Bond Investing, Hands-off Portfolios, and Promising Managers

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Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. Last month, we introduced the Morningstar Awards for Investing Excellence. We nominated several topnotch professionals for the Rising Talent Award. Here's a look at some of the nominees and their funds.

Emory Zink: A few factors contribute to our confidence in core bond manager Pramod Atluri. First, prior to his appointment at Capital Group in late 2015, Atluri gained experience as a credit analyst and comanager at Fidelity Investments. Between his experience at Fidelity and at Capital Group, he gained valuable insight at two substantial core bond shops. Second, over his tenure at Capital Group, he integrated smoothly with their collaborative culture, and he simultaneously managed to introduce new perspectives for managing and monitoring risks in portfolios. These positive attributes support his appointment as a principal investment officer at the end of this year when he succeeds long-tenured manager John Smet as the lead portfolio manager on the firm's core bond offering American Funds Bond Fund of America.

Jack Barry: Vincent Montemaggiore manages Silver-rated Fidelity Overseas and has since 2012. His process stands out for a number of reasons. First, he takes a quality value-oriented approach that looks for companies with sustainable competitive advantage, high returns on invested capital and recurring revenues, and pricing power. These types of companies have given the portfolio durability through tough markets. He has also shown that he is adept at picking stocks throughout sectors. Morningstar attribution data shows that he's been successful on all the GICS sectors, which also bodes well for the portfolio's ability to hold up in tough market environments. Additionally, he searches out under-the-radar ideas, particularly in the small- and mid-cap stocks, which makes him stand out from peers and the MSCI EAFE benchmark. Finally, Montemaggiore is an introspective investor, well aware of the psychological traps that most investors fall prone to. In order to prevent against those traps, he keeps a journal of all of his investment theses, which he regularly visits to make sure that he avoids thesis creep.

Alec Lucas: Pasadena, California-based Primecap Management's James Marchetti is the inaugural winner of Morningstar's Rising Talent Award for Investing Excellence. He is part of a five-person team at Primecap that manages three strategies for Vanguard and three Odyssey-branded funds. Four of the six funds are closed to new investors. The two ones that are open are Primecap Odyssey Growth and Primecap Odyssey Stock. All six funds are rated Gold by Morningstar analysts because of their superior long-term prospects. The strategies have been out of favor over the past year but have very good long-term track records. Marchetti himself is very experienced. He joined Primecap in 2005 and made his way as a biotech analyst and then has proven himself as one of the firm's portfolio managers over the past few years, and he is certainly a manager to be aware of as is the firm.

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Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Divorce is stressful enough, but it's also worth bearing in mind the tax and retirement planning considerations. Joining me to share some tips on this front is retirement expert Ed Slott.

Ed, thank you so much for being here.

Ed Slott: Great to be back here at Morningstar in Chicago.

Benz: It's great to have you here. Let's talk about the new tax laws that went into effect for 2018 that have some repercussions for divorced people. Let's talk about what's going on with alimony and the deductibility of alimony.

Slott: Well, it's no more deductible. This reversed 70 years of tax law. Now, unlike many of the other provisions in the Tax Cuts and Jobs Act, which kicked in in 2018, this one kicks in in 2019. Also, unlike many of the other provisions where they were all temporary--after 2025, they go away, they are eliminated--not this one. This one is permanent. I don't think many people realize that. So, the change is that alimony is no longer deductible to the one who pays it and no more taxable as income to the one who receives it. Now, for many years, like I said, for over 70 years, taxpayers got the benefit of what I call the spread. The spread is this: Obviously, in most cases, I would say, probably just about all cases, the one paying, the spouse who is paying the alimony is probably in a higher tax bracket than the one receiving it. So, if they get the deduction at a higher rate and the one receiving it picks it up as income at a lower rate, that's a spread favorable to that couple. What they did is they reversed the spread and now that spread goes to the benefit of the government.

So, there's a few things you can do. You can't deduct the alimony obviously anymore and the spouse who gets it doesn't have to pick it up as income. But this changes all the negotiations. Now, I've seen things where people are trying to use other assets in lieu of alimony, but the houses, they are finding, aren't working as well. Some of them have big mortgages, sometimes they don't want the house. So, the big asset people are fighting over now or negotiating over, I should say, seems to be a retirement account, because it's for many people their largest single asset, whether it's an IRA, 401(k). So, one suggestion I have is to use that as a negotiating tool in lieu of alimony. Now, it may not work for everybody. But the idea here is--and I'm talking about pretax IRA money--instead, use that. If it's possible, you have to work it through your state law, of course. In lieu of alimony give the other spouse a portion of the pretax IRA. What that does, it puts the spread back in the taxpayer's favor. Because now the person giving part of that IRA or all of it to an ex-spouse is giving away money that's pretax--in other words, money he or she would have had to pay tax on had they withdrawn it. And the spouse gets a retirement account and the spouse when they take the money out picks it up at their lower bracket. So, it brings the spread back.

Now, it doesn't work for everybody. For example, let's say, the spouse receiving it is under 59.5 and they need that money; if they take it out, they are subject to a 10% penalty. So, it may not work for everybody, but it's an idea to put the spread back in the taxpayer's favor using probably one of the biggest assets that they will be negotiating with anyway.

Benz: So, it should be part of the discussion leading up to divorce.

Slott: Oh, definitely. Could help.

Benz: Let's talk about another thing that's a more evergreen problem that can trip up divorced couples or divorcing couples. This is a failure to correctly execute beneficiary designations. Let's talk about how people can run into trouble on that front and discuss some kind of best practices if you are a divorcing spouse and you want to make sure that you are doing this right.

Slott: Well, there's a morass of paperwork in a divorce. You have your financial advisors, your attorneys, the judge, everybody signs a massive amount of papers. But the one thing that seems to almost always be overlooked is updating beneficiary forms on retirement accounts, on life insurance policy, anything beneficiary-driven. So, the big message, the best practices, as you say, is after a divorce, even if you think everybody took care of it--and many people think everybody took care of it... It's likely that you are writing checks to attorneys, to financial advisors, to accountants, you're paying court fees, you go to court. You figured it's all taken care of. You think the accountant took care of it. The accountant thinks the financial advisor took care of it. The financial advisor thinks the attorney took care of it. The attorney thinks the cat took care of it. Nobody took care of it. And it's a big gaping hole.

So, the best practice is, after a divorce, update all your beneficiary forms, so this doesn't get drawn out in court like we've seen Supreme Court cases that lasts for seven or eight years or longer and ends up going--you never know who is going to get the money. Sometimes it goes to the kids of one marriage; sometimes it goes to the ex-spouse. Maybe it's life insurance and that was part of the deal--you still want it to go to the ex-spouse. According to the latest court rulings, even if that's the case, still go in and execute a new beneficiary form naming that ex-spouse if that's what you want. But always execute a new beneficiary form. Update your beneficiary forms after a divorce so people don't have to spend thousands and thousands in money and time to figure out who gets the money. Everybody should know who will get the money right after the divorce.

Benz: And people tend to underrate the power of these... So, would say it's a best practice going through a divorce or not going through a divorce just to review those, say, once yearly as a part of your annual portfolio review, make sure everything is ...

Slott: Always review it, especially when you have, what I call, a life event, a birth, a death, a marriage, a divorce, always after a divorce. That's where we see the biggest problems. You had a new child, a grandchild, a change in the tax law. Best practice is, review them at least once a year. But always, after the divorce is signed, sealed, delivered, go back to the beneficiary forms, especially on 401(k)s, IRAs, and life insurance and annuities--anything beneficiary-driven--and make sure it's the beneficiary that you want. Maybe you want your ex-spouse off or on or you want to make sure it goes to your children in case you get re-married. There's been cases where people thought it was going to their children, but they got re-married. It was a 401(k); it was an ERISA plan, it went to the new spouse and the children were disinherited.

Benz: And how about when I change providers? If I switch from one investment provider to another?

Slott: Definitely. Definitely. Definitely. We just saw a huge case where there was multimillions in an IRA and the financial advisor moved to a new institution and for some reason the new institution changed all the beneficiary forms to the estate when they were supposed to go to trusts and other beneficiaries, and of course, the guy died and now it's a mess--it's a court case and lawsuits and still nobody knows who is getting the money and they may not know for years. So, always update beneficiary forms, especially when your account moves from one institution to another.

Benz: Ed, it's always great to get your perspective. Thank you so much for being here.

Slott: Thanks, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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Christine Benz: Hi, I'm Christine Benz for Morningstar.com. While investors have been fretting about rising yields for the better part of a decade, lately yields have been trending in the other direction. Joining me to share some perspective on this issue is Tom Lauricella. He is an editorial director at Morningstar.

Tom Lauricella: Glad to be here.

Benz: Tom, let's talk about declining yields, which we've seen so far in 2019. They tend to be good for bond prices, but for people who want to keep their money very safe in cash instruments, that means that they have to settle for lower yields, right?

Lauricella: Bonds makes for an interesting story in that you can have a good news, bad news situation at the exact same time. So, what we've seen this year is that bond prices have been rising but yields have been falling. So, the value of an investor's bond account maybe rising but the yields, the yields that they are earning, are actually dropping and for any money that they need to reinvest, they are going to be earning less money on that. So, it's this good news, bad news story for bond investors.

Benz: Let's talk about the factors that tend to drive yields down. It's generally when investors are thinking that the economy will weaken. What are sort of the forces that are pushing down on bond yields recently?

Lauricella: For bond investors, when you're thinking about what the dynamics of the market are, the story is that good news is bad news and bad news is good news. So, when the economy looks like it's weakening, if inflation looks like it's going to be declining, which comes along with a weakening economy, that's actually good news for bond prices but bad news in terms of the yields going down. When we have good news for the economy, things are getting stronger, it looks like inflation is going to rise, that's going to send bond prices down. So, it can be a little confusing. I mean, the bond markets are confusing. It can be hard to wrap your arms around at sometimes.

Benz: And so, for individual investors who have bond funds in their portfolios, I think there might be a temptation to think about, well, how should I play this? We've seen long-term bonds--when yields decline, long-term bonds perform really well. There might be a temptation to kind of load the boat with those bonds at this point. How should investors approach changes in interest rates whether up or down?

Lauricella: The first and easy answer is, you should have an asset allocation that works for longer than just a short-term market cycle. You want to have an asset allocation that matches up with your goals, whether they are long-term goals such as retirement or shorter-term goals in terms of saving money for an expense that you have in the next couple of years. So, really, it's: Set that asset allocation across the portfolio, stocks, bonds, what have you, and don't get too worked up about those short-term moves. If there's a move happening in the market, that potentially is extreme enough that it affects your ability to reach one of those goals, maybe then you can rethink how you approach your bond portfolio. But right now, we are not in much of an extreme actually when it comes to bond prices.

Benz: And the fact is, too, it seems like the bond market tends to price in this news really quickly. So, if you decide to sort of up-end your portfolio in search of whatever you think might happen, there's a good chance you might be late, right?

Lauricella: Oh, yeah. The bond market is like any other market. It's very, very difficult to time it. The big professional bond managers--it's not what they are trying to do. They are looking at longer-term trends. They are analyzing the trends behind the issuers, governments, or corporations, and they are not trying to time the market really--maybe just tweaks around the edges. Small investors, individual investors shouldn't try and do that either.

Benz: That's sort of how to approach thinking about the interest-rate sensitivity in your portfolio. Let's talk a little bit about credit sensitivity. Because it seems like if the market is concerned about a weakening economy, what should I be worried about in terms of sort of the complexion of my bond portfolio? Are there any types of bonds or bond funds that would tend to get hit particularly hard in a weakening economy?

Lauricella: I think credit quality is one of the least understood and least appreciated aspects of bond investing. Many investors I don't think quite realize that when they are holding a portfolio that has corporate bonds in it through a fund that invests in either investment-grade, very high-quality bonds, or junk bonds, low, there can be a lot of volatility in that part of the portfolio. It's not like a government bond where you are going to have changes based on interest rates, but credit quality is a whole another lever there. And we have seen time and time again where things like junk-bond funds or even shorter-term funds like bank-loan funds can be fairly volatile based on the credit quality. So, when we run into the times where the economy is looking just like it might fall into a recession such as happened in the fourth quarter of last year, you can see some real losses in credit funds. So, that happened in the fourth quarter. Junk bonds took a pretty big hit. Bank-loan funds took a pretty big hit. So, investors should keep an eye on that. But that should be factored into your initial asset-allocation strategy.

Benz: And you did a little bit of work on correlations among various bond types relative to stocks, and I worked on this recently, too. The idea is, if you want something that's going to give you a good ballast if you have an equity-heavy portfolio, it's generally not going to be that credit-sensitive stuff, right?

Lauricella: Right. High-yield bond funds track the stock market pretty closely--maybe not in terms of magnitude, but if you watch your high-yield bond funds, if the stock market goes down in value, your high-yield bond funds are probably also losing money. They are not great for adding diversification to a portfolio. It's a little less true for an investment-grade bond fund. They won't move as much up or down along with the stock market because there's more interest-rate sensitivity. But they are still not providing as much diversification to the portfolio as a government-bond fund will. Ultimately, if you want something that's going go the opposite direction as much as possible with stocks and really provide that short-term diversification, it's government-bond funds that will provide that lever.

Benz: Let's talk about stocks. In an era or in a period where investors seem worried about the strength of the economy, should investors be concerned about stocks if we are heading into sort of, if not a recession, then some sort of an economic slackening?

Lauricella: Well, again, I think it comes down to that asset-allocation question. Whenever an investor is setting that allocation, if it's in line with your long-term goals, you are going to allow for some of that flexibility over market cycles. So, particularly with a retirement portfolio, you are going to have a lot of ups and downs over that time. So, right now, the market seems to be going back and forth about the prospects for a recession. A lot of it's depending on how responsive people think the Federal Reserve will be in terms of helping the economy avoid recession. So, we're in a really tricky place right now. The valuations in the stock market, according to Morningstar research, were pretty much right there in the middle ...

Benz: Not cheap.

Lauricella: ... not cheap, not expensive. So, depending on a week, you can look one way or the other. But really, it's really just a matter of sticking to that long-term asset-allocation focus.

Benz: Tom, always great to get your perspective. Thank you so much for being here.

Lauricella: Glad to be here.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar.com. If you are in or near retirement, chances are you have better things to do with your time than spend hours monitoring your portfolio. Joining me to discuss some strategies for reducing your portfolio oversight responsibilities is Morningstar's director of personal finance, Christine Benz.

Christine, thank you for joining me today.

Christine Benz: Susan, it's great to be here.

Dziubinski: Now, one obvious reason that you want to create a low-maintenance portfolio is that you have better things to do with your time when you are in retirement or getting close to it. But what are some of the financial advantages to doing so?

Benz: I do talk to plenty of investment hobbyists who love nothing more than parking themselves in front of their computer and monitoring their portfolios. But another key reason is simply that as we advance in age, there may be things that will disrupt our ability to monitor our portfolios. So, the idea is that if you can create a portfolio that's at least somewhat hands-off, it could run itself for a time if you for whatever reason were unable to keep tabs on it. So, that's one reason why I recommend that investors as they advance in age think about a strategy to try to reduce their oversight obligations.

Dziubinski: Now, what are some of those strategies that we might consider? One, I would think, is to choose an advisor and choose to work with an advisor. What other things we should be thinking about if we want to think about pursuing that route?

Benz: This is certainly the gold standard if you want sort of a seamless hand-off or if you want your portfolio to be able to be up and running while you're out of the country or while you are really unable to keep tabs on it. This is the best way to do that: Hire a trained professional to keep tabs on your portfolio and monitor it and make any sales that need to be done.

The key trade-off here though, of course, is that you will need to pay someone to do that work for you. So, depending on how much you pay, that can drag on your return. The counterargument, though, is that a good advisor can earn his or her keep many times over by keeping you in your seat during turbulent market environments. But nonetheless, you'd want to evaluate the costs of hiring an advisor. And I talk to a lot of investors who really enjoy the process of being hands-on with their portfolios, so that might not be the best route for them either.

Dziubinski: Another idea would be to dedicate a portion or all of your assets to a simple income annuity. And that has some attractive things to it as far as academics are concerned because it's very much like receiving that paycheck that you've kind of been accustomed to for a large portion of your life. What do we need to consider with that strategy?

Benz: As you said, Susan, with a plain-vanilla income annuity, that's basically what you get, that you get that regular paycheck. It's a great hedge against cognitive decline when we think about the risk of that affecting people's portfolio management skills. The big drawback or the big thing to consider is that annuities vary immensely. So, there are some very complex high-cost products and then the type of annuity that academics tend to favor is the very vanilla annuity type where you hand an insurer a portion of your portfolio and they send it back to you as a stream of income payments and those tend to be very low-cost products. But you do want to evaluate the costs.

The other issue is that once you have purchased an annuity, it's a contract and that money is no longer part of your portfolio. So, even academics wouldn't typically recommend that you send your whole portfolio into an annuity because you would want to maintain some liquidity. A very basic annuity wouldn't preserve any bequest motive, for example. So, if you are someone without a pension, it's may be something to consider with 20% or 25% of your portfolio, but you wouldn't want to stake your whole portfolio in an annuity.

Dziubinski: What about an idea of a simple one-fund portfolio? Is there really one fund that can do all the lifting for you, either a very well-diversified allocation fund or some sort of retirement-income fund?

Benz: Well, I like this idea a lot because it does help reduce the number of moving parts in a portfolio. One thing we've observed when we do our runs of investor return data where we look at investor behavior with products, we tend to see that these all-in-one products effectively keep investors investing throughout different market environments. So, there is a lot to like there. I think there's more work to be done in the financial services world to create better retirement-income products. Because the key thing I don't like about them is that when you sell a piece of that portfolio to meet your living expenses, well, typically, if it's some sort of a blended product, you are going to be selling some stocks and some bonds, and that's rarely a great time to sell both asset classes. Right now, for example, you might be wanting to sell stocks, leave your bonds alone. But if you are selling an all-in-one fund, you are selling shares of both asset classes.

Dziubinski: Well, instead of an all-in-one fund, how about a three-fund portfolio?You've been writing a lot about those lately and talking about it. How might a three-fund portfolio be a good solution for some investors?

Benz: So, a three-fund portfolio would simply be a bond fund, a U.S. stock fund, as well as an international fund. All index funds, very plain-vanilla, very well-diversified, very inexpensive. There's a lot to like about that sort of portfolio, especially if in retirement you bolt on a cash component. So, if you are using like a bucket strategy, you would have a couple of years of portfolio withdrawals in cash as well.

The issue with this is, as I think simple and cheap as it is, it does require more maintenance than some of the other options that we've talked about where you are still going to have to refill that cash bucket as you spend from it. So, unfortunately, it's not truly hands-off even if it does reduce the number of moving parts in the portfolio.

Dziubinski: Christine, thank you for being with us today and sharing these ideas for how to reduce our oversight as we get a little bit older and maybe want to do other things with our time than monitor our portfolios.

Benz: Thank you, Susan.

Dziubinski: For Morningstar.com, I'm Susan Dziubinski. Thanks for tuning in today.

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Erin Lash: During former CEO Denise Morrison's seven years leading the charge, Campbell Soup placed an outsize emphasis on extracting profits, starving its core soup lineup of investment, while heightening its reliance on acquisitions outside its core focus to bolster its trajectory--efforts which fell flat. However, recently appointed CEO Mark Clouse is cooking up a new recipe anchored in driving profitable growth, even across the mature areas of its business, which strikes us as prudent.

With a narrowed portfolio reach that is set to include just meals, beverages, and snacks on its home turf, we’re encouraged that priority number one for Campbell centers on upping its game as it relates to innovation. Management has been forthright that it has for years failed to bring on-trend, new products to market in a timely fashion (with product development cycles amounting to 18 months or more, far in excess of the mere weeks or months smaller, niche brands boast). But now management intends to move away from large-scale launches to a “test and learn” approach--bringing a product to market in a select location, assessing the consumer response, and adjusting the offering as necessary to more effectively win with consumers. We view this as a prudent means to more nimbly respond to evolving consumer trends, targeting to cut its time to market in half. In this vein, it intends to enhance the product, price-pack architecture, and expand the distribution of its soup and snacking fare, while moving away from the deep discounting that it has resorted to in the past, which we think stands to drive modest sales gains. Shares trade at a modest discount of nearly 10% to our evaluation, but with a dividend that's yielding more than 3%, we'd suggest investors keep this wide-moat name on their radar.

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Christine Benz: Hi, I'm Christine Benz for Morningstar. Signing up for Medicare seems incredibly straightforward, but there are actually pitfalls to be aware of. Joining me to cover some of them is retirement expert Mark Miller.

Mark, thank you so much for being here.

Mark Miller: Hi, Christine.

Benz: Mark, let's talk about this. First of all, what is the initial enrollment period, the general enrollment period for Medicare?

Miller: As we go through this, I think listeners will see it's not so incredibly straightforward, which is really unfortunate. It'd be great if it was simpler. The initial enrollment period for Medicare is very--actually, that is kind of straightforward. That is, you turn 65, which is the eligibility age for Medicare. The initial enrollment period is, if you are ready to enroll at 65, you can do this as much as three months before your 65th birthday and as late as three months after. That's the initial enrollment. And then your coverage will start a month later than your enrollment date. So, that's worth thinking about if you're transitioning from workplace insurance, you want to avoid gaps, make sure you do it early enough that with that one-month lag you get covered.

Benz: There's also what's called a special enrollment period. Let's talk about that and who that affects.

Miller: Also, fairly straightforward. This is, let's say, you continue to work past 65; you're 66 or 67, now you retire. And so, you want to sign up for Medicare. There is a special enrollment period that lets you do this, assuming that that's your situation, and the rules are pretty similar. You sign up whenever that point is of retirement, and your coverage starts a month later.

Benz: Let's discuss some of the situations that would prompt someone to delay filing for Medicare, not filing right at around age 65.

Miller: A lot of it stems from sort of the way that Social Security and Medicare interact, used to interact, now interact. If you have already filed for Social Security before age 65, your Medicare card comes automatically when you turn 65. So, all of this that we're discussing becomes kind of not important to you. Your card will arrive. You go ahead and make your elections on things like your Part B coverage, whether you want traditional Medicare or Medicare Advantage, all those choices. But you're enrolled automatically at 65.

But with increasing numbers of people working longer, not filing for Social Security, trying to delay their claim for Social Security--usually a good thing to do--that's where you need to be proactive in making a Medicare decision to avoid problems and that's where a lot of this stems from. So, people working longer, still on employer coverage and the like.

Benz: Spousal coverage, how would that fit in there?

Miller: The thing we are saying here is that the default thought people ought to have is when you're 65, get on Medicare except if you're still working and you're covered by insurance at work or you have a spouse who is covered by your policy. In those situations, you don't have to enroll in Medicare. Again, there's an exception though. This applies to situations where your employer has 20 or more workers. If it's a small business with 20 or fewer, you should enroll in Medicare anyway, because Medicare becomes your primary coverage at that point and your employer's coverage becomes secondary.

Benz: How about if I'm covered by my spouse's healthcare plan? So, I'm Medicare eligible but I've been covered by the spouse's plan.

Miller: There you could also choose not to enroll in Medicare at that point.

Benz: Let's talk about where these complications can come into play. I want to talk about penalties and also, importantly, coverage gap. So, let's start with the penalties, how you can trigger a penalty if you goof this up.

Miller: If you are late, your penalty--we're talking primarily here about the Part B premium--you'll be charged a late surcharge for your premium equal to 10% of the Part B premium for every 12 months that you're late and that's a lifetime penalty. So, imagine that you're two years late, 20% penalty on your Part B lifetime.

Benz: That's huge.

Miller: It can really add up to significant money. And you know, where people get into trouble here is when they think they have coverage that exempts them that in fact does not. A great example would be COBRA coverage. So, we just talked about if you still have employer coverage, you can stay off Medicare …

Benz: And avoid this penalty.

Miller: … very easy to think, oh, I'm on COBRA for whatever reason; that's my employer's plan, I don't need to sign up for Medicare. Wrong. Because the rule is you have to be actively employed in order to stay off Medicare. And COBRA is not active employment coverage--it's for a former employee. This is one where people screw up quite frequently and find out that they should have done something, and they didn't.

Second is, people who are covered on the Affordable Care Act exchanges. So, let's say, you have an exchange policy and you turn 65 and you think, oh, I have insurance, I don't have to shift to Medicare. Again, wrong. At 65, you need to move. Sometimes people think, oh, I have this retiree coverage from my employer, that exempts me from Medicare. Also, not correct. Medicare is always primary. So, this is why I say, lean towards being on Medicare unless you are super sure you have a rock-solid exemption to stay off of it, which is just the active employment exemption.

Benz: Let's talk about how the coverage gaps can come into play, because this seems super important. Once you are at age 65, people do start incurring more healthcare claims. What are the coverage gaps here?

Miller: Well, the coverage gap, this comes up if you're late. Let's say you are 66 or 67, and you realize you should have been on Medicare and you are now starting to the process of getting moved over. In addition to those penalties we just discussed, to do this, you have to wait for what's called the general enrollment period. This is a form of special enrollment period that only runs from Jan. 1 to the end of March every year. That's when you have to enroll, in that window. So, let's say, you realized, I don't know, March of a given year I need to be on Medicare. You can't sign up until the following January and then your coverage won't start till July. So, you've got this potentially year-plus period where you have no insurance. You've probably been kicked off of your other insurance because that insurer says, wait a minute, you are supposed to be on Medicare. And so, this is a big--I think in some respects it's even a bigger risk than the late penalty. Let's say, a serious health issue comes up during that gap period, you are going to bear it in terms of your insurance coverage. So, this is as important as the late penalties I would say.

Benz: Absolutely. Let's talk about HSA contributions, how they come into play here, too, as if this weren't complicated enough!

Miller: I know, this is another great one. So, increasing popularity of high-deductible insurance plans in the workplace, they come coupled with a health savings account. Medicare is not classified as a high-deductible insurance plan. Therefore, you cannot continue to contribute to an HSA once you go on Medicare. But in addition to that, contributions need to stop six months before you go on Medicare. And the reason for that is that when you enroll in Part A Medicare--hospitalization--that enrollment is retroactive for six months. Now, the consequences of this are some tax penalties. So, the tax advantages that you're enjoying on the HSA contributions means you are going to have some tax penalties.

Benz: Just the new contributions?

Miller: Not a disaster, but it's something to look out for and try to coordinate.

Benz: Mark, really helpful information. You have done--you've got a blog, and you also have an in-depth booklet where you look at this specific issue how to avoid some of these penalties on your website.

Miller: Because of the complexity of this, I've started developing a series of these short kind of retirement guides on specific topics, and it's tied to the newsletter I do at RetirementRevised.com. So, you're able to download a short PDF to read about this, and then it's always tied with a podcast interview with an expert. So, it's like, listen to the podcast, read the guide, you should be good to go.

Benz: Fantastic. Mark, thank you so much for being here.

Miller: Thanks, Christine.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.