Prepare for the Real Costs of Long-Term Health Care

I loved living in Africa. I still love the wild spaces and the live-and-let-live culture. I’ll retire there for sure… my 150-year-old seaside cottage is ready and waiting.

But in my younger days, Africa came with a cost: I was far from loved ones. A round-trip ticket to the U.S. cost an entire month’s salary.

But sometimes I thought it worth it… such as when my dear grandma entered long-term care late in her life.

She was a lovely person; kind and gentle, but with a keen eye for saving a penny.

Luckily for her, when she needed round-the-clock care, a combination of sound financial planning and good timing – health care was a lot cheaper then, and Medicare had good benefits – meant she was well-provided for.

Those days, however, are over… are you ready?

Long-Term Care: It’ll Cost You

Consider these numbers:

The median cost of a private room in a nursing home is $250 to $350 per day, or about $91,000 to $128,000 per year.
The median cost of assisted living is $3,628 per month – more than $43,500 per year.
A home health aide for eight hours per day costs more than $40,000 per year.

Most people prepare for long-term care by calculating how much of the cost they could handle with retirement income and savings, then looking to insurance to fill any gap.

But long-term care insurance premiums have skyrocketed in recent years.

People are living longer with chronic diseases such as Alzheimer’s, like Grandma. And insurers didn’t anticipate an extended period of low interest rates, which have hit their investment returns on which they depend to pay future claims.

Consequently, premiums on long-term care insurance have soared.

In 2000, you could pay $880 per year for a $70 daily benefit, a 50-day waiting period, 5% compound inflation protection and lifetime benefits. Today a similar policy – but with a five-year maximum benefit period – would cost $2,944 per year.

Long-term care policyholders face a tough decision: Pay the increased premiums – cutting into your retirement savings! – reduce coverage, or let the policy lapse and lose the benefits.

Get Smart Instead

Fortunately, there are strategies you can adopt to cope with these rising insurance costs. Here are some of the easiest to implement:

Buy a combined long-term care and life policy. These pay out whether you need care or not, and the premiums are fixed. A 55-year-old man who pays $10,000 per year for 10 years could get a monthly long-term care benefit of $5,500 for up to six years, growing at 3% compounded per year. If he didn’t need long-term care, his heirs would receive a $130,000 death benefit, or he could cash in the policy and get back 80% of his premiums.
Add a chronic-care rider to a permanent life insurance policy when you buy it, which lets you use up to 2% of the death benefit per month for long-term care, with a $360 daily maximum. This rider tends to add 10% to 12% to the premiums

The average long-term care claim is just less than three years. That gives you scope to adjust your policy and save on premiums:

Cut inflation protection. Cutting back from 5% to 3% can reduce your premiums significantly. The older you are now, the better this option will be. Someone in his or her 70s, for example, may have already built up a big enough daily benefit at 5% inflation protection that reducing the rate to 3% or lower will be enough in the future.

Reduce the coverage term. If you have lifetime benefits, you can usually reduce coverage to three to five years, which covers the average claim period. But be aware that the reduced term may fall short of what you need if you develop a chronic disease.

Look for a “paid up” option. Regulators in some states require insurers to offer this option to policyholders who drop their insurance. Instead of losing all the coverage you paid for, you’d get a benefit based on the premiums paid.

Of course, there are other ways to reduce your health care costs, now and in the future, such as offshore health care and health savings accounts.

Don’t Set It and Forget It

Most people react quickly to changes in the investment environment. They seize opportunities and adjust their portfolios accordingly as asset values change.

Unfortunately, the same isn’t always true for insurance. There’s a tendency to buy it and let it ride. Don’t make that mistake.

If you don’t have long-term care insurance, consider getting it.

If you do, review your coverage and see whether it makes more sense to reduce it and divert some of the savings into your retirement kitty, where it might earn better returns.

Start a Plan for Retirement (Level II to Financial Freedom)

Once you’ve completed Level I (Tackle Bad Debt) in the game of Financial Freedom, it’s on to Level II – Retirement Planning. There’s a lot to consider when successfully setting up your retirement plan. In this level, we will just cover the accumulation portion of retirement planning, not the distribution phase (which happens when you retire). To set up the retirement plan, start with the Three main factors: determine your goals, the number of years remaining until your retirement and your tolerance for risks. The goal of this initial process is to set the average glide path for how contributions and appreciation will add up to enough money for you to convert into income at retirement.

When I started a retirement account, it was 1998 and I think Roth IRAs had just been established. So, I went through the whole process with a financial advisor, who was also my neighbor. I wanted to retire when I was 65, I wanted $3 million and I had a high tolerance for risk. I had always assumed that a high level of risk was required for any chance of a big reward. I don’t think that way anymore! When the “dot com” bubble burst in 2000, I had a new feeling about my “high-risk tolerance.” After paying all the brokerage fees, I think I lost about 50% of my investment that year. Because of that loss, I was forced reevaluate what having a high-risk tolerance meant. I’ve since learned you don’t need to take on high risk to make good, consistent returns. In fact, it’s probably better not to.

A lot of people don’t seem to get satisfactory answers as to the point of those 3 planning questions. So, I’ll say the main point of identifying your goal, time horizon, and risk tolerance is to set your portfolio’s asset allocation. Your asset allocation is the mix of various asset classes (like stock, bonds and real estate) that you will target, in percentage terms. Higher risk tolerances allow for a higher volatility. Since stocks are more volatile than real estate and bonds, a higher risk tolerance would set up a portfolio with a higher percentage of stocks. Lower risk tolerances look to reduce volatility, and therefore, target more fixed income in the asset allocation.

How does asset allocation work? It works in two ways. One way is diversification. Because asset classes react differently to the changing environment, diversification, over time, produces better results with less volatility. Why is that? All investments are affected by 4 main factors:
1) commodity prices as input prices, specifically oil,
2) interest rates as the cost of borrowing,
3) inflation (or deflation) as a combination of Federal policy, monetary policy and general pricing, and finally,
4) the economy, in terms of growth (corporate and economic).

Investments are affected by the nominal numbers for each of these 4 factors as well as the rate of change. For example, you can have low interest rates, but if those interest rates suddenly start to rise quickly, then the market will start to discount that change. Rate of change can greatly affect market pricing and volatility. Remember, the end goal is that the market is a future discount of profits, and any big change in any of these four areas will greatly affect the calculus.

The second way that asset allocation works is through “re-balancing.” Re-balancing allows for a systematic process of buying low and selling high. Re-balancing your assets at set points throughout the year, say twice per year, allows you to sell the asset classes that have grown larger than their target allocation percentage and buy asset classes that have drifted below their target asset allocation. This provides for a process that automatically and systematically buys low and sells high.

Now, why are we talking about this at Level II – Setting up Retirement? It’s because I recommend you find a service that can do all this for you as cheaply as possible. I recommend looking at the “robo-advisors” – WealthFront, Betterment or Personal Capital. These companies walk you through the planning questions, set a risk tolerance number from 1.0-10.0 and then set up an asset mix based on your profile. They allow you to set up automatic contributions and they will handle re-balancing on a set schedule. The important point is to have all this inside an automated system so you don’t even have to think about it. You can also directly buy the index ETFs, free of a trading charge, inside a brokerage like TDAmeritrade. They offer 100 free index ETFs. Keep in mind, though, that ETFs are not as automated as the robo-advisors. I would start with a robo-advisor account and then optimize and improve upon it later as you start getting better at the skills of investing.

So, to achieve Level II, you need to set up a retirement account and automatically contribute 10% of your income. I would generally stay away from company 401k plans, unless they provide a match. If they provide a match, then it’s free money and you can start Level II by setting up your 401k, but only to the amount the company will match. Why? Because 401k plans have many hidden fees and are quite expensive to manage. Most of the people getting rich in 401k-land are the providers, not the participants.

Additionally, how do you know you’re on track to retirement? I would use these very general statements. You want “four figures” in your 20’s so that some day in your 30’s you can achieve “five figures.” And you do that so you can get “six figures” some time in your 40’s. If you do that, you’re looking to get to “seven figures” some time in your 50’s. And if you want extra-credit, then you achieve “eight figures” some time in your 60’s or 70’s. If you’re 27 and you have $4,000 in your retirement account, you’re on track. If you’re 38 and you have $55,000 in your retirement account, you’re generally on track. If you’re 44 and you have $145,000 in your retirement, then you’re on track.

The main point here is that you need to have a portfolio of “four figures” before you have a portfolio of “five figures” and so on. And, that a retirement portfolio will use the power of compound interest and a long time horizon to generate large returns. This is a very general rule that does not apply to all. Also, this doesn’t allow for someone to skip the “goals” section of building a risk and investment profile. It should be used as a very general rule of thumb. I’ll give another rule of thumb in subsequent articles. For now, I hope you’ve found this point somewhat helpful and enlightening for how to win at Level II of the game of Financial Freedom – setting up a retirement account and investing process.

So, are you ready to complete Level II – Setting up a Retirement account and save 10 percent per year? You could do the whole Level II in one step – setting up a Wealthfront account and have automatic monthly contribution set up into a traditional or Roth IRA. OR, you could set up your 401k at your company, as long as they have a generous matching policy. OR, you could set up a TDAmeritrade account, set up monthly automatic contribution and invest using their free indexed ETFs. All of these approaches get you on your retirement investing track. You can improve upon it later. The goal is to just start and then make the management of it automatic.

Ladies, Do You Know The Three Threats To Your Retirement?

We all want a colorful retirement with opportunities to travel, visit grand kids, start a hobby, golf, read a book, or just relax in the front porch rocking chair.

But before we get too cozy, we have to make certain we have prepared for the three threats to retirement. There are other threats to be sure, but these three are “normal” and “expected,” and if not planned for, then there is a strong chance we could outlive our money!

• Inflation
• Real Rates of Return
• Life Expectancy

Inflation

The most significant reason for planning your finances is to ensure that your money stays even with, and hopefully outpaces inflation. Inflation is the silent killer of the purchasing power of money. Prices tend to go up over time. Your plan has to cover these increases.

Financially, you have to at least keep your purchasing power to stay even with inflation. If you put all your money in the bank and delay creating a plan, you are indeed making a decision and starting a plan.

Inflation is the increase of the cost of goods and services. We recognize that things may cost more next year than now. This is expected for a strong economy that continually has increasing growth. Inflation has been very low in the last decade when compared to historical numbers but is likely to increase again.

Real Rates of Return

Not all investment choices will keep you even with or ahead of inflation. You have to invest to beat inflation and the impact of taxes. The real rate of return that I am talking about is (a) the growth of your money after you consider your tax bracket and (b) the increasing cost of goods and services (inflation). Remember, purchasing power is measured from your take-home money and its ability to purchase goods after the impact of inflation. You have to keep taxes and inflation in mind when you calculate the real rate of return. Historically, the “easy” investments of CDs and other bank deposit accounts don’t keep you even with inflation. You have to “grow” some of your money to outpace inflation.

Life Expectancy

The final reason why creating your financial plan is so important is that the average life expectancy is getting longer and longer. You have to create a financial plan that anticipates your increasing longevity.

I have said it before and will say it again: “You don’t want to be an old lady on a fixed income.” You have to create a growth plan for life! If you have only traditional bank deposits (CDs, checking, savings, money market accounts), you are on a fixed income.

If you look at life expectancy chart, a sixty-year-old woman’s “expectancy” is 24.37 more years. This means there is a 50 percent chance she will live longer than 24.37 more years. If she invests money in bank deposit accounts, she will quickly lose purchasing power and be in trouble in years to come.

How much do you think a stamp, or car, or home, or that rocking chair will cost in 24 more years?

Whether it is through death, divorce, or choosing to remain single, women have up to a ninety percent chance at some point in their lives of having to be solely responsible for their finances. Even in strong healthy marriages, many women need to take a greater interest in the household finances. Now, with the baby boomers moving toward retirement, the number of women who will find themselves financially alone is predicted to dramatically increase.