How LTC Insurance Can Help Protect Your Assets

Create a pool of healthcare dollars that will grow in any market.

How will you pay for long term care? The sad fact is that most people don’t know the answer to that question. But a solution is available.

As baby boomers leave their careers behind, long term care insurance will become very important in their financial strategies. The reasons to get an LTC policy after age 50 are very compelling.

Your premium payments buy you access to a large pool of money which can be used to pay for long term care costs. By paying for LTC out of that pool of money, you can preserve your retirement savings and income.

The cost of assisted living or nursing home care alone could motivate you to pay the premiums. Genworth Financial conducts a respected annual Cost of Care Survey to gauge the price of long term care in the U.S. The 2010 report found that
• In 2010, the median annual cost of a private room in a nursing home is $75,190 or $206 per day – $14,965 more than it was in 2005.
• A private one-bedroom unit in an assisted living facility has a median cost of $3,185 a month – which is 12% higher than it was in 2009.
• The median payment to a non-Medicare certified, state-licensed home health aide is $19 in 2010, up 2.7% from 2009.

Can you imagine spending an extra $30-80K out of your retirement savings in a year? What if you had to do it for more than one year?

AARP notes that approximately 60% of people over age 65 will require some kind of long term care during their lifetimes.

Why procrastinate? The earlier you opt for LTC coverage, the cheaper the premiums. This is why many people purchase it before they retire. Those in poor health or over the age of 80 are frequently ineligible for coverage.

What it pays for. Some people think LTC coverage just pays for nursing home care. That’s inaccurate. It can pay for a wide variety of nursing, social, and rehabilitative services at home and away from home, for people with a chronic illness or disability or people who just need assistance bathing, eating or dressing.

Choosing a DBA. That stands for Daily Benefit Amount - the maximum amount that your LTC plan will pay per day for care in a nursing home facility. You can choose a Daily Benefit Amount when you pay for your LTC coverage, and you can also choose the length of time that you may receive the full DBA on a daily basis. The DBA typically ranges from a few dozen dollars to hundreds of dollars. Some of these plans offer you “inflation protection” at enrollment, meaning that every few years, you will have the chance to buy additional coverage and get compounding - so your pool of money can grow.

The Medicare misconception. Too many people think Medicare will pick up the cost of long term care. Medicare is not long term care insurance. Medicare will only pay for the first 100 days of nursing home care, and only if 1) you are getting skilled care and 2) you go into the nursing home right after a hospital stay of at least 3 days. Medicare also covers limited home visits for skilled care, and some hospice services for the terminally ill. That’s all.

Now, Medicaid can actually pay for long term care – if you are destitute. Are you willing to wait until you are broke for a way to fund long term care? Of course not. LTC insurance provides a way to do it.

Why not look into this? You may have heard that LTC insurance is expensive compared with some other forms of policies. But the annual premiums (about as much as you’d spend on a used car from the late 1990s) are nothing compared to real-world LTC costs. Ask your insurance advisor or financial advisor about some of the LTC choices you can explore – while many Americans have life, health and disability insurance, that’s not the same thing as long term care coverage.

Should You Downsize For Retirement?

It may be better to sell that big home rather than keep it.

You want to retire, and you own a large home that is nearly or fully paid off. The kids are gone, but the upkeep costs haven’t fallen. Should you retire and keep your home? Or sell your home and retire? Maybe it’s time to downsize.

Lower expenses could put more cash in your pocket. If your home isn’t paid off yet, have you considered how much money is going toward the home loan? The typical mortgage payment in the U.S. represents about 30% of gross income and about 50% of after-tax income. When you move to a smaller home, your mortgage expenses may diminish and your cash flow may greatly increase – and don’t forget about interest savings over the life of the loan.

You might even be able to buy a smaller home with cash (if finances permit) and cut your tax liability. Optionally, that smaller home could also be in a region with lower income taxes and a lower cost of living.

You could capitalize on some home equity. Why not convert some home equity into retirement income? If you were forced into early retirement by some corporate downsizing, you might have a sudden and pressing need for retirement capital – another reason to sell that home you bought decades ago and head for a smaller one.

The lifestyle reasons to downsize (or not). Maybe your home is too much to keep up, or maybe you don’t want to climb stairs anymore. Maybe a condo or an over-55 community appeals to you. Maybe you want to be where it seldom snows. On the other hand, you may want and need the familiarity of your current home and your immediate neighborhood (not to mention the friends attached).

If you decide to downsize, it may not pay to wait. Anyone who wants to retire in the current economy needs all the financial resources that can be mustered. Of course, the real estate market will eventually improve; it depends on how long you want to wait for improvement. Some people want to retire and then sell their home, but it may be wiser to sell a home and then retire since homes tend to sit on the market these days. If you sell sooner instead of later, you can always rent until you find a smaller house that could save you thousands (or tens of thousands) of dollars.

What Exactly is Wealth Management?

The two words signify a far-reaching kind of financial care.

There’s financial planning, and then there’s wealth management. Think of wealth management as a step up from garden-variety financial planning. One office (rather than one person) provides a range of services for a client: personal financial planning and investment management, tax reduction and estate planning strategies, and occasionally in-house legal resources. Business continuation planning, tax preparation and even budgeting and bill paying are sometimes added to the menu.

The difference is really big-picture. Financial planning usually means creating a strategy for accumulating wealth for retirement and personal goals. Investment management focuses on managing financial assets with a performance level in mind. Wealth management, in comparison, considers the total net worth of a family, a couple or an individual. It weighs financial decisions in light of an investment portfolio and additional components of the financial picture such as real estate, insurance, a business, charitable gifting and more.

Yet it is also about paying attention to detail. Every successful professional or business owner reaches a point of delegation – there comes a point at which you can’t do it all yourself. Indeed, it can be hazardous to try and keep track of every detail without help. The same goes for your finances – your taxes, your investments, your various accounts.

Good wealth management helps you stay on top of things. A skilled wealth management firm pays attention to many of the financial details in your life for you. You can free up your mind. You feel confident because the wealth management firm has an ongoing relationship with you, with regular reviews and communication.

Wealth management unites advisors from different disciplines as a team. The team looks at your goals, needs and priorities to determine the right, individualized strategy for guiding your invested assets and enhancing your net worth.

When is it time for wealth management? If you have too many financial concerns, issues or priorities to address by yourself, then it is certainly time for this kind of financial care. And even if your financial life is less complex, significant wealth calls for a vigilant, ongoing management approach.

Why Four Percent For Retirement?

Why are retirement plans often created assuming a 4% withdrawal rate?

When retirement planners try to estimate just how much money a couple or individual should take out of their savings annually, their model scenarios often assume a 4% annual withdrawal rate. Why is 4% used so frequently? Was that percentage plucked out of thin air? No, it actually became popular back in the 1990s.

The “Trinity Study” helped popularize the 4% guideline. In 1998, a trio of professors at San Antonio’s Trinity University analyzed historical market data between 1925 and 1995 in search of a “sustainable” withdrawal rate. They used five different portfolio compositions - 100% stocks, 100% bonds, and 25/75, 50/50 and 75/25 mixes. (For purposes of the study, “stocks” equaled the S&P 500 and “bonds” equaled long-term, high-grade domestic debt instruments.) They tried to see which withdrawal rates would leave these portfolios with positive values at the end of 15, 20, 25 and 30 years.

Their conclusion? If you are retired and withdraw more than 5% annually, you increase the chances of depleting your portfolio during your lifetime.

Subsequently, another such study was conducted by RetireEarly.com using financial market data from 1871 to 1998 – and that report reached the same conclusion.

However, that wasn’t all the study had to say. The “Trinity Study” made some other conclusions that were not entirely in agreement. The professors maintained that most retirees should have 50% or more of their portfolios in stocks. But they also noted that retirees withdrawing just 3-4% a year from stock-dominated portfolios may end up helping their heirs get rich while hurting their own standard of living.

Perhaps most interestingly, the study concluded that an 8-9% withdrawal rate from a stock-heavy portfolio was sustainable for a period of 15 years or less – but not for longer periods. In other words, while our parents and grandparents could confidently withdraw 8-9%, we who might easily live to age 90 or 100 probably can’t.

Another 4% advocate: Bill Bengen. In 1994, CERTIFIED FINANCIAL PLANNER™ practitioner William P. Bengen published a landmark article in the Journal of Financial Planning presenting his own research findings on withdrawal rates from retirement savings. While Bengen published this article in the middle of a long bull market, he factored in the possibility of extended bear markets, minimal annual stock market gains and sustained high inflation.

Looking at 75 years worth of stock market returns and retirement scenarios, Bengen concluded that a retiree who was 50-75% invested in stocks should draw down a portfolio by 4% or less per year. He felt that retirees who did this had a great chance of making their retirement money last a lifetime. In contrast, he felt that retirees taking 5% annual withdrawals had about a 30% possibility of eventually outliving their money. He put that risk at better than 50% for retirees withdrawing 6-7% per year.

Over time, people began to call Bengen’s dictum the “4% drawdown rule”. The model 4% income distribution could be inflation-adjusted – in year one, 4% of a portfolio could be withdrawn, in year two that 4% withdrawal amount could be sweetened by .03% for 3% inflation, and so on.

A dissenting view. In 2009, William Sharpe (one of the Nobel Prize-winning principals of Modern Portfolio Theory) published an article in the Journal of Investment Management contending that “it is time to replace the 4% rule with approaches better grounded in fundamental economic analysis.” Sharpe thinks that “the 4% rule's approach to spending and investing wastes a significant portion of a retiree's savings and is thus prima facie inefficient.” If a portfolio underperforms, he notes, you have a spending shortfall; and if it surpasses performance expectations, you end up with a “wasted surplus”.

So in Sharpe’s view, by adhering to a 4% rule, you either risk living too large or short-changing yourself. Therefore, it would be better to constantly fine-tune a withdrawal rate according to time horizon and market conditions.

While not necessarily a rule, 4% is a frequent recommendation. There is some compelling research to support the “4% rule”, and that is why financial advisers often cite it and tell retirees not to withdraw too much.

Would withdrawing 4% of your portfolio annually (with adjustments for inflation) allow you to live well? For some of us, the answer will be yes; others will need to address an income shortfall. As we retire, most of us will want to practice some degree of growth investing. Now may be the right time to talk about it.

Taxing the Rich to Pay for Health Care

That’s part of the plan. How will you be affected?


In 2013, wealthy Americans will pay extra Medicare taxes. Congress, President Obama and the IRS are putting a surcharge on the wealthy to help fund the health care reforms.

• Beginning in 2013, joint filers with adjusted gross incomes of $250,000 or greater and single filers with AGI of $200,000 or greater will have to pay 0.9% extra in FICA taxes (that is, Social Security and Medicare taxes). The employers of these taxpayers face no such increase.
• Also, joint filers with modified adjusted gross income (MAGI) of $250,000 or more and single filers with MAGI of $200,000 or more will be docked with a 3.8% tax on investment income. (Even estates and trusts will be subject to this new 3.8% levy.)

What might the dollar impact be? The Tax Foundation, a politically conservative watchdog organization, thinks that the richest 1% of American families will pay an average of $52,000 more in federal taxes by 2016.

What are the chances of these tax hikes being repealed? Think slim and none. Basically, you’d have to repeal the health care reforms to make it happen.

How can you avoid the 3.8% tax on dividends, capital gains & interest? It won’t be easy. Real estate investors may luck out the most, because federal law characterizes rental income as “active” rather than “passive”. On the other hand, if you sell a home you’ve owned for decades and see a taxable gain above the home sale exclusion ($250,000 single, $500,000 married), you’ll face the 3.8% tax.

Some forms of unearned income won’t be slapped with the tax. IRA distributions and income distributions from 401(a), 403(b) and 457(b) plans will be exempt. The same goes for pension income and Social Security income. Annuities that are part of a pension plan will be exempt. Any income from a business that you participate in won’t be hit with the 3.8% tax. Veterans’ benefits, life insurance payouts and interest earned by municipal bonds will also be spared.

As a result of this tax, you might start to see subtle shifts in financial strategy. You might see more muni bond purchases, more interest in life insurance, and more installment sales. As qualified Roth IRA distributions don’t boost AGI, you might be looking at another factor promoting Roth IRA conversions. Everybody will think about taking some capital gains prior to 2013.

The richest Americans have paid less tax in recent decades. Wealth for the Common Good (a liberal non-profit looking at this matter) notes that in 1955, the 400 largest incomes in America paid 51.2% of those incomes back in federal taxes. That led to the “tax shelters” of the 1960s and 1970s. In comparison, the top 400 incomes in America in 2007 paid out only an average of 16.6% in federal taxes.

So how can you reduce your taxes in 2013? It is not too early to think about it. You might want to devote a planning session to this topic, or start to read up on your options.

The 2 Biggest Retirement Misconceptions

While the idea of retirement has changed, certain financial assumptions haven’t.
We’ve all heard about the “new retirement”, the mix of work and play that many of us assume we will have in our lives one day. We do not expect “retirement” to be all leisure. While this is becoming a cultural assumption among baby boomers, it is interesting to see that certain financial assumptions haven’t really changed with the times.

In particular, there are two financial misconceptions that baby boomers can fall prey to – assumptions that could prove financially harmful for their future.

#1) Assuming retirement will last 10-15 years. Historically, retirement has lasted about 10-15 years for most Americans. The key word here is “historically”. When Social Security was created in 1933, the average American could anticipate living to age 61. By 2005, life expectancy for the average American had increased to 78.

However, some of us may live much longer. The population of centenarians in the U.S. is growing rapidly – the Census Bureau estimated 71,000 of them in 2005 and projects 114,000 for 2010 and 241,000 in 2020. It also believes that 7.3 million Americans will be 85 or older in 2020, up from 5.1 million 15 years earlier.

If you’re reading this article, chances are you might be wealthy or at least “affluent”. And if you are, you likely have good health insurance and access to excellent health care. You may be poised to live longer because of these two factors. Given the landmark health care reforms of the Obama administration, we could see another boost in overall American longevity in the generation ahead.

Here’s the bottom line: every year, the possibility is increasing that your retirement could last 20 or 30 years … or longer. So assuming you’ll only need 10 or 15 years worth of retirement money could be a big mistake.

In 2010, the American Academy of Actuaries says that the average 65-year-old American male can expect to live to 84½, with a 30% chance of living past 90. The average 65-year-old American female has an average life expectancy of 87, with a 40% chance of living past 90.

Most people don’t realize how much retirement money they may need. There is a relationship between Misconception #1 and Misconception #2 …

#2) Assuming too little risk. Our appetite for risk declines as we get older, and rightfully so. Yet there may be a danger in becoming too risk-averse.

Holding onto your retirement money is certainly important; so is your retirement income and quality of life. There are three financial issues that can affect your quality of life and/or income over time: taxes, health care costs and inflation.

Will the minimal inflation we’ve seen at the start of the 2010s continue for years to come? Don’t count on it. Over the last few decades, we have had moderate inflation (and sometimes worse, think 1980). What happens is that over time, even 3-4% inflation gradually saps your purchasing power. Your dollar buys less and less.

Here’s a hypothetical challenge for you: for the rest of this year, you have to live on the income you earned in 1999. Could you manage that?

This is an extreme example, but that’s what can happen if your income doesn’t keep up with inflation – essentially, you end up living on yesterday’s money.

Taxes will likely be higher in the coming decade. So tax reduction and tax-advantaged investing have taken on even more importance whether you are 20, 40 or 60. Health care costs are climbing – we need to be prepared financially for the cost of acute, chronic and long-term care.

As you retire, you may assume that an extremely conservative approach to investing is mandatory. But given how long we may live - and how long retirement may last - growth investing is extremely important.

No one wants the “Rip Van Winkle” experience in retirement. No one should “wake up” 20 years from now only to find that the comfort of yesterday is gone. Retirees who retreat from growth investing may risk having this experience.

How are you envisioning retirement right now? Has your vision of retirement changed? Is retiring becoming more and more of a priority? Are you retired and looking to improve your finances? Regardless of where you’re at, it is vital to avoid the common misconceptions and proceed with clarity.

European Debt & The U.S. Markets

Why the crisis has Wall Street stressed.

It would be wonderful if the U.S. financial markets could “decouple” themselves from what is going on in Greece, Portugal and Spain. Unfortunately, the debt situation in these countries is like a ripple in a pond. The question is, how strong will the ripple ultimately be and will its full force reach our markets?

The problem. Greece, Spain, Portugal, Italy and Ireland are all carrying enormous debts. On May 1, the New York Times put up a chart breaking this down: Greece owes $236 billion, which believe it or not is the smallest debt among these five countries. Portugal’s debt stands at $286 billion – and it owes roughly a third of that to Spain. Spain carries around $1.1 trillion in debt, and its economy is in horrible shape (20% unemployment). According to the Bank for International Settlements, it owes $220 billion to France and $238 billion to Germany. Ireland has $867 billion in debt, with about 40% of that owed to the U.K. and Germany. Italy owes $1.4 trillion, including $511 billion to France (almost 20% of France’s GDP).

After the euro was launched, Greece had access to a whole bunch of cheap debt - and the country used it nonchalantly. In the years since the establishment of the euro, Greece’s debt-to-GDP ratio has remained repeatedly above 100%.

Europe’s biggest banks are heavily exposed to these debts, and so are some of ours: names like Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley. In fact, these five banks have $2.5 trillion of cross-border exposure in the crisis, with Citigroup the most exposed. So you have potential risk to these banks, the euro, and the European and world economy.

The offer on the table. Fortunately, Greece has the chance to accept a $146.5 million bailout from the International Monetary Fund and the European Union in exchange for austerity measures (less government spending and a lower standard of living). This would help Greece avoid default – that is, having to renegotiate its debt and possibly assume more. (As a sovereign nation, Greece cannot go bankrupt.) Many economists think Greece will go into a deep recession (or depression) which could last most of the decade.

The potential ripple. It looks like the bailout will be accepted by Greece and its EU partners. This means some confidence will return and other Eurozone nations with big debts will be slightly less threatened. However, Greece still has a risk of default.

Should Greece default even with the bailout, some major lenders in France and Germany would be hit very hard. They would have to raise capital ratios and reduce the frequency of loans. That would hamper economic growth in France, Germany and in turn across Europe. In coming months, the U.S. and other nations could feel the pinch from such a slowdown.

Keep in mind, Greece only represents about 2% of the Eurozone economy. In the roughest scenario, Spain or Italy defaults and the shock wave to European banks (and U.S. banks exposed to the debt) is significantly greater. What would happen then? A credit freeze across Europe? Diving stocks? A trashed euro? A flight to gold?

These are merely scenarios, not present realities – but in a nutshell, this is what had Wall Street biting its nails this spring.

So is the bailout truly a solution? It was unpopular throughout the EU, but the right step to take. The move certainly helped defend the stability of the euro; in fact, German Chancellor Angela Merkel and French President Nicholas Sarkozy have jointly pledged to preserve the euro’s value.

The worry is that other bailouts will be needed to preserve the fiscal health of other Eurozone nations. We all hope these countries can effectively manage their debt levels, for the sake of the stock market and the economy in our country.