Outside Economics

Interest Rates Dance the Limbo

Posted by Wendell Brock, MBA, ChFC on Fri, Aug 12, 2016

The yield on the 10-year U.S. Treasury fell to a record low of 1.318 percent in early July, sending bond prices higher throughout the fixed income markets. Bonds have continued their rally since the beginning of the year as the Fed has held off on raising rates, while central banks in Japan and Europe have maintained unprecedented low rates.

Repercussions from Brexit channeled money towards the perceived safety of German government bonds in July, as Germany became the first country in the EU to sell 10-year government bonds with a negative yield at auction. A negative yield means that investors are willing to essentially pay Germany in exchange for holding funds in German bonds. Germany sold  €4.8 billion ($5.3 billion) of 10-year notes at an auction, with a yield of -0.05 %. 

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As of this past month there has been a continuous decline in long-term interest rates for 25 years, spanning from 8.3% in 1991 to 1.36% in July for the 10-year U.S. Treasury. Some bond analysts estimate that any continued decline in yields has become much less probable. But we all know, never say never!

With the Fed and its monetary stimulus efforts at capacity, many economists believe that this leaves ample room for fiscal stimulus in the form of lower tax rates. The presidential campaign has brought about the topic of lowering taxes and perhaps at a timely juncture that would help stimulate economic growth where the Fed may not be able to any longer.

A chellenge with this thought, is that this comes at a time when the federal government needs all the money it can get its hands on. (see the article: How Interest Rates Feed the Pig.) Its a fact that lower taxes has proven to increase the the total tax revenue, however to many people lowering taxes is unfair.  

This news on the heals of all the economy has been through since the Great Recession is a clear indicator that the economy has not completely recovered. With intermediate interest rates way below the historical average of 5.5%, this becomes a very serious concern for retirees who depend on their fixed income securities to help pay for their living expenses.

What to Do

Understanding this, the rate at which a person withdraws money from their retirement accounts will have a huge impact on the longevity of that account. People will need to simply save more for retirement and or live on less than originally expected. Both are unpleasant challenges. Getting out of debt will help with both of those challenges, as it frees up cash flow for additional savings and with little to no debt, it requires much less to live on. 

One strategy would be to take out much less during the earlier years of retirement and allow your savings to continue to grow, even for an additional five to seven years. This extra seasoning of your portfolio would make a world of difference.  Those who are preretirees may want to consider to start winding down their spending and try living on much less income, this will allow you to put more in savings and or get more debt paid off. It will also start you on a road of more discipline in your finances.

 

Sources: Federal Reserve, Bloomberg

 

Remember:

Training is everything. The peach was once a bitter almond, and the cauliflower is nothing but a cabbage with a college education.  - Mark Twain

Topics: Economy, retirement, debt, Interest Rates, Fed

6 Things You Must Know About Long-term Care Insurance

Posted by Wendell Brock, MBA, ChFC on Wed, Feb 17, 2016

Long-term care (LTC) insurance allows people to pay a known premium to help protect against the risk of much larger out-of-pocket expenses down the road. This article will help you understand some of the things to consider when purchasing an LTC polciy.

Taxation

When considering policy taxation, there are two general types of long term care policies, they are:

long term care insurance1
  • Tax qualified (TQ) policies which are the most common policies offered. As per HIPPA, a TQ policy requires that a person 1) be expected to require care for at least 90 days, and be unable to perform 2 or more activities of daily living (eating, dressing, bathing, transferring, toileting, maintaining continence) without substantial assistance (hands on or standby); or 2) for at least 90 days, need substantial assistance due to a severe cognitive impairment. In either case a doctor must provide a plan of care. Benefits from a TQ policy are non-taxable.
  • Non-tax qualified (NTQ) which was formerly called traditional long term care insurance. It often includes a "trigger" called a "medical necessity" trigger. This means that the patient's own doctor, or that doctor in conjunction with someone from the insurance company, can state that the patient needs care for any medical reason and the policy will pay. NTQ policies may include walking as an activity of daily living and usually only require the inability to perform 1 or more activity of daily living. The Treasury Department has not clarified the status of benefits received under a non-qualified long-term care insurance plan. Therefore, the taxation of these benefits is open to further interpretation. This means that it is possible that individuals who receive benefits under a non-qualified long-term care insurance policy may risk facing a large tax bill for these benefits.

Fewer non-tax qualified policies are available for sale. One reason is that consumers want to be eligible for the tax deductions available when buying a tax-qualified policy. The tax issues can be more complex than the issue of deductions alone, and it is advisable to seek good counsel on all the pros and cons of a tax-qualified policy versus a non-tax-qualified policy, since the benefit triggers on a good non-tax-qualified policy are better.

Most benefits are paid on a reimbursement basis and a few companies offer per-diem benefits at a higher rate. Most policies cover care only in the continental United States. Policies that cover care in select foreign countries usually only cover nursing care and do so at a rated benefit.

Partnership Plans and Medicaid

The Deficit Reduction Act of 2005 makes Partnership plans available to all states, although not all states participate in this program. Partnership plans provide “lifetime asset protection" from the Medicaid spend-down requirement.

In return for purchasing partnership policies, a portion of a policyholders’ assets will be disregarded when determining their eligibility for Medicaid long-term care services, if and when they apply for such services. Traditionally, to be eligible for Medicaid, applicants’ assets cannot exceed certain financial eligibility thresholds.

When applying for Medicaid long-term care benefits, the Partnership program allows individuals who purchase qualifying insurance policies to retain one dollar in assets for each dollar of long-term care insurance benefits paid by the policy. For example, the typical asset limit for an individual applying for Medicaid nursing home services is $2,000. If an applicant received $100,000 in benefits through a partnership program insurance policy, they may retain up to $102,000 in assets.

Deductibles

Most policies have an elimination period or waiting period similar to a deductible. This is the period of time that you pay for care before your benefits are paid. Elimination days may be from 20 to 120 days. The longer the elimination period the lower the premium.  Some policies require that the policy for long-term care be paid up to one year before becoming eligible to collect benefits.

What About Inflation

Because the daily or monthly benefit amount you buy today may not be enough to cover higher costs years from now, most policies give you the option of adding an inflation protection feature, for an additional premium cost. With automatic inflation protection, the initial benefit amount increases automatically each year at a specified rate, such as 3%.

Another form of inflation protection is the guaranteed purchase option. This gives you the option of increasing your benefit amount and your premium every few years. Policies without inflation protection cost less, but their benefit amounts do not increase and may be inadequate if you need long-term care many years from now.

Nonforfeiture Option

Some people feel that if they pay premiums on an insurance policy for years but later drop the policy, they should receive some payment. A policy with nonforfeiture provision does this. Most companies offer nonforfeiture options on long-term care policies. However, that can add from 20% - 100% to the cost of the premium.

Asset Based Policies

Other LTC policies are “asset based” meaning that they are based on an annuity, or a cash value life insurance policy. The benefit of these types of policies are the favorable underwriting, which is a blend of LTC and life insurance underwriting, giving people who may not qualify for one specific type of policy, be able to get a policy this way. Or LTC and annuity underwriting again may provide a benefit to the insured.

An example is a person who for one health reason, like diabetes who was turned down for regular LTC insurance, may be able to obtain a policy via an asset based policy.

This can also provide additional stability for other investments. A fixed annuity provides a solid fixed rate of return, even at three percent, it is much higher than zero! Also with the right annuity you may be able to withdraw money income tax free when those funds are used for qualified long-term care expenses.

A problem with long-term care insurance is that statistically 30 percent of people don’t end up using it and they feel like they have wasted all those expensive premiums. So the asset based policy solves this problem, it is not a “use it or lose it” policy. If you use it for long-term care great, if not then it is left to your heirs as part of your estate plan, either way the policy is preserving your estate. If the policy holder decides to cash it in then they can do that also, in some cases getting more than what they put in the policy.

Because long-term care policies are purchased by more people at or near retirement in preparation for what may happen in near the end of life. The question is this; is your retirement plan complete without some sort of long-term care plan in place? For most Americans, 93% of them, older than 60 years old, the answer is NO. And then for those who are younger than 60 what about your parents? What do they have in place? If they have nothing, will they be moving in with you? If you have questions about who needs long-term care insurance read Who Needs Long-Term Care Insurance.

Remember:

It's been said, "It isn't happy people who are grateful, it is grateful people who are happy!"

Topics: retirement, Long term care, LTC, LTC insurance, retirement planning

Investment Portfolio Performance

Posted by Wendell Brock, MBA, ChFC on Thu, Feb 05, 2015

Everyone envisions great performance within their investment portfolio. Performance is one of the most sought after characteristics of any portfolio. However, evaluating the return only ignores risk and several other factors that affect performance.

Achieving a balance between the risk and performance or return is what a balanced investment portfolio is all about. In a balanced portfolio the stocks generally provide the greater return and the bonds are there to help minimize the overall risk; risk management techniques are important to consider, providing a balance between two distinct asset classes, stocks and bonds.

These two major asset classes are often broken down between many other asset classes. For example, bonds may be divided between US Treasuries, US corporate bonds, international bonds, inflation protected bonds, junk bonds, municipal bonds, etc. Stocks are likewise divided; there are the large cap, mid cap and small cap, international stocks, real estate stocks, retail stocks, commodity stocks, natural resource stocks, utilities, etc.

Risk is also broken down, as there are several types of risk that each stock and asset class are subject to. There are four major types of risk: technical risk, fundamental risk, interest-rate risk and inflation risk. Each of these risks can play a significant role in a stock or bond’s performance. All publicly traded stocks are subject to technical risk (a.k.a. macro or market risk). Many simply rise and fall with the market as a whole. While fundamental risk, (business or default risk) deals primarily with the company itself; is the management team running things right? Default risk can come into play if the company gets in such a spot that it needs to file bankruptcy; such is the recent case for Radio Shack.

So here are a few things to watch when evaluating performance…

Don’t forecast.

Many folks have a wonderful year in the market and then think all the succeeding years will be the same and they expect the same. They figure that they will hit a jackpot in 10 or 20 years based on what their account did last year after all it should continue to perform at the same level in the future, right? Just like farming, farmers have seldom perfect farming weather year after year. Some years there is a drought and others flooding!

Don’t work off averages

An average return only tells us if the fund has been positive or negative over a period of time is all. Each year is a story to itself; long-term averages don’t always tell the whole story, the average will hide down years. If a portfolio goes up from $10,000 to $11,000 great we had a 10 percent gain. However, if the account goes down by 20% it will take 25% to get back to break even. This is the math of losses, which often plays a major role in the emotional choices to sell at the bottom or get out when things are not looking “great”.7Twelve_1

Keep a multi-year perspective

“Maintaining a multi-year perspective is vital to the mental and emotional health of an investor. Year-to-year returns are ‘noisy’ whereas 3-year rolling returns are more indicative of general performance patterns.”[1] One year’s return may not provide an accurate image of an entire portfolio model and may limit the investor’s vision.

While this may sound counter to the previous paragraph; it is not. The previous paragraph about averages is meant to keep the average return in perspective with the annual return. This section provides the reasoning to keep a long-term investment perspective; stick with the game plan for the long-term giving it time to work on your behalf. One year is not a sufficient amount of time to let a long-term portfolio model strategy work.

Expect Losses

According to Dalbar investors earned less than ½ the rate of return over the past 30 years that the market earned. Again, money is emotional, it is not math. This lack of return is due in part to investors pulling money out at inopportune times; the market is down, need college funds, down payment for a house, and other major unexpected expenses. The biggest looser is fear when the market tanks.

Yes it is wise to minimize losses, hence a properly balanced portfolio, but the best thing to do is have a game plan for when the market reverses. Ask that question now and make a plan. Are you going to hold on? Sell when the market is down by X% and get back in when? What if the market drops to your target sell level, we sell, and then it does not continue down, but reverses the next day and shoots back up! These bounces are devastating to portfolios; create a logical plan and agree on the plan with your advisor. The old adage of: “Buy low and sell high” might be part of your plan, when the market drops, should you buy more instead of selling?

Two Parts to Climbing a Mountain

If a person is not retired, then they ought to keep adding to their investment/retirement accounts, this will help immensely. (Many folks switch jobs and rollover their 401K to an IRA and let it sit never adding another nickel! To the extent possible keep adding.) This part of mountain climbing referred to as ascending, and when referring to investing, it is accumulating. Going up the mountain is typically easier, and less stressful on the body. Be an accumulator of assets and shares.

On the other hand, if a person is retired, then they are heading back down the mountain, descending or de-accumulating. It is always more trick getting down the mountain than up, for one it is much harder on the knees! There are far more accidents going down a mountain than up. It uses different tools and techniques; in this phase having some market exposure is good, but a person will want to develop greater security in their payouts too. Similar to having a sure footing with every step down.

Check emotions, make a plan for when the market does go down, and manage risk in a balanced portfolio and things should go alright. Most important keep a positive outlook, ask questions, do not be mean and nasty with advisors – they really do want to see investment accounts go up and up! Most advisors I know stress and lose sleep over client’s accounts and their performance.


[1] Craig L. Israelson, PhD. Architect of the 7Twelve Portfolio Model, Professor of Financial Planning at Utah Valley University (UVU).

Topics: retirement, Investment Portfolio, Investment, Risk Management

Social Security; The Qualitative Dimension

Posted by Wendell Brock, MBA, ChFC on Fri, Aug 01, 2014

Last week I discussed some of the factors that go into the decision about when to take Social Security. The discussion was primarily based on working the numbers and coming to the basic conclusion that it is an entirely individual choice based on one's financial situation. This week I want to add to this discussion some of the qualitative aspects of life that should not be neglected when making such a decision.

To give an example of what I have in mind for this discussion, consider some of these questions: Will I be better able to do some of the things I have always wanted to do if I take Social Security earlier rather than later? If I wait on taking Social Security will I have the stamina, interest and motivation to do the things I want to do now, later in life?

Last week I showed that the payout is often larger by waiting a few years to take Social Security, however, will waiting enhance the quality of your life? Would you be wiser to take it at a younger age and use the lesser amount to fund some of the life experiences (travel, toys, etc.) that you may not have the stamina or interest to pursue later in life?

The US Travel Association reports that the average age of leisure travelers is 47.5 years old. Mature travelers comprise 36 percent of leisure travel volume (18% are 65+, 18% are 55-64). Nearly two in ten (19%) are 45-55, 17% are 35-44, 20% are 25-34 and 8% are 18-24 years old. I give this statistic because many people dream of traveling once they retire. The majority of travelers- 36%- are over age 55. Will you have the money and the stamina to fulfill your travel dreams? Would the decision to take Social Security earlier help you reach that goal?

The American Psychological Association reports that a number of physical changes occur as adults reach age 65. The most common are listed below.

  • Hearing impairment among older adults is often moderate or mild, yet it is widespread; 48 percent of men and 37 percent of women over age 75 experience hearing difficulties.
  • Visual changes among aging adults include problems with reading speed, seeing in dim light, reading small print, and locating objects.
  • The amount of time it takes to respond to features in the environment once they are detected is typically slower among older adults.
  • The proportion of older adults needing assistance with everyday activities increases with age. Nine percent of those between ages 65 and 69 need personal assistance, while up to 50 percent of older Americans over 85 need assistance with everyday activities.
  • The top five causes of death among older adults are heart disease, cancer, cerebrovascular disease (relating to the blood vessels that supply the brain), pneumonia and flu, and chronic obstructive pulmonary disease. In spite of a decline in physical health, two-thirds of older adults who are not living in institutions (such as nursing homes) report their health to be good, very good, or excellent compared with others their age. What's important to remember about people over age 65 is that while many begin to experience some physical limitations, they learn to live with them and lead happy and productive lives.

These statistics can help us factor in the very real changes in health that we experience as we age. Not that everyone will experience some or all of these health challenges, but to simply acknowledge that the older we get, the more physical limitations we can expect. What do you want to do with your life before physical limitations set in that would thwart your dreams?

The point is that there is a qualitative dimension to this choice that is often overlooked or ambiguously lumped in the statement of 'individual choice'. People often forget to take into consideration the aging process with its diminished energy and somewhat constricted abilities, and therefore run the risk of not achieving their dreams and dying with a pot full of money. Abraham Maslow once commented that you can pay too much for money.

In researching for this article, I wondered, how are seniors spending their money? Below is a chart showing the top five areas that seniors are spending their money. It may surprise you to see education listed. This is typically due to either contributions to a grandchild’s college fund or else paying off college loans that were co-signed by the seniors.

Age Stats 1

Now see how those expenditures change as seniors age past 75.

Age Stats 2

Seniors spending reflects their hobbies. For 65 to 74 year-olds, for instance, notice that two of the top five fastest-growing expenditure categories are miscellaneous entertainment, which includes exercise equipment, photography equipment, campers, boats and other motorized recreational vehicles, and electronics; and pets and hobbies, which not only includes expenses for pets and pet supplies, but also toys, games, tricycles and playground equipment.

The Baby Boomers are far more active than their parents were. They have traveled more places, participated in more sports, and likely climbed more mountains. All resulting in an active lifestyle, that will be interesting to watch as they continue to age; how and when will they start to slow down?

According to the Bureau of Labor Statistics, the number of seniors age 75 and older are around 12,147,000 with a mean after-tax income of about $34,245 and a mean expenditure of $34,395.

One more thing that is noteworthy to mention is that 25 years ago, the credit card debt of seniors was negligible, and now it is around $5000 for seniors aged 75 years or older. I hope these statistics give you an idea of how to plan for your senior years. It isn't just about the numbers, but it is very much about the quality of life you want to maintain during those years.

I would like to share the story of a dying 85 year old man imagining how he would've lived his life differently if given the chance. It is found in the book Living, Loving & Learning by Leo Buscaglia, who discovered it in a journal of humanistic psychology.

He says, "If I had my life to live over again, I'd try to make more mistakes next time. I wouldn't try to be so perfect. I would relax more. I'd limber up. I'd be sillier than I've been on this trip. In fact, I know very few things that I would take so seriously, I'd be crazier. I'd be less hygienic. I'd take more chances, I'd take more trips, I'd climb more mountains, I'd swim more rivers, I'd watch more sunsets, I'd go more places I've never been to. I'd eat more ice cream and fewer beans. I'd have more actual troubles and fewer imaginary ones.

You see I was one of those people who lived prophylactically and sensibly and sanely hour after hour and day after day. Oh, I've had my moments, and if I had it to do all over again, I'd have more of those moments. In fact, I'd try to have nothing but beautiful moments- moment by moment by moment.

I've been one of those people who never went anywhere without a thermometer, a hot water bottle, a gargle, a raincoat, and a parachute. If I had to do it all over again, I'd travel lighter next time. If I had to do it all over again, I'd start barefoot earlier in the spring and stay that way later in the fall. I'd ride more merry-go-rounds, I'd watch more sunrises, and I'd play with more children, if I had my life to live over again. But you see, I don't."

The bottom line is that as we age, we may not want to travel as much, go out to the movies as much, or visit great grand-children who may be graduating from Kindergarten (as important as that may be). We may simply choose to stay closer to home and do less, simply because our perceived needs are changing and we discover that we want less. While this may be the case, and it is hard to predict, exactly how we will live at that age, choose to be happy with what you have. Manage your affairs so that when you do take Social Security it works for you and your life style, not just by the numbers. 

Topics: retirement, Social Security, Baby Boomers

Social Security - When To Take It

Posted by Wendell Brock, MBA, ChFC on Thu, Jul 24, 2014

There is a great debate growing about when is the best time to start taking Social Security. There are pro's and con's on either side of the debate. But really, it all boils down to a very personal decision based on your specific situation.

Social Security Check

The factors of when to take Social Security depend on two considerations: 1) the quantitative information, your work status between age 62 and your full retirement age; your life expectancy; your marital status; and your desire to protect your assets; and 2) the qualitative information, what are your goals during retirement, when do you anticipate slowing down, will you have the stamina or interest to pursue things later in life, say, over age 80, etc. This will be a two part article, first I will discuss the quantitative factors how each of these may affect your personal situation, next week I will discuss, perhaps the more important, qualitative factors.

If you have not yet reached your full retirement age as defined by Social Security (for most people that's about age 66) and you are still working, it will probably not make sense to start receiving your Social Security benefits. Why? Because if you earn over the Social Security earnings limit, your Social Security benefits will be reduced. Once you reach full retirement age your benefits will not be reduced regardless of other income you may earn (although your benefits may be taxed.)

If you live to your standard life expectancy, believe it or not, you will get almost the same amount whether you take Social Security early, or wait until later to take it. To see how this works, it helps to look at an example using real numbers, such as the one below.

Steve is age 61 and he is deciding when to take social security. Here are the numbers from his Social Security statement showing what he will get at which age:

  • Age 62: $1,643 ($19,716 per year)
  • Age 66: $2,238 ($26,856 per year)
  • Age 70: $3,009 ($36,108 per year)

A 62 year old man has a life expectancy of nineteen years, or age 81. Social Security has a cost of living adjustment which provides an increase in benefit of 2% a year, but for now we’ll factor it without that. Here are the three possibilities:

  • Assume Steve starts receiving benefits at 62. He gets $1,643 per month, or $19,716 per year, for 19 years. This is a total of $374,600.
  • If he waits until age 66, he gets $2,238 per month, or $26,856 per year, for 15 years. He'll receive a total of $402,870.
  • If he waits until age 70, he gets $3,009 per month, or $36,108 per year, for 11 years. He'll receive a total of $397,190.

Clearly, if Steve lives to life expectancy, he maximizes his lifetime income by taking Social Security benefits at age 66. When you factor in the 2% annual increases, Steve would expect the following total amounts:

  • $450,320 if he started benefits at age 62
  • $502,720 if he started benefits at age 66
  • $514,800 if he started benefits at age 70

If Steve lives to age 81, he will maximize his lifetime income by waiting until age 70 to begin taking his Social Security benefits. In Steve's case, his break even age matches the average breakeven point which is 80, meaning if he waits until age 70 to begin benefits, he must live to at least age 80 to receive the same total dollars he would have received if he started taking benefits earlier. If you don't think you'll live past 80, you're better off claiming earlier. If you are married and think one of you will live past 80, it might make sense to delay.

Morningstar's Blanchett wrote a report, "When to claim Social Security" in The Journal of Personal Finance. He said "We find that females, married couples, retirees who expect to invest in relatively conservative portfolios during retirement, and retirees who have longer life expectancies are likely to benefit most from delaying Social Security benefits. On the other hand, retirees who have shorter life expectancies or invest more aggressively and believe they can achieve a relatively high return on their retirement portfolios would likely be better off taking Social Security earlier."

There are a lot of dollars at stake, and of course no one knows their life expectancy with certainty. However certain health and lifestyle factors will affect your own personal life expectancy. Just as an insurance company would do underwriting, I would suggest you do an analysis on your own personal life expectancy, using a life expectancy calculator that will ask you health and lifestyle related questions.

For singles, life expectancy is one of the primary factors to consider. For married couples, you have to consider more than just life expectancy. The way Social Security survivor benefits work, when you are married, upon the death of the first spouse, the surviving spouse can keep the larger of either their own benefit or their spouse's benefit. Because of this, there are ways for couples to coordinate how and when they each take benefits so they can get more as a couple.

I'm a strong believer in leaving an inheritance for my posterity. Using up retirement savings in lieu of potentially one day getting a larger Social Security check just doesn't achieve this goal. It makes more sense to use money that won't be there after I'm gone - i.e. Social Security - than to burn through things like cash savings, retirement account funds, and home equity. Personally, I'd rather try to save these assets, using Social Security (a source of income that I won't be able to pass on to descendants) to pay the bills rather than dipping into personal assets.

There are also a variety of strategies regarding Social Security. One is a switching strategy, which allows one spouse to claim another's benefits. For example, a married man who is 67 and doesn't need the benefits can claim his wife's benefits until he's 70, and let his own benefits continue to grow. When he turns 70, he can switch to his own benefits. Another switching strategy: A divorced woman who is 67 and had been married for at least 10 years can claim her ex-husband's benefits until she reaches 70, then switch to her own.

When to begin taking Social Security benefits is a very personal decision. Knowing the rules will help insure that you don't needlessly waste months of benefits that you could have received. If you have questions about when you should receive Social Security benefits, feel free to contact us for a free consultation. If you know of someone who may be at the threshold of this decision pass along this article to them, you may just save them some grief.

Note: Next week qualitative issues surrounding Social Security.

A Special thanks to Dan Perkins, PhD. who helped with these articles.

Topics: retirement, Social Security, Life Expectancy, Morningstar

Long-term Care Insurance

Posted by Wendell Brock, MBA, ChFC on Thu, Apr 03, 2014

Nearly everyone knows someone over age 50, the prime age to purchase Long-term care insurance (LTC), which is an insurance product that helps provide peace of mind and dignity for the elderly who need assistance caring for themselves beyond a predetermined period. There are many aspects to this insurance, how premiums are priced, when does a person go on claim, how many people need the care, etc. Below these items and many more will be discussed.long term care insurance

Long-term care insurance covers care generally not covered by health insurance, Medicare, or Medicaid. Individuals who require long-term care are generally not sick in the traditional sense, but instead, are unable to perform some or all of the basic activities of daily living such as dressing, bathing, eating, toileting, continence, getting in and out of a bed or chair, and walking.

Age is not a determining factor in needing long-term care. According to the U.S. Dept of Health and Human Services, about 60 percent of individuals over age 65 will require at least some type of long-term care services during their lifetime. About 40% of those receiving long-term care today are between 18 and 64. Once a change of health occurs long-term care insurance may not be available. Early onset (before age 65) Alzheimer's and Parkinson's Disease are rare but do occur.

LTC insurance generally covers home care, assisted living, adult daycare, respite care, hospice care, nursing home and Alzheimer's facilities. If home care coverage is purchased, long-term care insurance can pay for care within your own home, often from the first day it is needed. It will pay for a visiting or live-in caregiver, companion, housekeeper, therapist or private duty nurse up to seven days a week, 24 hours a day (up to the policy benefit maximum).

Other benefits of long-term care insurance:

  • Many individuals may feel uncomfortable relying on their children or family members for support, and find that long-term care insurance could help cover out-of-pocket expenses. Without long-term care insurance, the cost of providing these services may quickly deplete the savings of the individual and/or their family.
  • Premiums paid on long-term care insurance may be eligible for an income tax deduction. The amount of the deduction depends on the age of the covered person. Benefits paid from a long-term care contract are generally excluded from income.
  • Business deductions of premiums are determined by the type of business. Generally corporations paying premiums for an employee are 100% deductible if not included in employee's taxable income.
  • Medicaid provides some of the benefits of long-term care insurance. As a welfare program, Medicaid does provide medically necessary services for people with limited resources who need nursing home care but can stay at home with special community care services. However, Medicaid generally does not cover long-term care provided in a home setting or for assisted living.

Once a person purchases a policy, the language cannot be changed by the insurance company, and the policy usually is guaranteed renewable for life. It can never be canceled by the insurance company for health reasons, but can be canceled for non-payment.

LTC insurance rates are determined by six main factors: the person's age, the daily (or monthly) benefit, how long the benefits pay, the elimination period, inflation protection, and the health rating (preferred, standard, sub-standard).

Most companies will offer couples and multi-life discounts on individual policies. Some companies define “couples” not only to spouses, but also to two people who meet criteria for living together in a committed relationship and sharing basic living expenses.

Most companies offer multiple premium payment modes: annual, semi-annual, quarterly, and monthly. Companies may add a percentage for more frequent payment than annual. Options such as spousal survivorship, non-forfeiture, restoration of benefits and return of premium are available with most plans.

You should not purchase any long term care insurance if you currently receive or may soon receive Medicaid benefits, if you have limited assets and can’t afford the premiums over the lifetime of your policy, or if your only source of income is a social security benefit or supplemental security income. Insurance companies and the National Association of Insurance Commissioners advise that you should not spend more than 7% of your income on this insurance.

The LTC industry suggests that you’ll pay less if you buy your policy at age 50 instead of waiting until age 60 as others recommend. Many people worry that if they wait until age 60 to buy LTC, they will develop a medical condition that will either prevent them from qualifying for coverage or significantly raise their premiums. The average age of purchasers has dropped from 68 years in 1990 to 61 years in 2005, and the number of purchasers who are under age 65 has increased significantly.

ltc solutions

Some may argue waiting until age 60 because you are much less likely to file a claim before that age. Statistically, 90% of LTC claims are filed for people over age 70. But if you have a family history of illness at a young age, or you are losing sleep because you’re worried about getting sick and not being able to afford care, then buy LTC when you can afford it. The peace of mind is worth more than any cash you’ll save on premiums.

Many people think that they will use a retirement account to help fund Long-term Care, should you need it. Remember withdrawals from retirement accounts are subject to income tax. However if this is done right the withdrawals for Long-term Care maybe income tax free, saving retirees thousands of tax dollars.

While there are hundreds of thousands of these policies that have been issued, still 93% of retired Americans, who are the very people who need this coverage don’t have it. It has been said that your retirement plan is not complete without long-term care insurance in place.  Have you looked into LTC insurance for yourself or your parent(s)?

Topics: retirement, LTC, LTC insurance, Long-term Insurance, elderly, Insurance, retirees, tax free

Social Security Will It Be There

Posted by Wendell Brock, MBA, ChFC on Thu, Feb 06, 2014

Recently I was told that there are 3-4,000 people per month in the Dallas Metro area who turn 65; the baby boomers are entering retirement in full swing. That is a lot of folks who are now descending on the local social security offices to collect the long awaited benefits, for, which they contributed many years.

Many folks wonder if they will ever receive any benefits, due to the financial state of the country and in particular the Social Security Administration (SSA) Trust Fund. I have always told people that the money may not be there, but you will be paid. After all, when have you known the government to shutter an agency and send over 68,000 government workers out on the street to find another job? It just doesn’t happen.

Social Security Cartoon 25A

At times, when I find a really good cartoon, I cut it out of the paper, like the one attached. This says drawn in winter 1990, 24 years ago when the baby boomers were in their early 40’s. Fast forward to 2014 and it seems nothing has changed!

So now, that we have established that Social Security will be there, now comes the question of how or when to take the benefit? There are several strategies to the challenge of maximizing the Social Security payment, while keeping the tax man at bay.

Here is one idea. Most people don’t know that they can “file and suspend”, meaning that they can file for the benefit and then immediately suspend receiving the benefit until they are a few years older. This strategy may be best used when one spouse has a higher income than the other. The spouse with the higher income files and immediately suspends receiving the benefit, while the lower-earning spouse files and receives half of the benefit.  While the one benefit is suspended it continues to grow until the suspension ends.  Once the higher-earning spouse reaches age 70, both can collect their own benefits in full.

While many people continue to work during the early years of retirement, they will want to watch how their income is paid to them so they can minimize the taxes on their Social Security. They may want to take money from their IRA’s first before receiving Social Security, thus reducing the taxable income from that source early on. This may help keep Social Security payments from being taxed if payments are put off for a few years.

How are you planning for your Social Security? Are you using any strategies to get the most benefit you can?

Topics: retirement, Social Security, Baby Boomers

An Annuity - Why?

Posted by Wendell Brock, MBA, ChFC on Wed, Dec 18, 2013

When talking about annuities, over the years I have met with many people who get a glazed look on their faces and ultimately they throw their hands up and say, “I am so confused”. I will admit that some investments are confusing. But here is one that almost anyone can get their arms around – a retirement income contract, commonly known as an annuity. (Say "an annuity" 10 times really fast!)

annuity definition 500x500

 

When considering the many types of investment vehicles in the market place these days, one should consider a variable annuity.

 

Basically, an annuity is an income contract with an insurance company. You pay the insurance company money, either in a lumpsum or in payments over time. In return the insurance company contracts to pay you an income for a period of time, typically based on a set number of years or until death. (In this way you cannot out live the income benefit.)

Annuities are primarily used for funding retirement income, so they are a long-term savings vehicle. Depending on the annuity contract, the point at which they begin paying the income is up to you.

There are three basic types of annuities: fixed, indexed and variable. A fixed annuity behaves much like a CD (Certificate of Deposit). On the contract anniversary, the insurance company establishes a new interest rate the company will pay over the next twelve months.

The advantage is that the interest earned, growth and dividends compound income tax deferred.

A variable annuity is also an income contract, rather than investing in the fixed assets of the insurance company and receiving a fixed rate of return, you may invest in a combination of sub-accounts.

These sub-accounts behave almost identically to mutual funds. They can have many of the same objectives as investing in mutual funds, such as, US large cap stock, US bonds, non-US stock, non-US bonds, real estate, etc. Some mutual fund companies have created partnerships with insurance companies to offer copy-cat funds inside variable annuities. Most variable annuity contracts also have a fixed account that will work similar a fixed annuity.

All of these accounts grow tax deferred. It’s like having a tax deferred mutual fund. The tax deferral will result in a greater amount of available funds at retirement, which can greatly increase your income.

Because an annuity is a retirement income contract, it is subject to early distribution penalties by the IRS, similar to an IRA. Making a withdrawal before age 59 ½, creates a 10 percent income tax penalty.

And the risk? People rightly associate mutual funds with risk – after all, aren’t they invested in the stock and bond markets? Can’t I lose my money? Yes, but no more than you would in regular mutual funds. That is why investors should be wise in how they are managed. Never invest and leave the money there and forget about it.

This prompts a discussion about the indexed annuities – these annuities are good investment vehicles. One client had much of his retirement money in an indexed annuity before the market meltdown of 2008. Many of his neighbors lost thousands (maybe millions) during that time a few lost their homes. He was just fine, did not lose a nickel as he says.

An indexed annuity pays a fixed rate of return based on the returns of a particular investment index like the S&P 500. If the index goes up the annuity earns a percentage of the amount it increases. So if the index goes up 10 percent, the annuity may earn 6 percent. But when the index drops and goes down below a certain level the account value does not follow it down; the annuity simply earns 0% that period. Many people would rather earn nothing than lose money.

With an indexed annuity you get the upside but not the down side.

Each type of annuity has its place for different investors. You may consider each one for a part of your retirement nest egg.

One thing to be mindful of is the insurance company that is offering the contract. Each one may be a little different and their fees for managing the annuity contract may vary. One annuity contract may charge a low flat monthly fee of as little as $20 and another as much as three percent. It is important to read the information about the contract and ask questions so you understand; don’t end up confused! Do you own an annuity?

Topics: retirement, Annuities, annuity, investments, retirement income

Start Saving For Retirement Now

Posted by Wendell Brock, MBA, ChFC on Thu, Dec 12, 2013

Americans these days talk a lot about retirement, what they want to do, when they want to retire and where they dream about living. While there are many issues in planning a comfortable retirement, the most important is having enough money.

One fear these days is that a retired person may outlive their money. With people living longer, the 10 year retirement plan that worked for our grandparent’s generation no longer equals security.

To be on the proverbial save side, plan for at least 25 years of retirement. This puts an

Retirement planningthing you can’t afford.
 extra strain on your retirement savings because it not only has to provide you with a decent income, but for a longer period of time. 

There are some things that will help. First, get started right now. Procrastination is one 
In fact, waiting 10 years to start will cost you over two time the savings rate. For example for every $100,000 you wish to have saved by the time you reach 65, it will cost you $28.64 per month at age 25 and $67.10 per month at age 35. You may think that’s no big deal, but at age 45 it will cost you $169.77 per month and it only goes up from there. 

According to the Employee Benefit Research Institute only 39.4 percent of the 156.5 million Americans working participate in an employer sponsored retirement plan. This lack of savings will greatly affect the spending of future retirees.

Second, plan on working at least until you can collect 100 percent of your socia
l security benefits. For those born after 1958 this is age 67. The longer you work, the more social security you will collect on a monthly basis. Working longer, will also allow you to put more away in your retirement plan and let what is there grow.

Third, open a Roth IRA, use a Roth IRA as your primary retirement savings vehicle. (Unless your company matches your contributions in a company sponsored 401K). Between these two you should save a substantial amount of your retirement funds. The big thing is to save regularly, make regular contributions to these accounts. No one forces you to do this, so you must be self-disciplined in your savings and simply DO IT!

If you don’t like that idea, plan on increasing your savings rate. Currently Americans save approximately 4 percent of their income. It should be at least 10 percent, if not 15-20 percent. The more you save now, the less you will have to work during the golden years.

Finally, don’t be afraid to use mutual funds and exchange traded funds (ETF’s). By using an effective portfolio management strategy, like the 7Twelve® portfolio model you can manage risk while at the same time maintain adequate returns. Outside Investment Advisors can assist in implementing this type of model. Using appropriate funds should keep your money growing at a fair rate and keep it ahead of taxes and inflation.

Topics: retirement, Saving, Investment, money, planning

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Wendell W. Brock, MBA, ChFC

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