services that help you remain in your home.
5. Is the policy renewal guaranteed?
Policies that qualify for federal tax deductions must have the renewal guaranteed, meaning that the policy cannot be canceled if you pay the premiums on time. Other policies are conditionally guaranteed and the company could cancel coverage for a group but not for you as an individual member of the group.

Long-Term Care Insurance - III

Long-term care policies vary widely in cost, benefit amounts, and coverage. While many of us do not have the time or the expertise to make an informed decision about whether or what to buy, there are people who can help. If you decide to work with an advisor, be sure to go to someone who has no financial stake in your purchase of an insurance policy.

What should I ask before I purchase a long-term care insurance policy?

There are numerous long-term care insurance policies being sold today. Here are some questions to ask as you compare the various policies.

• Will the insurance premiums I pay now remain level or increase as I get older?

• Is the benefit amount inflation-protected? How much will this protection increase the monthly premium?

• What is the daily benefit amount or percent of cost that the policy will pay for care in each venue covered by the policy?

• Will the policy cover assistance in my home, an adult daycare facility, an assisted living facility, or a hospice, as well as skilled, intermediate, or custodial care in a nursing home?

• Will the policy allow a family member or friend to provide care? This is called “informal caregiving,” care provided by someone who is not a licensed care provider.

• What is the length and definition of the waiting period before any benefit will be paid and is there a deductible?

• How long over the life of the policy will benefits be paid?

• Are premiums waived when I am receiving care?

• What payment options are available? What would be best for me?

For more information about long-term care insurance, get a copy of A Shopper’s Guide to Long- Term Care Insurance from either your state insurance department (or call (800) Medicare to get their number) or the National Association of Insurance Commissioners, 2302 McGee Street, Suite 800, Kansas City, MO, 64108. You may also call your State Health Insurance Assistance program.

Conclusions

Just as financial planning can help insure that our retirement income goals are met, planning can help insure that our health and long-term care needs are met as well. Understanding what the four parts of Medicare provide and what is available for those with low and no income or assets through Medicaid can help us plan what we need to do now to provide for our futures and enjoy being older women. Keep eating that apple a

day, but take the time to plan for your health and long-term care future.

Long-Term Care Insurance - II

What does long-term care insurance cost? Be aware that long-term care insurance can be expensive. Average annual premiums vary widely based on your age, the length of the policy, and what benefit options you choose. The younger you are when you apply to purchase your policy, the lower your monthly premiums will be, but of course, you will be paying those premiums for a longer period of time. Your health is also an important factor in the premium costs. Unlike the Medicare and Medicaid programs, you must apply for long-term care insurance coverage and be accepted by the insurance company.

Note: You can deduct the premiums for a qualified long-term care plan from your federal taxes if your total medical expenses, including the premiums, exceed 7.5 percent of your adjusted gross income. A number of states also offer tax credits or deductibility incentives for long-term care insurance. Additionally, if you own your own business, this insurance is deductible for you as a business owner. Be sure to talk with your accountant or tax advisor about this deduction.

Should I purchase long-term care insurance? Long-term care is an investment—you purchase it now with the intent of using it later. And like any investment, it should be carefully  considered. There are numerous factors to consider when you think about whether or not to purchase long-term care insurance—among them are your age, your health and your family’s health history, and, very important, your finances—how would the premiums fit into your monthly or yearly budget. As a younger, healthier person, your premiums probably will be lower, but remember, you will be paying them for a longer time. As an older person, your monthly premiums will be higher, but you will pay them for a shorter time. On the other hand, if you wait too long, you might not qualify for a policy because you have a pre-existing condition or overall bad health.

What should I ask myself before I purchase a long-term care insurance policy?

• Is my family able to provide some or all of the care I might need?

• Are there health conditions or health trends in my family that are associated with chronic illnesses that could lead to the need for long-term care? For example, stroke, osteoarthritis or diabetes.

• What do various types of long-term care cost in my area—per day and per year?

• What can I afford to pay for long-term care insurance?

Long-Term Care Insurance - I

A woman age 65 today can expect to live another 19 years. That’s the good news. The bad news is the estimate that over 50 percent of women will enter a nursing home before  they die, and the current national average cost per day of a private room in a nursing home is more than $200 or almost $75,000 per year. In addition to having a financial impact, long-term care needs also have a family impact. A recent survey showed that one in four American households is providing some kind of caregiving support for a family

member.

Will you have the resources to pay for long-term care if you need it? Would long-term care insurance enhance your personal health care future? What follows is some information to think about before you buy a long-term care insurance policy. And, if you decide that long-term care insurance is right for you, there is information on some features to look for in a policy.

What is meant by the term “long-term care?” Long-term care is different from health care. 

The general intent of health care is to return a person to good health, so its focus is on skilled or acute care. In contrast, long-term care focuses more on caring than on curing. Generally, longterm care provides either custodial or supervisory care when a person is unable to perform basic activities of daily living, such as eating, bathing, or dressing, because of a physical or cognitive impairment.

What is long-term care insurance? Long-term care insurance is designed to help cover the cost of certain long-term care expenses and services you might need that are not covered by Medicare or Medigap insurance. Remember that Medicare does not cover long-term custodial care, and to qualify for Medicaid you must spend down most of your resources. For further information on Medicaid and the resource limits, go to www.cms.hhs.gov/Medicaid.

The financial assistance that long-term care insurance provides can help you protect your assets—rather than spending down to become Medicaid eligible; stay in your own home with paid help—rather then going to a nursing home; choose the assisted living facility where you want to live—rather than going to a facility because it has an available Medicaid space.

There are three basic types of long-term care insurance: 1) Most policies are indemnity policies. They pay a pre-determined fixed dollar amount toward your costs for each day that you receive covered care services regardless of actual expenses. You might be insured for $100 per day of covered care and you would pay the rest of the daily rate. 2) Another type of long-term care insurance, expense reimbursement, pays a portion of costs for services up to a predetermined daily or monthly limit rather than a set dollar amount. 3) The third type, cash, pays a specific dollar amount each day you have the impairment regardless of the actual charges for covered services received or whether you receive care every day. There are also hybrid policies that combine various elements for consumer flexibility. In each of the versions, you are responsible for any costs above the covered or defined benefit amounts of the policy

Medicare Supplemental Insurance (Medigap Insurance)

If you are in the Original Medicare Plan (Parts A and B), there are gaps in Medicare’s coverage of the care and services you might need. Medigap insurance was designed to fill those gaps.

What is it? Medigap insurance helps to pay for what Medicare does not cover—things such as such as deductibles and coinsurance. Medigap policies are sold by private insurance companies. What plan you buy should depend on both what types of care you need and what you can afford. Note: Generally, when you buy a Medigap policy, you must have Medicare Part A and Part B. If you are in a Medicare Advantage Plan or other Medicare Health Plan, you may not need a Medigap policy. Be sure to review your plan coverage to see what is and is not covered.

What does it cover? Insurance companies can only offer “standardized” policies that follow state and federal rules. Currently, 12 different Medigap plans labeled “A” through “L” are available. Plan A covers only the basic (core) benefits. These basic benefits are included in all the Medicare plans (A through L). Medigap Plans B through J offer extra benefits or combinations of benefits. Plans K and L have benefits similar to plans A through J, but they offer lower monthly premiums and higher out-of-pocket costs. Are  there specific kinds of care you need and use? Check to see if that service is covered in the plan you purchase. Note: Medigap insurance does not cover long-term care services. 

What does it cost? Medigap policy premiums vary depending on the provider and the  level of benefits provided. Before you purchase a policy, compare premiums—there can be a big difference in price from company to company for the same policy. Note: If you are married, you and your spouse must purchase separate Medigap policies. Your policy will not cover the health expenses of your spouse.

Medicaid

What is it? Medicaid is a jointly-funded state and federal program that provides health care and long-term care for certain categories of people with very low or no income and resources.

Who is eligible? Medicaid is available to you and your family only if you meet the very strict federal and state income and resource requirements. How much income you may have and what resources you may keep and still qualify for Medicaid varies from state to state. (“Income” includes wages and pension payments, and “resources” can include items such as insurance policies, savings, cars, and valuables that the applicant may own.)

Medicaid also pays for long-term nursing home care for very low income elderly and disabled Medicare beneficiaries. Generally, if you apply for Medicaid to cover long-term nursing home costs, you will have to prove that your financial status meets the requirements for very low income and resources set by your state.

Note: It may be that you are ineligible for Medicaid at first, but several states allow people to enter a facility and then spend down their income and assets on nursing home bills to become eligible. However, there are many rules and regulations for “spending down.” You might want to consult an attorney or financial planner. In any case, be sure you understand the rules in your state.
Be assured, if you are married and only one of you needs nursing home care, the one not in the nursing home will not be required to become destitute in order to pay for the care of the other. In other words, you would not be required to “spend down” by selling your home to pay for your husband’s care. On the other hand, Medicaid can require some "payback" by billing his estate after he has died.
What does Medicaid cost? Depending on your state's rules, you may be asked to pay a small co-payment for some medical services. Medicaid makes payments directly to your health care provider—it does not pay the money to you. If you think you might qualify or for more information, go to: www.cms.hhs.gov/Medicaid.

Medicare Part D (Prescription Drug Coverage)

What is it? Under Part D, Medicare offers prescription drug coverage for everyone in Medicare. Part D plans are run by insurance companies and other companies approved by Medicare. You don’t have to participate in a Part D plan, and if you do not take many expensive drugs now, you may think, “Why bother?” However, it is worth considering. 

Many of us, as we age, will need various drugs to stay healthy. You have until three months after you turn 65 to enroll in Part D. You may have to pay a late enrollment penalty if you wait—and you carry that extra cost for as long as you’re covered under the plan. Note: If you have Medicare Parts A and B, you do not have prescription drug benefits. If you participate in a Medicare Advantage plan, prescription drugs may be

covered and you may not need Part D coverage. Be sure to check your plan.

What does Part D cost? Most Medicare Part D plans have a monthly premium. The Part D premium is in addition to the Part B premium. The premium amount you pay will vary by plan provider and by how many and what drugs the plan covers. Depending on the plan, you will also have to pay part of the cost of your prescriptions. If you have limited income and resources, you may qualify for assistance or a waiver of the

premiums and deductibles altogether.
What is the donut hole? Part D drug plans may have a coverage gap, often called the “donut hole.” Once you and your plan have paid up to $2,400 for prescriptions, you are responsible for all your drug costs (including the monthly premium) until you spend $3,051.25. At that point, you will be covered again and make a small co-payment until the end of the calendar year. Note: Some Part D plans offer coverage during this gap.
How do I decide on a Part D plan? Most prescription drugs, both brand-name and generic, are covered under Medicare Part D. However, the coverage varies by plan, so you must choose carefully. When you look at plans, it helps to compare three things:
• Cost: What will the coverage cost you—including premiums, deductible and the
payments for your drugs?
• Coverage: What benefits do you get? What drugs are covered? Do you need
prior authorization to get a drug you need? Is the donut hole covered?
• Convenience: Are the pharmacies near you a part of the plan? Is there a mailorder
option?
You can get current information on the Medicare drug plans by calling (800) Medicare,
TTY (877) 486-2048, or by going to www.medicare.gov and selecting “Compare
Medicare Prescription Drug Plans.”

Medicare Part C (Medicare Advantage)

What is it? Medicare “Part C,” also known as Medicare Advantage, offers health plan options approved by Medicare but run by private companies. If you choose Part C, you are still enrolled in Medicare. Under Part C, health coverage is provided through private fee-for-service arrangements, managed care plans (such as HMOs) and preferred provider organizations (PPOs). 

If I enroll in Part C, do I lose Part A and Part B coverage? You can enroll in Medicare Part C in place of Parts A and B to receive all your hospital and medical coverage.

What is covered by Part C and what does it cost? The benefits and services you may receive and the difference in what you save or spend depends on the type of Advantage plan you purchase. Generally, the fee-for-service plans are the most flexible, but they are also the most expensive. With a PPO, while you may save on premiums, you will have to pay an additional fee if you do not use an “in-network” provider.

Is Part C the right choice for me? You should make some comparisons between what the Original Medicare (Parts A and B) and what Medicare Advantage plans provide for you before you make a decision. Find out:

• Is there an Advantage Plan available in my area?
• Would the Advantage Plan be more or less expensive in meeting my needs than Original
Medicare?
• Would the Advantage Plan provide more or fewer options for the kinds of care and
services that I need?
If you decide an Advantage Plan is what best meets your needs, compare plans to determine
which one is right for you. Find out:
• What is the premium?
• Is there a deductible—how much?
• Are there co-payments, or coinsurance costs—how much?
• Does the plan cover the extra benefits or services you need such as prescription drugs?
• Do the health care providers you normally see participate in the plan?

Medicare Part B (Medical Insurance)

What is it? Medicare Part B covers medically necessary doctor’s services, outpatient hospital care, and some other medical services that Part A does not cover. Part B is optional. It is financed through the monthly premiums paid by enrollees and by contributions from the federal government.

What does Part B cover? Part B covers your doctor’s services or outpatient hospital care and
some other services not covered by Part A, such as physical and occupational therapists, and
some home health care. Note: Part B does not cover routine physical exams.
Also covered by Part B are these important services for women:
• Annual mammograms for individuals age 40 or older;
• Pap smears;
• Pneumococcal vaccines;
• Hepatitis B vaccines for high-risk individuals;
• Pelvic and breast cancer screenings every three years for women, or annually for highrisk
women or women with a relevant medical history, exclusive of any Medicare
deductible;
• Colorectal cancer screening;
• Bone density measurements for women at risk for osteoporosis;
• Self-management training for individuals with diabetes.
What does Part B cost? If you decide to participate in Part B, you will be required to pay a Part
B premium each month. As of 2007, beneficiaries with higher incomes ($80,000 and over for
individuals, $160,000 and over for married couples) pay a higher premium based on a sliding
scale. This premium is adjusted based on the cost of living and typically increases each year.

You also have to pay a deductible amount each year before Part B starts to pay. This deductible
amount increases each year by the same percentage as the premium.
There is a penalty for signing up for Medicare Part B after you turn 65. The cost of Part B may
go up 10 percent for each 12-month period that you could have had Part B but did not sign up for
it. You will have to pay this extra 10 percent for the rest of your life. Don’t let the sign-up date
slip by. Note: There are some exceptions if you are still working and covered by an employer
health plan.

Medicare Part A (Hospital Insurance)

What is it? Medicare Part A helps pay for your inpatient care in a hospital and provides limited
coverage for care and rehabilitation immediately after you get out of the hospital in a skilled
nursing facility and in your home. Many people mistakenly assume that Medicare will provide
for their long-term care. It will not.
What does Part A cover? In addition to inpatient hospital stays, Part A covers skilled nursing
facilities that provide skilled nursing and rehabilitation, hospice care, psychiatric inpatient care,
and some home health care such as physical therapy ordered by a doctor. However, these afterhospital
services have very strict qualifying rules and are time sensitive.
Skilled Nursing Facility: While Medicare Part A does not cover typical nursing
home care, it does cover care in a skilled nursing facility. However, coverage is
limited to a maximum of 100 days per benefit period, with coinsurance payments
required after day 20.
Home Health Care: Medicare may provide “necessary and/or intermittent”
skilled nursing care, home health aids, physical therapy, and occupational therapy
that are ordered by a doctor and provided by a Medicare-certified home care
agency. Medicare may also provide for durable medical equipment for use at
home—things like a wheelchair or walker.
Hospice Care: Medicare provides home health and other services, as well as
drugs for pain relief and respite care for people with less than six months to live.
Lifetime Reserve Days: If a person is in the hospital for more than 90 days,
Medicare provides a total of 60 “reserve” days that can be used over a lifetime.

For each reserve day, Medicare pays all costs except for
the coinsurance.
What is not covered by Part A? Medicare does not cover care that is or becomes primarily custodial. In other words, if you have a chronic disabling condition or disease and need assistance with eating, dressing, using the bathroom, moving from the bed to a chair, or bathing (called “activities of daily living”), Medicare benefits will not cover that assistance for an extended period of time. Simply put, Medicare does not cover long-term care in a nursing home, assisted living facility, or your own home.
What does Part A cost? There is no premium for Part A if you or your spouse worked and paid FICA taxes for 10 years or more (i.e., have 40 quarters of Social Security coverage). If you don’t qualify for free coverage, you may be able to buy into the program. If your resources and income are limited, you may qualify for help from your state.
There are deductibles and coinsurance requirements for different types of covered care. For example, if you are in a skilled nursing facility, your first 20 days of each benefits period are free, but days 21-100 are $124 per day. The rules vary by number of days, benefit period, and type of care. For more information about the Medicare Part A rules and requirements, visit www.medicare.gov or call (800)-Medicare. You may also find Medicare information at www.socialsecurity.gov or by calling (800) 772-1213 or TTY (877) 486-2048.

. Medicare Parts A through D

Today more than 20 million older women rely on Medicare, the federal government program that provides a base of health insurance for those ages 65 and older. Understanding what each part of Medicare provides and how the parts interact will help you decide what you need to provide for yourself. People over age 65 generally get their health care one of two ways: Original Medicare or Medicare Advantage Plans (see chart).

Typically, you are eligible for Medicare at age 65 if you or your spouse paid Medicare payroll taxes while in the paid labor force. If you are divorced, and were married for more than 10 years, you may qualify for Medicare benefits based on your former spouse’s work record. For more information on who qualifies, go to Frequently Asked Questions at www.ssa.gov.

Chapter Five: Prescription for Your Health Care Future: What You Need for a Healthy, Worry-Free Future

By E. Lisa Wendt mediarelations@lifesecureltc.com 

http://www.yourlifesecure.com/ 

An apple a day is a great idea, but eventually, we won’t be able to keep the doctor away. It is a fact of life that as we age, even if we are healthy, to stay healthy we may need preventive medicine like high blood-pressure pills or screening tests such as mammograms. And as we continue to get older, we may need a hospital, nursing home or extra care so we can stay in our own homes. While most of us are aware of the need to plan for our financial futures, it is a good bet that many of us have not even thought about our future health care needs. Planning for health care is especially important for women because women live longer than men and spend twice as many years with some kind of disability. To help you plan for your health care future, this chapter first outlines the Medicare programs (Parts A through D) that are currently available for older women. It also provides a brief description of Medicaid, the government health care program for those with low or no income or assets. It then describes Medigap and long-term care, two additional kinds of insurance that you may want to purchase for yourself. Remember, an apple a day may keep the doctor away for a while, but planning for your health care future today will help to ensure that you can enjoy being an older woman, worry-free, tomorrow.

References

Beedon, Laurel. Social Security: Basic Data. Fact Sheet. AARP Public Policy Institute. April
2005.
Social Security Administration Web site, www.ssa.gov.
Social Security Administration. Facts & Figures about Social Security, 2006. Released
September 2006. http://www.ssa.gov/policy/docs/chartbooks/fast_facts/2006/
Women’s Institute for a Secure Retirement Web site, www.wiserwomen.org.
Women’s Institute for a Secure Retirement. Social Security and Divorce: What You Need to
Know. Fact Sheet. Social Security section on www.wiserwomen.org.
Women’s Institute for a Secure Retirement. Social Security: What Every Woman Needs to Know.
Fact Sheet. Social Security section on www.wiserwomen.org.
Women’s Institute for a Secure Retirement. Your Future Paycheck: What Women Need to Know
About Pay, Social Security, Pensions, Savings and Investments. May 2002.

A Woman’s Social Security Checklist

􀀀 Review your yearly benefit estimate to find out what you’re eligible for at different points in time. To request a free estimate or to apply for benefits, go to www.ssa.gov or call 1(800)772-1213.

 􀀀 Understand that if you divorce, you will only be eligible for spousal benefits if your marriage lasted at least 10 years and you remain unmarried. Read more about Social Security and divorce online at www.ssa.gov. 􀀀 If you’re married, review your husband’s annual benefits estimate together. The longer your husband works, the higher your benefits will be. 

􀀀 Save as much as you can, and get help making investment decisions if you need it. Social Security is not supposed to be your only source of retirement income, so don’t rely on it that way. For help figuring out how much you’ll need in retirement, use the free retirement planning calculator at www.wiserwomen.org. 

􀀀 When planning for your retirement, factor in the taxes you’ll have to pay on your benefit if you make above the earnings limit. You can estimate your taxes at www.ssa.gov, under Retirement Planner. 

􀀀 If you decide to apply for benefits later than age 65, you still have to call and apply for Medicare benefits three months before your 65th birthday. Call (800) 772-1213.

 􀀀 Pay attention to the Social Security reform debate! We owe it to each other to rally in support of this program that protects so many women from poverty as they age.

#6: How to Apply for Social Security Benefits

When you are eligible to begin receiving Social Security benefits, you will need to apply for them. They don’t start up automatically. The application process is pretty easy. You can call (800) 772-1213 or apply online at www.ssa.gov (if you aren’t applying for survivors benefits). Or you can call the 800 number to set up an appointment to apply in person at your local Social Security office. You may need several documents within reach when you apply, such as your:

• Social Security card
• Birth certificate
• Military discharge papers if you served in the military
• Proof of citizenship or legal status if you weren’t born in the United States
• Most recent W-2 tax form
• Bank name and account number, so your check can be directly deposited into your account each month.

If you are applying for benefits based on your spouse’s earnings, you’ll need his birth certificate and Social Security number, as well as your marriage certificate.

#5: How Social Security Benefits Are Taxed

You might not realize that your Social Security benefits may be counted as taxable income in retirement. The IRS looks at your “combined income” to figure this out. “Combined income” is your adjusted gross income, plus non-taxable interest, plus one half of your Social Security benefits.

If you are married and file a separate return, you will probably pay taxes on your benefits.

#4: How to Find Out What Your Benefits Will Be

Each year, the Social Security Administration sends out benefit estimate statements to workers age 25 or older. You should get it about three months before your birthday. The statement tells you what benefits you can expect to receive at retirement. It also contains your earnings record, 36 your name, and your date of birth. If any of this information is wrong, you might not get the full benefits you have earned. Check your statement each time you receive it for inaccuracies. If you don’t want to wait for your yearly statement, you can order a free statement anytime. Go to the Social Security Administration’s Web site, www.ssa.gov, or call (800) 772-1213. In addition to providing an estimate of your full retirement benefits, the Social Security statement will also provide an estimate of the monthly benefit you would be eligible for at early retirement—age 62—and if you wait until age 70. The statement also estimates the monthly benefit you could be eligible for if you qualify for disability benefits. If you are married, take a look at your husband’s statement, too. It has important information about what survivor benefits you and your children could be eligible for.

How Work Affects Your Benefits

If you plan on receiving your Social Security benefits beginning at age 62 and think you may continue to work while receiving them, your earnings could reduce your benefits. If you earn above a set limit, you lose one dollar in Social Security benefits for every two dollars over the limit. The limit changes with the cost of living, but in 2007 it is $12,960. Let’s look at an example of how this plays out: 

Lynn turned 62 in January and signed up for Social Security early retirement benefits. She began receiving $800 a month. 

However, Lynn kept on working, and her total income from her job will be $20,480 this year. This puts Lynn over the $12,960 earnings limit by $7,500. She loses one dollar for every two dollars over the limit, so in her case Lynn will lose $3,750 in benefits this year. This drops her monthly benefit down to $490 from $800. In the year you reach full retirement age, your benefit will be cut by one dollar for every three dollars over the earnings limit. But in the years after that, your benefit is no longer reduced due to earnings. If you start collecting benefits and continue to work beyond full retirement age, your benefit may be higher in the future. Additionally, if your latest years of earnings turn out to be among your highest, your benefits will be adjusted upward to reflect those higher earning years.

#3: When You Can Get Benefits - IV

Some people decide to continue working full-time beyond their full retirement age and delay receiving Social Security. If you decide to do this, you can increase your benefit amount two ways: 

• Your benefit is increased by a certain percentage for each month that you do not take benefits from the time you reach full retirement age until either you start taking benefits or you reach age 70. This increase is called a delayed retirement credit (DRC). 

• Each additional year you work adds another year of credits. Higher lifetime earnings or additional earnings may result in higher benefits when you do retire and take benefits. For millions of women who rely heavily on Social Security income, the monthly benefit amount can mean the difference between making ends meet and sliding into poverty. Your own personal situation should guide you in your decision on when to begin receiving benefits. Ask yourself these questions: 

• Can you count on a pension, income from retirement savings, or other income during retirement? 

• Are you healthy enough to continue working? • Is the difference between the benefit amounts at different ages significant given your situation? For most people in good health, it’s better to wait at least until full retirement age. If you’re like Jennifer, you might want to consider delaying your Social Security benefits for a year or more after you reach full retirement age. Jennifer’s benefit will go up by more than $900 a month if she holds off retiring until age 70. If you decide to delay your Social Security benefit, you still have to sign up for Medicare health insurance three months before you turn 65. Call (800) 772-1213 to set up a phone appointment or to request an in-person meeting at your local Social Security office.

#3: When You Can Get Benefits - III

Friends or even financial professionals may advise you to start taking benefits as early as you can, figuring the more years you receive a benefit, the more money you get from the system over time. The catch is that early retirees receive a reduced monthly payment. Take a look at this example:

#3: When You Can Get Benefits - II

Here’s a breakdown of when you can begin receiving Social Security benefits based on the type of benefit you are eligible for:

#3: When You Can Get Benefits - I

You can start receiving your own full retired worker benefit beginning somewhere between the ages of 65 and 67, depending on when you were born.

Spousal Benefits - II

If you are divorced and your former husband worked long enough to earn a Social Security retirement benefit, then you may be eligible for a survivor’s benefit if your marriage lasted at least 10 years and you are at least age 60 (50 if you are disabled). If you have been receiving benefits as a survivor and reach retirement age, you can switch to your own retired worker benefit if it is larger. In many cases, you can begin receiving retirement benefits based on your own work history at age 62 and then switch to the higher spousal benefit when you reach full retirement age. 

Many women face a harsh reality during their retirement years when their spouses die. Until then, a woman receives half of her husband’s retirement benefit as a spousal benefit, and her husband collects his own retirement benefit. When the husband dies, the wife begins receiving her husband’s benefit, but the spousal benefit goes away. It’s important to recognize this and plan ahead by saving more or purchasing an annuity to help lessen the financial impact of this drop in monthly income.

Spousal Benefits - I

If a married or divorced woman earns a benefit that is less than 50 percent of the amount her spousal benefit would be, or if she has no benefit from her own work years, she is eligible for a spousal benefit. This benefit is generally equal to half of her husband’s (or former husband’s) worker benefit. Until recently, the spousal benefit was the most common type of benefit received by older women. 

A divorced woman is eligible for spousal benefits only if her marriage lasted at least 10 years, she remains unmarried, and is at least age 62. This benefit has no effect on the benefits of a divorced woman’s former husband or his current spouse if he remarries. If you have earned benefits through your own work history as well as through spousal eligibility, you are considered to be “dually entitled.” But this doesn’t mean you get both benefits added together. If you qualify for more than one benefit, you will receive the benefit amount that is higher.

 Survivors Benefits If your spouse dies and he worked long enough to earn a Social Security retirement benefit, then you and your young children may be eligible for “survivors” benefits. If you don’t have children under age 16, you can collect:

• A survivors benefit at your full retirement age (your husband’s full retirement
benefit);
• A reduced benefit beginning at age 60; or
• A benefit beginning at age 50 if you are disabled.

Retired Worker Benefits

In theory, Social Security is set up to pay the same retired worker benefits to women and men with exactly the same work histories and earnings. But the reality is that women don’t typically have the same work histories and earnings as men, so their retired worker benefits are usually lower. Women have fewer work years that count toward Social Security benefits because they tend to move in and out of the workforce due to family caregiving responsibilities. That said, many women are eligible for a retired worker benefit based on their own work histories. Back in the 1940s, women made up only 12 percent of Social Security beneficiaries receiving a retired worker benefit. Today, 49 percent of retired worker beneficiaries are women—underlining the remarkable growth of women in the labor force over the decades. However, women often work fewer than the 35 years the full benefit is based on. As noted before, a zero is entered into the benefit calculation for each year under 35, which reduces the benefit amount. Women retiring today average 13 years of zeroes. All of this adds up to a major gender gap in retirement benefits. The average benefit for retired women workers in 2005 was $867 a month, compared to the average retired worker benefit for men of $1,130. This is a difference of $263 a month.

#2: The Types of Retirement Benefits Available

A woman is generally eligible for one of three types of benefits: her own retired worker benefit based on her work history; a spousal benefit based on her husband’s (or former husband’s) benefit; or a survivor benefit.

1 How You Earn Benefits

You are eligible for a Social Security retirement benefit once you have earned 40 credits, which for most people is after they have worked and contributed to the system for 10 years. Ultimately, your benefit is based on your earnings over 40 work years. For each year you don’t work in that 40-year period, a zero is entered into the calculation. The lowest five years of your earnings are dropped, and retirement benefit amounts are based on your income averaged over 35 years. Since Social Security first arrived on the scene (more than 70 years ago) millions of women have not qualified for their own benefit as retired workers because they didn’t work enough years. For women who have qualified, their benefits have been low due to the number of years they spent out of the workforce (for example, raising a family or taking care of parents or in-laws) and because women generally earn lower wages. In these cases, Social Security has provided a “spousal benefit” to married and certain divorced women based on their husbands’ work histories. The next section covers spousal benefits in detail.

Chapter Four: Six Things You Need to Know about Social Security

Most workers—about 96 percent of us these days—pay into the Social Security system through federal payroll or self-employment taxes. In return, we receive an income benefit when we retire. Social Security benefits rise with the cost of living, so inflation doesn’t shrink their value. Once you begin receiving retirement benefits, you will get them as long as you live, even if (and here’s hoping) you’re still around at age 110. (Social Security is also a disability program and a family support program if the breadwinner dies or becomes disabled. But in this chapter we’ll only be discussing the role it plays in providing retirement income benefits for older Americans.) After reading this chapter, you’ll know:

1. How you earn benefits
2. The types of benefits available
3. When they’re available
4. How much you qualify for
5. How taxes affect your benefit
6. How to apply for your benefits

Why is it important for you to know these six things? Because Social Security is the first line of defense against poverty for millions of women. Without Social Security, more than half of the older women alive today would be poor. These women are our grandmothers and mothers, our aunts, and our neighbors. And eventually, we could be those women. Consider knowing these six things about Social Security as your line of defense against poverty in retirement.

Conclusion

In the end, how well your money works for you depends on your understanding of the fundamentals. Knowing, for example, to focus on fees and avoid sales commissions will improve your returns. Understanding the risks that come with different types of investments can help you invest in a way that makes sense for your time horizon and the amount of risk you are willing to take. No one ever said that understanding stocks, bonds and investing is easy, but it also isn’t as hard as a lot of people think. Knowledge is power, and you now have the power to take control of your financial future. So—go forth and invest!

Finding Good Advice

Many people discuss their investment choices with a financial advisor. Keep in mind that there are numerous types of advisors and many have vested interests. Stockbrokers and bank employees usually earn a commission if they sell you certain types of investment products, even if these products might not be the absolute best fit for your needs. Financial planners usually charge a fee—this is often a small percentage of your portfolio’s value, much like the expense ratio that mutual funds charge. Sometimes, however, a planner will ask you to pay a fixed sum of money for a certain service, or will charge an hourly rate. In general, advisors who work on a “fee-only” basis have fewer conflicts of interest. This doesn’t mean advisors who charge commissions are bad; it’s just something you should be aware of. If you decide to go it on your own, you can narrow your choice of funds with an online “screener.” This is a computer tool that researches funds based on criteria you set and produces a list based on those criteria. Many Web sites host free screening tools. For example, you could search for growth funds with no loads and an expense rate no higher than one percent. If the list is too long, add more criteria to narrow it down.

Diversification Is Key

It all depends on the amount of risk you’re willing to live with and the amount of investment income you need to live on in retirement. For example, if you have many years left to let your money build up before you retire, and if you’re willing to take a chance, you may want to put a bigger percentage of your money in stocks or other investments that offer relatively high rewards at higher levels of risk. On the other hand, if you expect to retire in a few years and you don’t want to risk losing any savings, you’ll probably want to keep a good portion of your money in safer investments like bond funds. Your money won’t grow as fast as it would if you put everything into stock funds, but you don’t want to risk your hard-earned nest egg when you’re so close to your goal. The other factor to consider is how much risk you can stomach. Remember, small company stocks tend to be riskier on average than blue-chip stocks. Finding Good Advice Many people discuss their investment choices with a financial

How Do You Choose?

With thousands of mutual funds—investing in stocks or bonds—currently on the market, you can find yourself dragged down by the sheer number of investment choices available. Even the experts have a hard time agreeing on which funds the typical person should buy. We’ve already seen that in the long run, fees are the critical factor. The big question is what funds are right for you?

The Big Secret of Bond Funds: Fees Matter More

Research has proven that the skill of a bond fund manager is a less reliable predictor of future performance than one simple fact: how much his or her fund charges. This is true for many of the same reasons that we’ve covered with stock funds, but added factors make it even more important when we’re dealing with bond funds. All other things being equal, stick with bond funds that charge the lowest fees you can find.

What Are the Different Kinds of Bond Funds?

As with stock funds, fund companies have created bond funds tailored to suit many different investment interests and tax brackets. Some concentrate on bonds issued by low-risk borrowers with rock-solid credit to provide a relatively low but steady income. Others take a chance on somewhat shakier issuers (again, junk bond funds come to mind here) and hope that the high yields will make up for any defaults. Some bond funds take a long-term approach, while others will only look at short-term debt. Most bond funds invest in government or corporate bonds; these funds are also called “taxable” bond funds. Some invest only in state and local government bonds (which, remember, are generally not a wise investment for investors in low tax brackets). 

Just as it is essential to consider expenses and fees when investing in stock funds, it’s just as important to do so when evaluating bond funds. The average taxable bond fund charges an expense ratio of 1.1 percent; this can be a very high cost relative to the return you receive, particularly in an environment where interest rates are low. In contrast, the best bond index funds (bond funds that attempt to invest in broad market indices representing all bonds) often charge less than 0.2 percent a year.

What Is a Bond Mutual Fund?

Since most types of corporate and government bonds (with the exception of savings bonds) carry a price tag of $1,000 or more per bond, it can be hard for the average person to put together a truly diversified bond portfolio. 

The sheer variety of bonds available also makes it difficult to choose which ones are best for you. Should you buy a one-year bond or a 30-year bond with your $1,000? Should you buy it from the government or a corporate issuer? 

And if the bond is from a corporate issuer, which one should you choose? Many mutual funds invest in bonds. Just as bonds are less risky than stocks, bond mutual funds tend to be less risky than stock mutual funds, but pay generally lower returns. 

There are exceptions. Junk bond funds, for example, can be as risky as many stock funds. It is critical to understand one thing: Unlike an individual bond that you can hold until maturity, a pool of bonds has no maturity date. With a bond fund, there’s no guarantee that as of a given date, you will receive your investment back. If the fund managers make bad trades, you could end up losing a lot of money.

Buying Individual Bonds

If you have more money to invest and can stomach a little more risk in order to get a higher return, there are a few things you need to consider. 

The government sells marketable securities, known as Treasury bills, notes, bonds, and TIPS (Treasury Inflation-Protected Securities), with maturities ranging from one month to 30 years. Treasury securities are considered among the safest in the world in terms of default risk, but tend to pay a slightly higher coupon rate compared to savings bonds or I Bonds. You can buy these in $1,000 increments from the government’s TreasuryDirect.gov Web site. You can buy them from a broker as well (see below), but it’s cheaper to get them direct from the source. To tempt investors away from the relative safety of Treasury bonds, other issuers have to offer higher coupon rates—and the riskier the issuer, the higher the rate. 

For example, agencies like the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) issue bonds that aren’t officially backed by the U.S. Treasury, and so carry a higher coupon rate. State and local governments also issue bonds to fund various projects, again with a somewhat higher risk of default. 

Most of these bonds also carry lower coupon rates than federal government bonds, however the interest on these bonds is generally exempt from federal income taxes and (in some cases) from state and local income taxes as well, which makes them more desirable to investors in high tax brackets. Generally, these bonds are not a wise choice for lower-income investors. It is important to compare returns on an after-tax basis. 

Corporations and foreign governments also issue bonds. Much like people, different companies, countries, and government issuers have different credit ratings that gauge the likelihood that they’ll be able to meet their debt obligations. In general, the better the credit rating, the lower the risk of something going wrong—and usually, the lower the coupon rate will be. 

You can buy corporate bonds from a broker, usually in $1,000 chunks, but it can get very expensive, especially if you’re only buying a few bonds at a time. Bonds purchased through brokers often include a mark-up in price that is imbedded in the transaction cost. Every broker has different rules and charges different fees; in general, expect to pay a minimum of $20 to $50 or more, depending on how many bonds you’re buying. The added cost of purchase reduces the effective yield you receive on the bond.

Savings Bonds: Super-Safe Alternatives

If you want to get into bonds for a relatively small amount of money, the government still sells traditional U.S. savings bonds (now called EE Bonds). Savings bonds are extremely safe, but the trade-off is that they pay a fairly low interest rate, currently 3.6 percent. The minimum you need to invest in EE Bonds is $25. They’re available in increments of $25 from banks, or in any amount of $25 or more (up to the annual purchase limit set by the Treasury) from www.TreasuryDirect.gov. All EE Bonds will pay monthly interest for up to 30 years, but unlike Treasury bonds, you won’t be getting a check every six months—you need to cash them in (also called redeeming them) to get the money. You can redeem these bonds at any time after one year, but beware: If you cash in a savings bond before five years, you’ll have to pay a penalty of three months’ worth of interest. Another type of savings bond that anyone can buy is Series I savings bonds—I Bonds, which are like traditional savings bonds with an extra shield against inflation. In late 2006, I Bonds paid 1.4 percent in interest above inflation, which the government re-measures every six months before announcing the new rate. If the official rate of inflation comes in at 3.1 percent (for example), new I Bonds would yield that amount plus 1.4 percent, or 4.5 percent. Unlike EE Bonds, I Bonds are sold at face value and accumulate interest over time. You can start buying I Bonds with as little as a $50 initial investment from a bank or as little as $25 through the TreasuryDirect program. They can be cashed in any time after a year, up to 30 years after you buy them. As with EE Bonds, there’s a three-month interest penalty if you cash them in before five years. Savings bonds are non-marketable, meaning that they cannot be sold in the secondary bond market. They can only be redeemed for their current value from the Treasury or a Treasury agent (which includes most financial institutions).

How Can You Invest in Bonds Wisely?

It’s generally considered a good idea to invest at least some of your retirement money in bonds. After all, bonds can provide steady income while helping to protect your principal from potential losses. However, the range of options available can be confusing.

The Risks of Bonds

One of the main risks of a bond is the possibility that financial trouble could make the bond’s issuer unable to pay the interest or even give you back your principal as originally agreed. The issuer may even declare bankruptcy. If this happens, the issuer defaults on the debt it owes you, which can make it difficult or impossible to get all of your money back. Different issuers carry different risks. The highestquality bond issuer is the U.S. government. 

A superior credit rating makes Treasury bonds the safest investment in the world when it comes to default risk. Corporations, in contrast to government issuers, must depend on their revenues to repay their debt, which means that strong and large corporations will generally be considered better bond credit risks than smaller, less profitable companies. 

Some low-quality issuers can only offer what are called high-yield or junk bonds, which can provide high rates of interest, but also carry the risk of paying nothing at all if the issuer defaults. Bond investors are also affected by inflation. The problem here is that the interest rate bonds pay is locked in when you buy them, so if everyday prices go up too fast before the bond matures, the money you get back won’t go as far as it did when you bought the bond in the first place. Say you buy a $1,000 bond with a term of one year and a five percent coupon rate. 

When the bond matures, you’ll have earned $50 in interest. Unfortunately, if the price of everything climbs three percent during those 12 months, your $50 only has the buying power of $48.50 in next year’s dollars (this “after-inflation” value of an investment is called its real return). Furthermore, when you get your $1,000 back, its buying power will have shrunk also. You haven’t technically lost principal, but you haven’t done quite as well as it might look on paper. And if you depend on income from your bonds to pay your living expenses, you could have to cut back if faced with rising inflation. Inflation forecasts are always changing as the market receives new information about the way prices are going. 

The quality of a bond can also change if something happens to make the issuer more or less able to pay its debts. New bonds are always being issued at whatever interest rate people are willing to accept in return for the loan of their money, and old bonds are always changing hands as investors look for a better deal.

How Bonds Make (and Lose) Money

Bonds are generally considered less risky than stocks for a number of reasons, but they aren’t a risk-free place to invest your money. When you own an individual bond, you generally have two choices: You can buy it and hold it until it matures, or you can sell it for a profit (or a loss). Sometimes investors decide to sell a bond before it matures. Perhaps they’ve found a better place to put their investment, or maybe they simply want (or need) to get their money. In this case, they may have to take a loss if they can’t find a buyer willing to pay face value to buy the bond. 

Of course, this process also works in reverse. If enough people want to buy your bond—because its coupon rate is higher than prevailing rates on similar types of bonds—you can sell it for more than its face value and collect a profit. This sort of active trading approach to bonds can be risky, however, and is best left to the experts. If you follow the news from the bond market, you’ll probably hear a lot of talk about how the “yields” on various types of bonds are changing from day to day. 

The current yield is simply a way to express as a percentage the interest rate a bond would actually pay if you bought it at the current market price, as opposed to the coupon rate it offered people who bought it at face value when it was first issued. As an example, take a $1,000 bond with a coupon rate of five percent. No matter what price it trades for, it will still pay five percent of its original value, or $50 in interest a year. If, for any reason, demand for that bond increases to the point where people are paying $1,100 for it, those people would receive a current yield of that $50 interest payment divided by the current market price ($1,100), or about 4.5 percent.

Bonds 101

If a share of stock represents ownership in a company and its profits, a bond is basically a temporary loan that you make to a company, the US Treasury, or a local government entity. Bonds are created when an organization (called the issuer) decides that it wants to borrow a certain sum of money from investors. As with any other loan, the issuer promises to pay the money back after a fixed period of time (a term) and agrees to pay the investors a fixed interest rate as well. 

This rate of interest, expressed as an annual percentage, is called the coupon rate. The total amount of debt that the issuer is taking on is then divided up into smaller chunks, each representing a fixed dollar amount of the money being borrowed (the face value) and sold to investors. These are the bonds. 

At the end of the term, a bond matures and the issuer repays the original money borrowed. However, because you can buy or sell bonds like shares of stock, the person holding the bond at maturity may not be the original buyer. In the meantime, the issuer keeps making interest payments to the current bond owners.

The Big Secret of Stock Investing: Fees Matter

Now that you know the stock basics, you’re ready for perhaps the most important information in this chapter: fees matter. There’s nothing magical about index funds. If the index they track goes up, the fund goes up with it, and you make money. If the index goes down, the fund goes down, and you lose money. Actively-managed funds tend to be a lot more expensive than index funds, and these added costs take a bite out of the money that these funds can make for you. Every mutual fund company charges its investors an annual fee in order to cover its costs, pay its managers and other employees, and make a profit. This fee, called the expense ratio, varies widely from fund to fund, but is always a percentage of the money you have in a particular fund. For example, if you have $1,000 invested in a fund that carries an expense ratio of 1.83 percent, the fund company will automatically deduct $18.30 from your account. In late 2006, the average actively-managed stock mutual fund carried an expense ratio of 1.49 percent, or $14.90 on every $1,000 you invest. On the other hand, you can find index funds that charge as little as 0.07 percent, or 70 cents on every $1,000. While performance will vary from fund to fund and from year to year, this fee gap means that, everything else being equal, your actively-managed fund has to beat the index fund by an extra 1.42 percent every year just to break even. Over the long haul, there aren’t too many active managers who can do that. If you invested $1,000 in an index fund and your friend invested the same amount in an activelymanaged fund—both returning the same eight percent per year—after 10 years, you’d have $266 more than your friend because the average managed fund costs so much more than the index fund. Go back to 20 years ago, and you’d be ahead by $1,071 today. Whether you choose an index fund or an actively-managed fund, focus on lower fees. Many mutual fund companies also make investors pay an added fee called a load. There are several types of loads, but they all boil down to a sales charge or commission—again, a percentage of your investment—that you pay either to buy into a fund or sell your shares. There’s no evidence that funds that charge a load do any better over the long run than those that don’t, so you should definitely avoid the added fees whenever you can. There are over 2,000 noload funds to choose from.

What Is a Stock Mutual Fund?

Unless you are willing to bet on individual stocks, funds are probably the way to go. Stock mutual funds will invest in individual stocks for you, while spreading your risk. You can still lose money, but it’s generally less risky than choosing a single company’s stock. It would be hard to find two stock funds that are exactly alike. Large-cap funds invest in only the biggest companies (generally, these companies are worth tens or even hundreds of billions of dollars) while small-cap funds focus on smaller ones. 

Mid-cap funds, naturally enough, fall somewhere in the middle. International funds invest in foreign stocks; some concentrate on just a specific country. There’s a whole group of emerging markets funds that invest in stocks from countries that have yet to develop their economies to the extent of areas like the United States, Japan or Western Europe. Specialized sector funds focus on a particular industry, like technology or health care. Every stock fund has its own investment approach and its own balance of risk to potential returns. However, the main distinction you need to know is between actively-managed funds and their passively-managed (or index) counterparts. 

As their name implies, actively managed funds are run by people who take an active hand in managing their investments. These managers are constantly making decisions about which stocks to buy, which ones to sell and which ones to hang onto. 

When you invest your money in one of these funds, you’re really betting on the managers’ ability to buy the right stocks. Index funds are considered “passive” because their managers simply buy the stocks that make up a specific market index, like the S&P 500. They don’t make any active decisions on which stocks to own, and so they don’t have the costs of actively-managed funds for things like research or high-powered investment advice. This translates into savings for you in terms of lower overall fees over the long run. Even the best active manager can have a bad year, and there’s no guarantee that you’ll be able to pick the best manager. Over the long haul, research shows that you would generally be better off investing in index funds that follow the stock market as a whole.

What Are Mutual Funds?

A mutual fund is a financial product that combines the money of many individuals like you. The company that operates the fund collects the money and keeps track of how much each person puts into the pot. Professional investors called fund managers determine what to buy with the money to deliver the best returns they can find, depending on the type of mutual fund. Some funds concentrate on various types of stock, while others hold bonds (more on those in a moment). Because most mutual funds bring together tens or even hundreds of millions of dollars, fund managers have the money to spread out among many investments such as different stocks, for example. This is an advantage because it means that as an investor in the fund, you own a small slice of each of those stocks—possibly as little as a fraction of a share, but still some real amount worth a certain amount of money. In other words, by dividing your savings into all of these small investments, mutual funds let you diversify and reduce the risk that you’ll lose big if one of those stocks melts down

How Can You Invest in Stocks Wisely?

Now that you have an overview of what stocks are and understand some of the factors that make their prices move, it’s time to start talking about how you can invest in them. In general, most individual investors should avoid owning individual stocks, because if you bet most of your money on the health of a single company, you become vulnerable if something goes wrong with that company

The Dow Wilshire 5000

index is even more extensive, covering a large percentage of the stocks traded on the major exchanges. Despite its name, the Dow Wilshire 5000 is actually made up of approximately 6,700 stocks, drawn from a wide range of small, medium, and large companies. Its goal is to track practically every publicly traded stock, so it is often called the “total” market index.

The Russell 3000

brings together 3,000 stocks that account for about 92 percent of the value of the entire stock market. They trade on both the NASDAQ and The New York Stock Exchange (NYSE).

The Nasdaq Composite Index (Nasdaq)

contains about 3,100 of the more than 4,000 stocks that are bought and sold on the electronic NASDAQ network. This is the index that included many of the most famous (and infamous) high-tech and Internet companies of the late 1990s There are more indexes than the “big three” that offer investors options.

The Standard & Poor’s Index of 500 Stocks (S&P 500)

provides a wider sample of the market. When this index was created back in 1957, those 500 companies accounted for about 80 percent of the total value of all American stocks, and even today, this index provides a fairly accurate look at what’s driving the stock market as a whole.

The Dow Jones Industrial Average (the “Dow”) is

is the oldest and most famous index. It is an average of the stock prices of 30 of the largest companies, each hand-picked by the editors of the company (Dow Jones) that publishes The Wall Street Journal. These are McDonald’s, Disney, Microsoft, and other household names—big stocks like these are called blue chips. Since 30 stocks is only a small sample of the very biggest multi-billion-dollar companies, the Dow doesn’t always provide an especially accurate reading of where the entire market is going.

What Are the Dow, S&P, and NASDAQ?

There are about 15,000 U.S. stocks that change hands every day, but not even Wall Street professionals can keep constant track of them all. Instead, people talk about the performance of the “stock market” as a whole, and Wall Street has developed some gauges to give investors a clearer perspective on where “the market” is moving. These are the various averages or indices that people make such a big deal about when they talk about financial markets. Think of them as thermometers, except instead of measuring temperature, they tell you whether the stock market is heating up or cooling down.

How Do Stocks Make (and Lose) Money?

When you own stock, you don’t get interest like you would earn if you kept your money in a savings account, but certain companies do pay dividends to every shareholder. 

Dividends are the way companies distribute their profits to the investors who own them and are entitled to share in their success. The amount paid per share tends to change as the company’s profits rise and fall. This is one reason why investors watch those quarterly earnings reports so closely. Depending on the company, dividends can be paid every quarter, once a year, or whenever the board of directors decides to distribute the profits. Old or conservative companies like banks and utilities generally pay dividends because they no longer need to use their profits to grow or improve their operations—they’ve gotten about as big as they’re going to get, so they might as well share the profits. Younger companies in more innovative industries like computer technology or drug research tend to skip the dividend payment and plow those profits back into their research or marketing budgets. 

When these growth-dependent companies ruled the market back in the 1990s, dividends became an endangered species, but they’re making a comeback now as investors return to more triedand- true types of stocks. The other way to make money from stocks is to sell your shares for more than you paid for them. This is the old “buy low, sell high” approach that you’ve probably heard about. It sounds easy in theory, but it’s hard to achieve consistently because nobody really knows in advance the perfect time to buy or sell. Most advisors believe that the average person is better served by simply buying quality investments (of any type) at a reasonable price and then holding onto them until she needs the money to fund retirement or for some other purpose. Of course, what counts as a “reasonable” price depends on your investment goals and how much you’re willing to pay to achieve them. The ability of stocks to become more valuable is called capital appreciation, and your profit (or capital gain) from buying low and selling high is simply the difference between the two prices. 

Naturally, it’s possible that a stock will decline in value after you buy it, in which case you would be looking at a capital loss if and when you sell. Every company is different, and there’s no easy way to pick a winner.

What is the Difference between a Bull Market and a Bear Market?

When demand for stocks is generally rising (pushing prices higher as the number of would-be buyers climbs), we are in a bull market period. When demand for stocks falls and prices slump, we call it a bear market. Both bull and bear markets can last months, years, or even decades, but nobody has found a way to reliably predict when they will begin or end. (Sad, but true.)

Think of stock trading as organized haggling.

Someone who wants to buy a stock makes a bid of a certain amount of money per share and announces how many shares he or she wants. Meanwhile, investors who want to sell their shares are setting the asking price that would-be buyers will have to pay; this works a lot like an asking price when someone is selling a house. 

There are millions of people in the market and everyone is trying to get the best deal they can, so prices can move wildly in just a few minutes. 

Any number of factors can influence a company’s stock price, which is where the risk factor comes in. Sometimes a company or a whole industry simply becomes fashionable or falls out of favor, like Enron and many of the dot.com Internet companies did. Investors also tend to react strongly to new information (or even rumors) that lead them to believe that a stock price will move up or down. 

New information that indicates a company is doing better than expected tends to make its stock go up, while bad news can have the opposite effect as shareholders put their stock up for sale. Investors are especially sensitive to news that affects a company’s profits because a company that is making money (a profit) instead of losing money is obviously more likely to stay in business and even thrive. Every company that has publicly traded stock is required by law to report its financial performance every three months in a quarterly earnings report. This report includes an estimate of how much money the company made (or lost) per share. 

A good report can mean good news for the stock price. However, the reverse can happen as well, with stocks going down after a company reports good news (maybe it wasn’t good enough) or up after a bit of bad luck (maybe it was better than what most people expected)

Chapter Three: Understanding Stocks, Bonds, and Investing in Financial Markets

Even though there’s a pretty good chance you have some money invested in the stock market, the charts, ticker symbols, and jargon of the financial markets can leave many of us feeling like we’ve gone to another planet. TV reporters spend a lot of time talking about how well the Dow did or where Treasury yields are headed … but what does it mean? More importantly, what does it mean to you? 

This chapter can’t decode all the ins and outs of stocks and bonds, but it should help you with the fundamentals so you can make the right investment choices for your future. For many people, the stock market and discussions about bonds and mutual funds make them tune out. 

But with the decks stacked against women when it comes to preparing for their retirement, investing is one of the best ways to make your savings go a long way. Some people approach investing as if they were shopping for a car. Some are drawn to the flashy convertible. Some want the sedan with a few bells and whistles that will get them to and from work in comfort. 

And some want the sturdy old station wagon. No matter how you approach investing your retirement savings, the most important thing is to know the basics so that you can make sound financial decisions. Nobody can predict the stock and bond markets. Generally speaking, you have to accept some risk in order to have a chance to receive some reward. If anyone promises you a very high return with little or “no” risk, be skeptical. While relatively safe investments sometimes double or even triple in value in a short time, this is a matter of luck, not a sure thing. So the more knowledge you have, the better your chances are of having your retirement savings work for you for decades after you retire. 

Let’s begin with the basics facts about stocks and bonds. Stocks 101 A stock is a measure of ownership in a company. Stock is sold in units called shares, each of which represents a bit of the company. Most major companies have literally millions of shares divided up among different people and financial institutions, all of which are collectively called shareholders. 

Because investors are constantly buying and selling their shares, the price per share (the number you see quoted when you look up a stock or see a news story about it) changes every day and sometimes minute to minute, depending on how often the stock is traded.

It’s Your Tomorrow

Retirement isn’t all about calculators and special accounts. But if you spend some time setting things up ahead of time, your retirement can be so much richer. Maybe you have something luxurious in mind, like plenty of money for travel or a villa nestled in the hills. Maybe you want to spend your time on a favorite hobby, or strolling along the beach. Maybe you want to be able to help out your family. 

Or maybe you just want a paid-for house and plenty of time with the grandkids. No matter what the details, some up-front planning can help you create a retirement fund that will enable you to accomplish the most important objective: 

When the time comes, you can retire in comfort and dignity. This means having money to cover your basic needs, money for your health care, money to let you pay your own way. It can mean there will be no need to call on the charity of others, and no need to continue working longer than you are physically able. And, with a little luck, it means having money for your dreams.

How much can you save?

Do those numbers look big? They should! Once you begin to add to your savings, the effects of compound interest begin to kick in. Your savings produce interest, and that interest becomes more savings. After a while, the interest on your money is working harder than you are, pulling in interest and earning returns faster than you invest every month—all because you started saving a little at a time. Even if you don’t get it perfect—even if you don’t save the full 10 percent or you don’t set up your retirement account right away—saving something is always better than saving nothing. Every dollar you save is a dollar toward a brighter future.