The Independent Investor: Medicare Premiums and Your Income
We all know that Medicare is not free. Once we enroll in Part B and D, we start paying monthly premiums. What many consumers fail to realize is that how much you pay depends on how much you make.
For most of us, this is a moot point. We assume that we will be retiring at 65 years old (at the same time Medicare kicks in) but that assumption is no longer accurate. The reality is that Social Security, retirement, and Medicare can happen at different times in your life.
Take, for example, Social Security benefits. Every year the target date for full retirement creeps higher. It used to be 65, but now, for many, it is edging up to almost 67 over the next few years. When that occurs, workers will usually sign up for Medicare A but delay enrolling in Parts B and D until after they retire and are no longer covered by their company's health insurance program.
What most applicants don't know, until it is too late, is that your monthly Medicare premiums will be based on your last two years' annual income. But the actual logistics of that can be confusing. Here's why.
Your reported income follows a governmental processing chain where once the IRS processes your tax returns, they pass that information on to Social Security, which, in turn, feeds the data to Medicare, which then determines your premiums based on those numbers.
Let's say you are applying for Medicare B and D right now. For starters, most of us are just now filing our tax returns for 2017 (even though we are already approaching the second quarter of 2018). It will take months before the IRS gives Social Security your 2017 tax returns and even more time before that data gets to Medicare. Bottom line: there is a big-time lag between your current income and when it shows up in your Medicare premiums.
That means if you are retiring now and made less than $85,000 (as a single taxpayer or $170,000 filing jointly) in the calendar year 2016, your premiums would qualify at the base rate of $134 a month for Part B and $13 a month for Part D.
Above that income level, your premiums increase to $267.90 and $33.60, if you make over $85,000-$107,000 ($170,000-$214,000 jointly). They jump again above $133,500 or $267,000 jointly. And again, and again, until you can be paying as much as $428.60 and $74.80 per month when your income exceeds $160,000 or $320,000 jointly. If your spouse is also retired and on Medicare, then double that premium amount. For those couples making above $320,000 a year, for example, they will be paying $503.40 per month or $6,040.80 a year.
Social Security determines what you pay each year, based on your modified adjusted gross income (MAGI) as reported to the IRS. MAGI would include things like wages, dividends, rental income, capital gains and non-taxable Social Security benefits. If you earn more (or less) the following year, Social Security will adjust your monthly premiums. They call it your income-related monthly adjusted amount. That premium will be deducted from your Social Security income check or, if you are not taking Social Security yet, it will be billed to you.
Theoretically, your premiums should be adjusted every year with a lag. So, if you report a high-income number to the IRS for the two years prior to retirement, you can expect to pay a lot in Medicare premiums. What happens when your income drops, as it usually does once you retire?
You can petition for a Request for Reconsideration to reduce your Part B premium if you feel there is a compelling reason why you should not be paying a higher premium. The most common reason most petition is that income has dropped dramatically in retirement. Other reasons might include marriage, divorce or being widowed. The loss of income-producing property and changes or termination of a pension would also count.
Appeals work some of the time, but not all the time. It is a lengthy process and you still must pay your premiums while the petition makes its tortuous way through this process. It costs nothing to petition, however, and you might win in the end.
A much better approach, if you can manage it, is to reduce your income as much as possible two years prior to signing up for Medicare B and D. That is not always easy to pull off. You might reduce your hours and compensation, for example, if your employer is flexible, or, if your spouse works, and has family health coverage, you could retire, delay Medicare coverage for two years, and then apply. It comes down to what you can afford to give up now for future benefits in the years ahead.
The Independent Investor: The Economy and What Could Go Right
The markets are in a funk. Concern that Trump's tax cut will be too much, too late, has investors riled up. But there may be a flip side to this argument that bears watching.
First, the negatives, as authored by me way back when the tax cut was still being contemplated and the markets were riding high in anticipation of such. At the time, I voiced my concerns and it is worth repeating them.
Fiscal spending because of the Republican-inspired tax cut adds $1.5 trillion of stimulus to an economy that is already growing at a 3 percent clip. I bemoaned the fact that this tax cut was about eight years too late. Back then, I wrote that the fastest way to pull the economy out of recession and reduce the unemployment rate was by the passage of a massive fiscal stimulus package. The Federal Reserve Bank agreed with that strategy.
But it was the Obama years and Republicans voted down everything and anything that might have helped the economy. Instead, they argued that the deficit had to be reduced, and, in the end, they cut spending at the absolute worst time. As a result, the economy and the employment rate languished for many years.
The Fed continued to single-handedly pull the country out of recession. The economy started to finally gain momentum last year, and that growth is accelerating. At the same time, unemployment has shrunk to historically low levels, while the deficit grew anyway, despite the spending cuts.
Now that Republicans control the House, Senate and White House, they passed a tax cut, which economists say should have never been done this late in the economic cycle. This unprecedented fiscal stimulus, economists fear, will lead to too much growth. The economy will overheat, which will cause wages in a tight market to spike higher causing inflation.
This will cause the central bank to raise rates much higher than expected. In turn, these higher rates will cause the stock market to crash and the economy to fall until recession is all but inevitable. The tax cut will, contrary to GOP expectations, be the demise of both the economy and the market.
However, the flip side of this doom and gloom scenario could result in an opposite conclusion. Clearly, tax cuts increase productivity by increasing business spending on things like capital equipment, technology and the like. New equipment allows businesses to produce goods at lower costs. As such, managers can raise wages and keep their selling price the same. Why is that important?
If the end price of a company's product does not increase, inflation should not rise. Instead, you get higher economic growth, higher wages and lower costs, which results in the same end price to the consumer. It would be the best of all worlds: lower taxes, coupled with lower regulations. It is normally called "supply side" economics. We have heard little to nothing from this side of the economic argument for many years. Maybe it's time to consider the possibilities?
The Independent Investor: Is America Back in the Space Business?
If you were watching television this Thursday, you may have caught the launching of a low-orbit Spanish government-commissioned satellite launched from Vandenberg Air Force Base in California. The difference between today and 25 years ago is that it was a private company called Space X, rather than NASA, that made it happen.
For old guys like me, space exploration was a big deal while growing up. Americans my age cheered and cried as the U.S. raced for space from the tragic death of the crew of Apollo One in 1967, to the first moon walk in 1969 (and no, I don't mean Michael Jackson). The work day would be put on pause as everyone watched the latest rocket launch from Cape Canaveral. If the launch was on the weekend, the family would gather around the television to applaud our latest leap into space.
But America's interest and commitment to space waned as the years went by. The space shuttle program was expensive and the government had other wars to fight. Building new space craft required lots of new technology with no guarantee of success. And there was a limited pool of people that had the expertise in space flight operations and even less who were capable of space flight operations.
Yet, there were some among us, call them entrepreneurs, visionaries or just good businessmen, that still believed in space. But in addition, they believed that there were economic possibilities in pursuing space. People like Elon Musk (the electric car guy) who was willing to go where others feared to tread. A flood of new private money began to flow into private space projects. Rather than construct the behemoth rockets and huge space ports of yesteryear, today companies such as the Musk-owned Space X make do with a few trailers and super-thin rockets topped by large payload capacities.
In a new approach to cost savings, rocket parts are designed to be reusable (like the old space shuttles). Space X, for example, tries to save the first stage of its rockets. New technologies also allow for many of these modern rockets to land once their mission is over, which saves even more money.
Thursday's successful launch, for example, is the second time Falcon 9 is being used for space duty. It is the same rocket that was launched in 2016 on a cargo resupply mission for NASA. Its payload this time is a satellite for the Spanish government.
Space X is reported to be charging $60 million for the service, plus launching costs. There have been other cargos that commanded even more (upwards of $160 million), depending upon the amount of cargo involved. The cost to make the Falcon 9 was roughly $60 million, plus $200,000 to fuel it.
These private efforts were spurred on last year by a series of actions by the federal government and a president who has long harbored a soft spot in his heart for space. The difference this time around is that President Trump, while rededicating the U.S. to the exploration and utilization of the moon, Mars, and space in general, will rely on private companies to achieve that goal. He wants to make the U.S. "the most attractive jurisdiction in the world for private-sector investment and innovation in outer space."
Space exploration is a goal that all of us can get excited about, something that could pull us together again and provide an enormous pay-off in ways we cannot even begin to imagine. I don't care how we get there, just as long as we do. As one of my heroes once said "to infinity and beyond" – let's do it!
The Independent Investor: Time to Hedge Your Bets?
Over the last few weeks, the threat of rising inflation has triggered a great deal of concern among investors. Given that inflation has been at a low level for a number of years, their concern may be justified.
Many market pundits were surprised by the wage data in the non-farm payroll report for December, which was released two weeks ago, Friday. In that report, wages jumped far more than most expected coming in at a 2.9 percent annualized growth rate.
Given that our central bank monitors wages as one of their key indicators to gauge future inflation, that number sent the bond and stock markets into a tizzy. Again this week, investors received another inflationary surprise when the most recent Consumer Price Index (CPI) jumped 0.5 percent in January. The gains were broad-based in everything from energy to apparel.
This news was not taken too well in the bond market where the U.S. 10-year Treasury bond rose to above 2.9 percent, the highest level it has been in several years. Many economists believe that a further rise to 3 percent is inevitable. Yet, none of these numbers spell doom for the economy or even the stock market. From a historical perspective, both inflation and interest rates are still at incredibly low levels. But the markets tend to look ahead.
What, they ask, will the rate of inflation be by the end of this year or next year? Here, things get a bit dicey. You see these recent inflation numbers do not reflect the impact of the $1.5 trillion tax cut, nor the increase in the nation's deficit. Neither do they include this week's presidential announcement that an infrastructure package worth another $1 trillion is in the works.
If you add all of this spending up, in addition to an economy that is already growing at 3 percent while unemployment is at rock bottom levels, there is a danger that the economy might overheat. If this were to occur, the Fed would be forced to raise interest rates sharply. That would be bad news for stock and bond holders.
However, in a scenario where inflation expectations are rising, commodities do quite well, at least for a year or so before the Fed takes away the punch bowl by raising rates. When most investors fear inflation, they buy gold as a hedge. It has worked well through past cycles.
Looking at the price of gold over the past decade or so, gold's up cycle began back in 2002. It peaked in 2011 when the price per ounce touched $2,000. Since then, it has fallen by almost half, finally bottoming out in 2013 at around $1,200 an ounce. It has gradually creeped higher (by about $200 per ounce) in fits and starts until now. For the last year or so it has been in a trading range of $1,310-$1,370.
While we won't know whether those predicting higher inflation will prove to be correct, it might be a good idea to at least hedge your portfolio. A little gold exposure, via a precious metal fund, commodity fund, or a combination of the two, might not be a bad idea. Since
commodities are speculative, provide no interest or dividends, and are much more volatile than either stocks or bonds, buyers should beware. If you decide to hedge against inflation, I would limit exposure to no more than 2-5 percent of any portfolio.
The Independent Investor: How to Handle a Pullback
The stock market is in turmoil. Several hundred point swings in the Dow and other averages has investors on edge. The indexes are suffering 1-2 percent point swings per day. How are you dealing with it?
Over the last several months, I have written several columns preparing you for this day. I thought it might be useful to give readers a refresher course on coping. Here are some useful tips on avoiding that worst of all reactions—selling on the lows.
Number one: do not check your portfolio. The more often you do, the greater the probability that you will panic and sell. Every time you check your investments in a freefall decline like this one, you will feel terrible. The only way you can stop the pain (you will say to yourself) is to sell. Don't do it.
You see, we humans are really not built for investing. Our primal instinct when we face danger is to run. That fear and flee response has been saving our butts ever since the first sabre-tooth tiger chased us out of our caves. But putting some distance between you and that predator doesn't work very well when it comes to investing.
We are more comfortable thinking in the short term. No never mind that stocks may come back next month or next quarter, most of us can't take our eyes or our minds off what happened today and what may happen tomorrow. How many of you remember the back-to-back declines we had in the first quarter of 2016? Not many, I would wager.
For some, this is an opportunity. Given that many of us receive bonuses in the first quarter of the year, we may have some cash sitting on the sidelines. This is the kind of opportunity that most investors hope for. Baron Rothschild once said "buy when the blood is running in the streets." Now is your chance to put that money to work. Buy a little on every down draft and be patient.
But doing that takes courage and willpower. You have to fight that instinct to simply husband that cash and "wait until the market recovers," but by then it will be too late. Do it now when panicky traders are giving away stocks at great prices. There is nothing fundamentally wrong with the markets or the economy. We are simply experiencing a long-overdue correction in stock prices.
But the markets have never experienced these kinds of declines, you might say. The headlines may scream "1,000 point drop on the Dow" but they fail to remind us that the Dow has gained much more than that over the last year. By the time the dust clears, we will have discovered that the total percentage loss of the main equity indexes will be no more or less than what we normally see in corrections.
As I have written many, many times before: this too shall pass. You trusted me then, so I am asking you to trust me now. You won't be sorry you did.