Tuesday, May 13, 2008

Welcome to the Retirement Income Guide Hotline Report!

In this Issue:
 
· Don’s Outlook
· Plan for Health Care Costs in Retirement
· Question & Answer
· Subscription Help Center

Fidelity Independent Adviser Retirement Income Guide Net Model Returns
Through April 30, 2008

Don’s Outlook

Profit-taking by oil traders and some better-than-expected news from the retail sector left stocks higher on Monday, the lightest trading day on the New York Stock Exchange this year. The Dow Jones Industrial Average gained 130 points, or 1 percent, to 12,876. Alcoa, the world’s third-largest aluminum producer, was up 2.6 percent on speculation that it could be become the target of a takeover attempt by global mining giant Rio Tinto. The S&P 500 increased 15 points, or 1.1 percent, to 1,404, thanks to a rally in consumer discretionary stocks. Apple and Electronic Data Systems led the Nasdaq Composite Index to a gain of 43 points, or 1.8 percent; the tech-heavy index closed at 2,488.

Despite higher gasoline prices and the ongoing recession in the residential real estate market, the U.S. consumer has held up fairly well during the first quarter. Discounting giant Wal-Mart announced this morning that its net income for the first three months of the year increased by 6.9 percent over the same period in 2007. Wal-Mart executives remain cautious about the remainder of 2008, however, and investors bid the stock lower in early trading today. Clothing retailers TJ Maxx and Ann Taylor have also reported growth in first-quarter profit.

Given its enormous market share, many investors look to Wal-Mart for indications of changing trends among U.S. consumers. According to company executives, the “paycheck cycle” has recently become more noticeable. Receipts at many stores have been declining toward the end of the month because rent, transportation, utilities and other costs are leaving consumers with less money left over for discretionary purchases. Nevertheless, Wal-Mart executives say that consumers still have room in their budgets for discretionary spending, particularly for home entertainment products.

On Monday, oil retreated for the first time in six trading sessions on the New York Mercantile Exchange; the contract for June delivery settled at $124.23 a barrel. Although some commentators have blamed speculators for the rally that has sent oil soaring 29 percent this year, fundamental market forces of supply and demand are keeping the floor under record high prices. Traders believe that Monday’s earthquake in southwest China could temporarily put a dent in demand from that country, the world’s fastest-growing consumer of oil. In early trading today, however, oil futures resumed their climb.  

First-quarter earnings season has been a mixed bag for U.S. corporations. As expected, the financial sector continued to record losses related to the subprime mortgage meltdown and the ensuing credit crunch. The latest casualty was insurance behemoth and Dow component American International Group, which announced a $7.8 billion loss last week. With around 90 percent of the companies in the S&P 500 having reported first-quarter results, overall earnings are down 17 percent from the same period a year ago.

If the rally in oil continues—and at this point only a change in market fundamentals appears likely to trigger a significant selloff—stocks may not be able to continue their upward momentum. As tax rebate checks begin hitting bank accounts (via direct deposit) and mailboxes over the next several weeks, consumer discretionary shares could continue to show strength.

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Plan for Health Care Costs in Retirement

Health care is expensive and becoming more so every year. Fidelity now estimates that the average 65-year-old should plan to spend at least $551 on health care each month. That amounts to more than $6,600 annually just for Medicare, Medigap, prescriptions, and dental and vision coverage.

What’s more, the costs are likely to become even higher as you age. A study by the AARP Public Policy Institute found that the probability of having a disability increases greatly as people grow older—and health care costs are sure to follow suit. The cost of home care service reached an average of $25.47 per hour nationally in 2007, according to a study by Genworth Financial. A year of care in an assisted -living facility averaged $32,573 nationally, while the average price of a year of nursing home care hit $74,806.

Specific costs will vary from region to region—and, of course, will depend on individual circumstances. Nevertheless, it’s clearly essential to take health care expenses into account when planning for your retirement. Here’s how to do it:

Determine how much you’ll need.
Fidelity last year determined that a 65-year-old couple planning to retire in 2007 would need $215,000 to cover their retirement health care costs. A third of that amount would fund out-of-pocket prescription drug costs, 32% would pay for Medicare Part B and D premiums, and the remaining 35% would fund other out-of-pocket expenses. (The estimate assumes no access to employer-sponsored health care insurance, and life expectancy in retirement of 17 years for men and 20 years for women.)

Since Fidelity first began tracking this figure in 2002, it has increased an average of 6.1% annually. You can use that average to make a rough calculation of your retirement health care costs based on your retirement date and then incorporate that figure into your overall retirement planning.

Think carefully about your health care needs before retiring early.
Medicare eligibility begins at age 65. If you plan to retire before you qualify for government insurance, consider how much maintaining coverage on your own will cost. You have two options: buying private health insurance or temporarily continuing your employer’s health coverage under COBRA. Federal law establishes your right to COBRA coverage, but you typically have to pay the entire premium yourself. COBRA still typically costs less than individual health coverage, however, because you receive the rate for group coverage.

Consider a health savings account (HSA).
Health savings accounts are sort of like IRAs for health care. Not everyone qualifies, however: You must have a health insurance policy with a deductible of at least $1,100 in 2008 if you have an individual plan or $2,200 if you have a family plan.

You can deduct contributions to an HSA from your taxable income, and your investments in the account can grow tax-free. Your withdrawals from the account also are tax-free as long as they pay for qualified medical expenses, such as over-the-counter drugs and co-pays (but not insurance premiums). Withdrawals prior to age 65 for non medical expenses incur taxes plus a 10% penalty, so be sure not to put in the account funds that you might need for other purposes. (Withdrawals after you turn 65 trigger income tax, but not the penalty.) If you do open an HSA, make sure to save all paperwork related to contributions and withdrawals, including receipts for services you pay for with money from the account.

You may contribute a maximum of $2,900 to an HSA in 2008 —or $5,800 if you have a family high-deductible insurance plan. And if you’ll be age 55 or older by December 31, you may contribute an extra $900 to the plan this year.

Unlike other medical spending accounts, HSAs allow you to keep unused funds in the plan from year to year—allowing you to build a separate nest egg for health care expenses if you wish. You may not open or contribute to an HSA after you have enrolled in Medicare, but you can continue to use the funds you have accumulated in your HSA at any time.

Investigate long-term care insurance.
Fidelity research indicates that roughly 50% of Americans now turning 65 will be admitted to a nursing home at some point in their lives. About half of those individuals will stay in the facility for six months or less—but approximately 10% will remain in nursing home care for three years or more. Ordinary health insurance policies and Medicare typically do not pay for long-term care. And Medicaid will foot the bill only if you’ve already spent most of your savings.

You may decide to take out long-term care insurance, which can help pay for care at home or in a nursing facility. While long-term care insurance is expensive at any age, your premiums will be significantly lower if you purchase it earlier in life. And, of course, the cost of the insurance—$2,000 to $3,000 a year for a healthy 65-year-old, according to AARP—is considerably less than the cost of nursing home care.

Dion Money Management’s portfolio strategists can help you manage your 401(k), 403(b) and IRA accounts. Please call one of our Portfolio Strategists at 800-432-7447, ext. 191 to learn about the benefits of a portfolio review and a consultation regarding your retirement accounts.

Question and Answer Forum

Q—Do you think it’s a good idea to hold an annuity in my IRA? My broker suggested it because I’m getting closer to retirement, but I don’t really know enough about how they work to tell whether it’s a good idea.

A—Great question. As you know, IRAs give you a lot of flexibility with your retirement investing. You can hold just about any kind of investment in an IRA—not just mutual funds, stocks and bonds, but exchange-traded funds, as well as fixed and variable annuities. A lot of retirees like annuities because they typically guarantee fixed payments for life regardless of what is going on in the market or how long the annuity holder lives. This feature can provide real peace of mind for retirees who are living longer—and doing more—in retirement than ever before.

I want you to be careful about holding an annuity in your IRA. In many cases—particularly with expensive variable annuities—you may wind up paying hefty fees for features that your IRA already provides. Remember that the assets in your IRA grow tax-deferred until you begin making withdrawals in retirement. Yet many variable annuities are sold to unwitting investors as a way to defer taxes on earnings—something that you’re already getting in your IRA. There’s no need to pay for this feature in an annuity.

Depending on your life expectancy and the other assets you’re holding in your portfolio, a fixed annuity may make sense for you. I would recommend consulting a fee-based financial adviser—i.e., not someone who will be compensated from commissions—to go over your retirement portfolio with you. Together, you’ll be able to determine if an annuity is a good investment choice.

Dion Money Management specializes in managing intergenerational wealth transfers, and provides managed account services for your IRA, Roth IRA, 401(k), 403(b) and other retirement accounts. Call one of our Portfolio Strategists at 800-432-7447, ext. 191 to learn about the benefits of our managed account program.

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This concludes today's hotline email, thank you and have a good week . . .

Fidelity Independent Adviser is completely independent of, and not affiliated with, Fidelity Investments or any of the Fidelity mutual funds listed above.

Performance Disclosure.All models and tables presented in this publication are the product of Fidelity Independent Adviser Newsletter, LLC, an independent company operated by Donald R. Dion, Jr., President of Dion Money Management, LLC (DMM), a registered investment adviser that manages assets for individuals, families, trusts and non-profit organizations. The Fidelity Independent Adviser is completely independent of and not affiliated with Fidelity Investments. The model performance returns are compiled by Fidelity Independent Adviser from historical returns of a determined mix of selected mutual funds or exchange-traded funds based upon investment strategies. These results include the reinvestment of all dividends and capital gains. Beginning 3/31/2007, portfolio returns are net of Dion Money Management’s highest fee, 0.4375% per quarter.  The model results do not represent actual recommendations or trading. Model results do not reflect the impact of material economic and market factors that impact DMM's decision-making if DMM were actually managing clients' money. Because DMM manages its actual client portfolios according to each client's specific investment needs and circumstances, model results may in some cases differ significantly from the results our clients achieve, due in part to timing of the recommendations by DMM, market conditions, client money market balances, and timing of client deposits and withdrawals. In addition, client portfolios may contain less or more funds and may contain different funds in order to meet client needs.  Model performance results may have inherent limitations. No representation is made that any account will or is likely to achieve profits or losses similar to those shown, and there are frequently significant differences between hypothetical performance results subsequently achieved by following a particular strategy. Model trading does not involve financial risk, and no model trading record can completely account for the impact of financial risk associated with actual trading. Other factors related to the markets in general or the implementation of any specific trading strategy that can adversely affect actual trading results cannot be fully accounted for in the preparation of model performance results. The volatility of the S&P 500, Wilshire 5000, Russell 2000, Dow Jones and Nasdaq indices may be materially different from that of the client's account, the securities holdings of which may differ significantly from those of the indices. The indices' results shown reflect reinvestment of dividends unless otherwise noted. These indices have not been selected to represent appropriate benchmarks to compare the clients' performance, but rather are disclosed to allow for comparison of the client's performance to that of well-known, widely recognized indices. This material has been prepared solely for informational purposes. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. All investments involve risk including loss of principal.

Both retired investors as well as those of you nearing retirement can benefit from the professional advice found in the Fidelity Independent Adviser's Retirement Income Guide. Planning for retirement is a long and important process.

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