Outside Economics

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.

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

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. 

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.

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.

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 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.

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)?

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.

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?

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!)

 

 

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?

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