Long Term Care
1. Having Sufficient Income
Many retirees want to generate sufficient income so that they never need to consume their principal. In fact, moat invest in a manner that will increase their probability of using their principal. You may be doing this also. Many retirees think that they must keep their principal safe and available, so they invest in low yielding short-term investment such as money market funds and CD’s.
These investments pay very low return, but they are highly liquid, they include the following:
- Savings accounts
- Checking accounts
- Treasury bills
- Money market accounts
Most retirees are lulled into false safety of these investments. Let me know why. First, let’s take a look at bank accounts. Bank investments typically pay 2% or less. After you subtract taxes and inflation, you have a negative return.
- Interest CD: 1.25%2
- Income Taxes: .37%3
- Consumer Inflation: .5%4
- Net real return to you: .38%
You must remember that while your money sits in a savings or money market accounts for the year, the prices at the supermarket are rising. This inflation must always be subtracted from any investment return so that you see how much you are really ahead. In the case of the savings account, you’re not ahead barely. Economists call this the “real return”, because it represents what you are really receiving.
So why do retirees have such a preference for investments with a small return? First, most retirees do not even realize that they have a small return? First, most retirees do not even realize that they have a small return. Secondly, retirees like the flexibility of having the money liquid in case of an “emergency”. What type of an emergency do you anticipate? Ill health? A nursing home stay? These concerns are legitimate. The cost of these catastrophes is so great that retirees could quickly wipe out their $200,000 in savings in order to cover costs (e.g. cost of average stay in a nursing home is 29 months’ x $7500 per month= $217,500).
Here’s another idea to help safeguard your assets. Take the money out of your bank accounts, invest it for a potentially higher return (e.g. 3% from a federally and a state tax exempt bond) and then use this extra income to get insurance for health care and long-term care insurance that could protect you in case of an emergency.
- Municipal Bond: 2.85%
- Income Taxes: 0.00
- Consumer Inflation: .5%
- Net real return to you: 2.35%
$200,000 invested x 1.97% (difference between CD and municipal nominal after-tax interest rates) = 3,940 annually to pay for quality long-term care and health insurance (the premiums for these insurances may be tax deductible).
Investments in any security involve fluctuation and may result in a loss of your investment; while CDs are FDIC- insured, municipal bonds are not. Additionally, the purchase and sales of municipal bonds may incur commissions, and municipal bonds may not be as a liquid as CDs. If sold prior to maturity, municipal bonds may return more or less than your original investments appropriate for your circumstances.
When most people stop to think this through, they’ll realize the following-they have money that they consider to be core capital. In fact, for many of us, our core is It capital is money that we intend to never spend. It is money that we keep working; money that we depend on to generate either interests or dividends.
Our core capital should be designed to outlive us. In fact, it’s important for you to start thinking about your money in terms of it outliving you, not the other way around. You don’t want to outlive your money. That makes for a very difficult existence. Your money should actually be invested for a period longer than your life expectancy. That’s the only way it will outlive you, and that’s the way it should be planned. Unless, of course, you think that you can time it perfectly to die when all your money runs out. But I don’t think your timing is that good.
So, your objective should be to have your core capital earn the highest possible rates with appropriate safety. By planning to have your money outlive you, you can make sure that your money will be working and providing for you until the day you go to a better place. The last thing you want to worry about is money when you retire. The one way to improve your chances for a bright financial future is to start pushing your money to work for you now.
When looking at bonds, consider investing in longer-term bonds to potentially increase your interest income. The objective for your core capital is to have it conservatively earn as high a rate as possible without taking undue risks.
Annuitization
If “annuitization” is a new term for you, you will be hearing it more and more. The idea is to use your principal to supplement your spending money-but do so in a way that the principal lasts as long as you do. Many people will have no choice but to use their principal to sustain themselves, and this is not a bad thing as long as it is done correctly. Since you can never be sure how long you’ll last, the insurance industry provides some assistance with life annuities. You receive payments for as long as you live.
Here’s how it works. In exchange for a single payment, the insurance company will immediately start making monthly payments to you. Part of these payments is considered income and part comes from your principal investment. These payments can last for a term of years or even for your lifetime If you choose. Note that life annuity payments could incur premium taxes in some states. Maintenance expenses and contract fees charged by the insurance company could also reduce your payments – but when you get a quotation, it will be net of these expenses.
The amount of money you receive each month is dependent on several factors, including your estimated life expectancy, the amount of money you have invested, and the current interest rate being paid by the annuity company (which is locked in at the time of purchase). The payout will typically be higher the older you are because the insurance company does not expect to have to make payments as long as they would to a younger person. Assuming that you have chosen the lifetime payment option, your annuity company will continue to make payments to you even if you live past your normal life expectancy.
If you die sooner, the insurance company keeps the balance of the annuity if you selected lifetime payments. You may also be able to elect to receive a lower payment in exchange for having the payments continued to your heirs until the entire amount of your original premium has been paid out. For whom may a fixed immediate annuity be suitable.
- A retiree needing increased monthly cash-flow
- A person with no heirs or who is not concerned about leaving an estate
- Someone who has a set aside other funds to leave to heirs if they desire to leave an inheritance
- A retiree desiring the fixed payment and wanting to avoid maturities, rolling over investments, and the maintenance and administration require of investing on one’s own.
2. Health Insurance
The health insurance scenario for retirees is scary. You read and hear a lot about Medicare running out of money and benefits being cut. Seniors have been asked to pay for more for their Medicare benefits. The good news is that through a better understanding of your options, you can secure some peace of mind knowing that you have selected appropriate health coverage.
No retiree should rely on Medicare alone. You must supplemental coverage- as Medicare typically pays 80% of your health care costs. That 20% that you must pay can be a very large sum if have a serious illness.
The AARP conducted a study titled: An Assessment of Medicare Beneficiaries’ Understanding of the Differences between the Traditional Medicare Program and HMO’s. The findings indicated that only a fraction of the total beneficiary population (11%) had “adequate” knowledge to make an informed choice between HMOs and regular Medicare. Therefore, it is important that you understand how you can receive proper medical coverage.
Medicare offers different ways to get health care benefits. Once you understand what you get, you can then get the appropriate coverage for what Medicare does not provide. The Medicare coverage options depend on which plan you select. And based on where you live, you may have more than one plan to choose from (note that available plans can vary from zip code to zip code)!
There are two basic Medicare health plans (see next page for table breakdown):
- Medicare + Choice plans include Medicare Managed Care Plans and Medicare Private Fee-for-Service plans. These plans provide care under contract to Medicare. They may offer benefits such as coordination of care or reducing out-of-pocket expenses. Some include additional features, such as prescription drugs. The availability of plans varies among geographic areas. Many people loosely refer to all of these plans as “HMOs”.
- The Original Medicare Plan (sometimes called fee-for-service) – everyone with Medicare can join the Original Medicare Plan that is available nationwide. Many people in the Original Medicare Plan also have a Medigap (Medicare Supplement Insurance) policy or supplemental coverage, provided by their former employer to help pay health care costs that this plan does not cover. This supplement is a separate policy which we will discuss shortly.
Why Should Retirees Want Medigap Insurance as Opposed to An HMO Arrangement
With a Managed Care Plan, you don’t need to buy Medicare Supplemental (MediGap) insurance. This could result in several thousand dollars of savings each year. In fact, some Managed Care Plans may have no monthly premium at all.
There are potential repercussions, though, that could make you wish that you would have spent the additional money for the insurance and stuck with traditional Medicare.
The companies sponsoring a managed care plan might limit the number of doctors, hospitals, and other health care providers within the network. Also, they can abandon the Medicare benefits program if the insurance network finds it unprofitable. This could leave you with significantly higher out-of-pocket expenses, especially if your health has declined.
The government can create another problem if you are not happy with managed care. For instance, suppose you cancelled a Medigap policy to join a Managed Care Plan. Medicare could possibly penalize you if you decide that you don’t like managed care and try to buy a new Medigap plan. Instead of having a choice of 10 plans, you might only be able to select from four. Consequently, your new policy might not be as good as the one you previously canceled.
Even though Medigap policies will not cover all the gaps in the Original Medicare Plan, they may help retirees:
- Lower their out-of-pocket costs, and
- Get more health insurance coverage
Note: Some Medigap policies also cover other extra benefits that aren’t covered by Medicare. Examples include:
- Routine yearly checkups
- At-home recovery
- Medicare Part B excess charges (the difference between the doctor’s charge and Medicare’s approved amount). The excess charge only applies if the doctor doesn’t accept the assignment.
- Prescription drugs
3. Maintain Your Independence
Statistics indicate that over half of all people over age 50 require long-term care. In fact, the most current statistics are below:
- A 50-year-old has a 53% to 59% chance of ever entering a nursing home before he dies and that conditional on any stay, the average duration is just over a year.
- Females face a 64.9% probability of having at least one stay, compared to 49.8% for males
- An earlier study indicated that 1 in 5 that enter a nursing home will need 5+ years of care.
With such a great risk, doesn’t everyone need insurance? After all, the cost of long-term care can run $7,500 or more monthly in some locations. So if you have an extra $200,000 to $300,000 to pay for long-term care, you can self-insure and just pay out-of-pocket in case of mental or physical incapacity.
But if you want to remain in your home, get quality in home care and do not have plenty of excess funds, then you want insurance.
4. How to Leave Assets to their Heirs
This whole arena of asset protection would be incomplete if I didn’t include a small section devoted to estate planning. Many people not only want to protect their assets for themselves, but also for their heirs. If you do not plan ahead, it’s easy to watch estate taxes and poor planning rip away the value of your estate.
First, let me mention s big mistake I see most retirees make regarding estate planning. Many times, I see a single retired individual who makes an investment. Then he or she puts the name of his or her son or daughter on it as a joint tenant because he or she knows that when he or she passes away, his or her son or daughter will then inherit that asset automatically. This is true.
However, such superfluous estate planning can lead to a very severe problem. If that son, for example, happens to be a physician and gets sued for malpractice and the son’s assets get attached, legally, the son appears to own half of your investment because your son’s name is on it.
As a result, your son’s creditors could attach that money, which is yours. So, you may not want to expose your assets in that wat, and I strongly advise that you don’t. Instead, you probably want to own half of your investment because your son’s name is on it.
As a result, your son’s creditors could attach that money, which is yours. So, you may not want to expose your assets in that way, and I strongly advise that you don’t. Instead, you probably want to own the investment in just your name, passing it by will, or have a living trust created so that the name of your trust is on the assets at all times. In this way, you don’t have exposure to the creditors of your sons or daughters, and everything is well protected. Additionally, with living trusts you also avoid probate for very quick and immediate transfer to your heirs.
There are some basics that you need to understand about estate planning. Currently, every individual is allowed to pass $5.45 million of assets to his or her beneficiaries without gift or estate tax (as of 1/1/16, indexed for inflation in future years). Be aware that tax laws, exclusions and estate exemptions are subject to change. Now, there’s another great mistake that a lot of married retiree make. Say the husband has a will and he leaves everything to his wife. The wife has a will and she leaves everything to her husband. Here’s the problem that maybe you’ve never been told before. Each of us has $5.45 million exclusion on passing along assets to out heirs, or we can leave our exclusion to our spouse. The most important word in that sentence was “or”, because if you leave your assets to spouse, you’ve lost your exclusion.
Generally, when an attorney draws up a living trust or will for you, what happens is that he or she segregates the exclusion amount of assets directly to your heirs, not to your spouse, so that you, in fact, get the full benefit of your exclusion. This way, if you’re married, you get the exclusion of $5.45 million, your spouse gets $5.45 million and a married couple can pass a $10.9 million estate to their heirs with no estate taxes. That’s exactly what you want to do. For people whose estates are larger, you definitely want to consider the idea of using some type on insurance to pay your estate taxes.
Let me give you an example, and note that this is hypothetical example that does not reflect any particular products. Let’s say you and your spouse have the fortunate situation of a $12 million estate. Now, that may not be the current value of your estate, but you’ve got to remember, if you’re 65 years old now, it’s very likely that one or both of you might live to age 85 or even longer. So, the question is, not what your estate will be worth today, but what will it be worth in 20 years?
But let’s say you have the terrible misfortune of an early death. In that case, the first $10.9 million is not going to be subject to estate tax, but the other $1.1 million will, and unfortunately, the estate taxes are very high. On $1.1 million, you’d pay $440,000, for estate taxes.
Total estate: $12 million
Potential exemption from tax: $10.9 million
Taxable estate: $1.1 million
Estate tax due: $440,000
Who pays that? Actually your heirs do. It comes right out of their inheritance. So, how do you protect it? It may be very useful to invest in an insurance policy for you and your spouse in the amount of $440,000. What specifically would you do?
The first step is for you to get a quote on what it would cost you to buy an insurance policy for $400,00. Let’s just assume that would cost you $10,045 a year. You would have to deposit that in premiums each year.
Now, before you shudder. “That’s ridiculous,” remember you’re going to be saving $440,000. So let’s just see if you can, in fact, pay your estate taxes for a heck of a lot less than $440,000.
Let’s say you can go out and get an insurance policy for yourself. The annual policy for yourself. The annual premium is $10,045 a year and you gift it to your children, or you can use an irrevocable life insurance trust. (Preparation of trusts can incur significant expenses). The gift helps you reduce the size of your estate and in itself reduces your estate taxes.
Your children then pay the premium on the insurance policy so that your children actually own the insurance policy. It is crucial that your children or someone other than you and your spouse own the insurance policy. (In fact, if you have life insurance policies right about now that you own, please see your attorney, financial advisor or insurance agent, or contact us right away about why these policies must be owned outside of your estate.)
When you have passed away and the IRS comes knocking for $440,000 in estate taxes, the children merely take the $440,000 they’ve received from the life insurance, turn around and pay the IRS and the entire $12 million estate passes to them unencumbered by estate taxes and any other liens or taxes. What are the premiums to the insurance company? Approximately $160,720 ($10,045 annually for 16 years, the life expectancy of a 65-year-old.) However, the premiums in your situation could be higher and lower depending upon your age, your health, the company that places the policy, future interest rates, and your actual longevity.
So that’s the way to pass a sizeable estate to your heirs and avoid as much as possible. You can do this by doing what the wealthy do—using life insurance to pay the taxes.
Instead of paying almost $440,000 out of pocket, you have paid $160,720 for insurance premiums. A savings that is hard to beat! Remember, the figures will vary in each situation, and this is a realistic but hypothetical example of how to use insurance to pay estate taxes. (Note that the time value of money has not been considered in this analysis).
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