Older Americans are at a high risk for serious illness from the coronavirus, and most who are over age 65 are covered by Medicare.
Medicare already covers its enrollees for much of what they might need if they contract the virus and become seriously ill — and it has expanded some services and loosened some rules in response to the crisis.
Here’s a look at what enrollees can expect from Medicare, some problems to look out for and some additional changes that advocates think still need to be made.
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Reta Lancaster worries a lot that she or her husband, Richard, will be stricken by the new coronavirus. But the retired Indianapolis couple haven’t had a moment’s worry about paying their bills.
The couple, who spent careers in teaching and nonprofits, proved to themselves during two bear markets since 2000 that a large cash stash and what’s known as a “bucket strategy” would get them through the cruelest of markets. And it seems to be working again during the market’s abrupt turn from near record highs to a nearly 35% drop at one point in recent weeks.
“We really are feeling fortunate,” said the 88-year-old Reta, contrasting her peace of mind with retirees whose savings have been savaged during the coronavirus crisis.
A typical iteration of the Lancasters’ strategy includes three buckets designed to give retirees long-term growth potential as well as a stash of cash and liquid investments that can be drawn upon for living expenses and as a bulwark from having to sell stocks in a market downturn.
In the first bucket, a retiree typically has at least two years of cash for any expenses no matter what the stock market does.
A second bucket, containing primarily bonds, provides another safeguard—a stash to get through a stock-market beating as Treasuries typically act as a haven when equities are tumbling. As time goes on, bond income via interest or through maturity replenishes cash that’s been spent from the first bucket.
The third bucket is key: This is where stocks go to provide more long-term growth than bonds or cash, while also potentially yielding cash dividends for use in the first bucket. When a market downturn comes, however, this bucket can be left untouched until stocks rebound.
Christine Benz, director of personal finance for Morningstar, examined the impact of the market tumult on a prototypical bucket strategy in late March. Her conclusion: The third bucket made up of stocks was awful, but that was to be expected. The second bucket of bonds, which are supposed to be relatively safe, had been hit with some “worrisome” losses.
How could a microscopic organism destroy nearly $15 trillion in global stock-market wealth in five weeks?
Until recently, many investors believed central banks and other policy makers had repealed the business cycle and that making money in the stock market was something you could take for granted—in much the same way that science and technology seemed to have beaten back diseases that had been the scourge of humanity for millennia.
Maybe investors a century ago and more had a wiser view. They believed the world was governed by unseen, omnipresent powers that could be appeased but never controlled—and that financial panics were a form of divine retribution for the sinful excesses of prosperity.
We shouldn’t regard market panics as quaint artifacts from the days of ticker tape and trading by telephone. Rather, they are forces that can be hidden or delayed but never eliminated. And believing that panics have become obsolete is a precondition for their recurrence.
The modern history of financial markets is a chronicle of attempts to control risk—if not eliminate it. One after another, they have all failed.
Crash Landing
The downturn of 2020 could rival market pullbacks during past contractions but is far from the lows reached during the Great Depression.
“We trust these brilliant innovators in finance who seem to know what they’re doing when they try to control risk,” says Yale University economist and financial historian William Goetzmann. “And then, lo and behold, the risk mitigation doesn’t happen.”
The Federal Reserve was created in the wake of the Panic of 1907 to mitigate the risk of financial meltdowns.
Some thought the problem could be solved. As the stockbroker DeCourcy W. Thom proclaimed in his postscript to economist Clement Juglar’s “A Brief History of Panics” in 1916: “Just as modern medicine is overcoming the dangers threatening the physical man, so is modern finance overcoming panic and the other dangers which threaten financial stability.”
He was wrong—as similar forecasts have been ever since.
The Fed failed to stave off the crash of 1929 and, by not expanding the money supply in the early 1930s, probably worsened the Great Depression.
In the mid-1980s, a computerized hedging technique called “portfolio insurance” purported to limit losses for big institutional investors; it ended up being partially blamed for the crash of 1987.
In the mid-2000s, financial engineers created ever-more-complex derivatives as a way of carving up and spreading risk. That, Federal Reserve Chairman Alan Greenspan said in 2005, “contributed to the stability of the banking system” by allowing participants “to measure and manage their credit risks more effectively.”
But risk can’t be removed; it can only be moved. The techniques hailed by Mr. Greenspan may have caused the financial crisis of 2008-09 by making bankers and investors so complacent that they never sufficiently tested whether their assumptions might be wrong.
Contraction calculation
Some economists are now predicting a pullback in gross domestic product that would rival the severity of the 2008-2009 slump.
Finally, in the run up to the latest panic, many investors seemed to believe index funds and exchange-traded funds, which can offer broad diversification at extremely low cost, had somehow eliminated the risk of owning stocks.
Our forebears, on the other hand, believed panics are the indispensable hygiene of markets, sweeping the investing landscape clean after every orgy of prosperity.
That notion was captured brilliantly by the illustrator Frank Bellew in a cartoon for New York’s “The Daily Graphic,” days after the onset of a market panic in 1873. An ugly giant straddles the street, sweeping up clouds of dirt and shreds of ticker tape labeled “BOGUS BROKERS,” “SHAKY BANKS” and “ROTTEN RAILWAYS.” He wears tattered goatskins, his hair tangling into horns as it rises from his scalp.
The caption reads: “Panic, as a Health Officer, Sweeping the Garbage out of Wall Street.”
Bellew personifies Panic as the god Pan, who haunted the countryside of ancient Greece. Half-goat, moody and mischievous, Pan was the god of herds, manipulating them with the music from his pipes. He lurked in mountain caves, arising at midday to burst out of nowhere at startled travelers.
No wonder the ancient Greeks called a sudden fear “panikos.” It came from Pan.
He was also the god of fertility. And financial panics, through the ensuing upheaval, fertilize old ground for new competitors and transfer assets to those who can put them to their best use.
Out of the boom and bust in wooden turnpikes in early 19th-century New England came the rights of way that railroads later followed with ease through the forests and fields. Out of the mania for technology stocks that collapsed in 2000-02 came the glut of fiber-optic networks that make instant communication universal and cheap as dirt today.
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But investors were pacified by their cash, Benz said. “Now is the bucket portfolio’s time to shine. It’s giving people comfort,” she said, and keeping people from bailing out of deep losses on the riskier stock investments they will need over time.
Benz contrasts this volatile period with times when stocks are steadily climbing. During long rising markets, Benz said, investors look at stock gains and question why they should keep two years of cash out of stocks and bonds. Some studies have questioned the strategy, too, because sizable cash stashes can deprive retirees of the growth they need to make portfolios last for 20 or 30 years.
What’s more, bonds have provided meager income in recent years and haven’t always performed as expected during recent downturns. In 2018, bonds were a disappointment and in March, safe Treasuries fell along with stocks at a certain point although they have been cushioning stock losses recently.
“The long-held belief that bonds give you a hedge against a fall in stocks is not always true,” said Patrick Leary, head of trading for InCapital.
While the bucket approach is used by many financial planners, the design of the buckets varies. Some financial planners in the first bucket want cash to last three years in case a long bear market occurs. Others are satisfied with one year. Advisors differ on investment choices, too: Some stick to federally insured savings accounts and certificates of deposit for cash, while some take on a little more risk with money-market funds and short-term bond funds.
In the second bucket, bonds and bond funds are key because they replenish cash as retirees spend the money they originally had stashed away in bucket one. But there is no universal prescription. Advisors usually pick a mixture of bond types, but some lean toward safe U.S. Treasury bonds and top-quality corporates, while others try to boost income with larger exposures to riskier corporate bonds and small allocations of dividend-paying stocks.
This second bucket has been a particular thorn in recent years for many financial planners, who say they have been struggling to hold relatively safe bonds that will provide enough income to replenish the cash retirees need. Ten-year Treasuries, for instance, were recently yielding around 0.70%, compared with 1.6% early this year.
Yet higher-yielding bonds—everything from corporate bonds, to floating rate bank loans, mortgages and municipal bonds—have been dicey as the coronavirus crisis has pummeled the economy. For example, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), lost 21% between March 6 and March 19.
Meanwhile, financial planners say they are sticking with well-diversified portfolios and the security their clients have from large amounts of cash to ride out the coronavirus lockdown.
“Most people have 10 or more years to ride out the storm, and during that time money comes to them virtually every month,” said Marc Hadley, the Lancasters’ financial planner.
If this crisis goes on long enough, though, Long Island financial planner Larry Heller said he might need to suggest some clients reduce their spending. That happened in the financial crisis as the market fell 57% and people panicked and demanded an escape from stocks.
Yet retirees appear positioned well and no one has asked him to sell stocks, Heller says. “They get a check every month so they don’t worry,” he said. “They can sleep.”
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