Understanding Long-Term Care

Once you turn 65, there is a 70% chance that you will need some form of long-term care.  Long-term care refers to the help individuals with chronic illnesses or disabilities need to cover their daily activities over a long period.  (Think nursing home or adult day care).

This type of care is extremely expensive.  A quick calculation shows that it can easily cost you more than $200,000.

Many retirees wrongly believe that Medicare will provide assistance with these costs.  But it only does so if you require skilled services or rehabilitation from a specific injury.  Even then, Medicare rarely covers more than 22 days of nursing home care. 1

Medicaid does pay for long-term care services, but in order to qualify, your income must be below a certain level and you must meet minimum state eligibility requirements.  These requirements vary from state to state.  Regardless, the ugly truth is that you often must be broke before Medicaid steps in to help.

So what should you do?

Long-term care insurance is one potential solution.  There are various forms of coverage that range from home services-only to full nursing home care.  Policy costs differ based on age at the time of purchase, policy type and coverage.  The policy will provide a daily benefit amount that covers your costs up to a specified lifetime maximum amount, unless your policy includes lifetime guaranteed coverage.

Currently, a 55-year-old male can purchase a policy that covers $200 per day for 3 years of coverage and will pay an annual premium of $2,070.  The maximum benefit under this policy is $219,000.

Since females typically live longer, the equivalent policy for a woman would cost $2,536 annually.2

Regrettably, the cost and care of aging retirees often falls to a spouse, children or other relatives.  Understanding potential long-term care risk is vital to creating a proper retirement plan.  And by preparing today you can avoid wiping out your retirement assets and leaving a financial and emotional weight on family members.

 

 

 

1 U.S. Department of Health and Human Services, https://longtermcare.acl.gov/

2 Genworth, https://www.genworth.com/about-us/industry-expertise/cost-of-care.html

3 Reasons Retiring in Your 30s Won’t Pay Off

The 4% Rule
Yet another couple has realized their goal of retiring in their 30s.  In his blog, Root of Good, Justin McCurry discusses how he and his wife Kaisorn afforded such an early retirement, despite raising 3 kids, by saving 70% of their income (congrats to them on that feat) because the 4% rule supposedly said they could.  To the McCurry’s…good luck; you’re going to need it.  Take a look at these three reasons why relying on rules of thumb for such an abnormal retirement situation is a terrible idea.

  1. The 4% Rule is made for 30 years of retirement, not 55+.
  2. William Bengen’s 4% Rule is out-of-date and isn’t applicable to today’s investment environment.
  3. Unexpected and unavoidable expenses can quickly erode wealth.

 

  1. The 4% Rule isn’t Suited for 55+ Years of Retirement.

In William Bengen’s original article, he notes that a 4% asset withdrawal should be sustainable over 30 years.  Beyond 30 years, however, that’s not true.  Assuming Justin and Kaisorn are both 37 years old, their joint life expectancy is over 55 years, effectively meaning we can expect at least one of them to live past age 92!

In Justin’s defense, he does mention in one comment that Bengen found a 3% withdrawal rate (which is closer to what they’re withdrawing) to be sufficient for 50+ years.  However, as mentioned below, that’s not applicable to today’s investment environment, and it’s far from a perfect calculation.  Furthermore, the McCurry’s won’t be receiving much of a Social Security check even once they reach eligibility since they’ve worked so few years.  This means they’re stretching their investments without much of a backup plan.

 

  1. The 4% Rule is out-of-date.

William Bengen’s Four Percent Rule was published in October of 1994.  Though it was much better than the leading research at the time, today’s environment isn’t the same.  In fact, retirement researchers Wade Pfau and Wade Dokken put a more relevant withdrawal rate at 1.26%, and that’s for only 40 years!

The 1.26% withdrawal rate assumes a 5% failure rate and a 60/40 stock/bond allocation.  As risk level rises and percent of one’s portfolio invested in stocks rises, the sustainable withdrawal rate rises but never nearly as high as 3%.

 

  1. Unexpected and Unavoidable Expenses can Quickly Erode Wealth.

The research upon which the McCurry’s based their retirement strategy doesn’t say anything about expenses; it focuses solely on account balance.  Let’s say (God forbid) a family medical emergency forces large expenditures over a few years.  The silver level ACA plan they elected may not prevent them from dishing out some large sums.  The McCurry’s also have three kids—what about college?  Suppose a client of Justin sues over bad advice he received—what then?  Rules of thumb don’t account for any of these.

Finally, healthcare is expensive.  Justin mentions the 94% “discount” the family will receive on their healthcare premium, but that could all change within the next four years.  Even once Medicare hits, out-of-pocket costs, MediGap or Medicare Advantage plans can quickly get expensive.

 

The savings strategies the McCurry’s follow may be good advice, but following a rule of thumb to retire in one’s early 30s certainly isn’t.

Votaire In Action

Votaire is a powerful platform that provides a personalized retirement outlook based on your own unique situation.  Our proprietary algorithms are designed to handle vital variables including longevity risk, healthcare exposure, as well as market turmoil.

Watch our quick intro video to see Votaire in action.

What is an annuity?

An annuity is simply a contract between an individual and an insurance company.  In its simplest form an annuity consists of two steps:

  1. An individual agrees to pay an insurance company an up-front premium, and
  2. The individual begins receiving regular payments from the insurance company for the rest of their life.

There are countless variations to the above stated example.  As such, annuities are often stigmatized as complicated and difficult to understand.  Many are.  But at its core this is how an annuity functions and for many people incorporating an annuity into their retirement plan makes a lot of sense.

As retirement approaches people are forced to face complicated questions.  One of those usually goes something like this:

“How do I turn this pile of money I saved during my 30+ year career into a reliable income stream that will last the rest of my lifetime?”

One answer is via an annuity.  By providing a one-time lump sum payment to an insurance company, you can erase the possibility of ever running out of money during your lifetime and benefit from the security of a predictable income stream, free from market volatility.

This guaranteed income stream and protection from risk create the foundation for why you should include an annuity in your retirement strategy.

Sorry, Dr. Pfau—We’re with Steiner on This One

In his December 21 blog, Ken Steiner proposes an “Actuaries’ warning label” on systematic withdrawal plans (SWPs).  While disclaiming that his opinions don’t represent the entire actuarial profession, he does call for some support from his fellow actuaries.  Here at Votaire, our actuaries are 100% behind Mr. Steiner in his opposition to SWPs.

Generalized withdrawal principles and SWPs just aren’t relevant, anymore.  To Steiner’s point, they certainly don’t classify as “retirement spending strategies,” as Dr. Wade Pfau hinted at in his December 20 article.  To accurately plan your retirement, you’ll need a truly holistic retirement spending plan.

As Steiner mentions in his blog, other assets and income streams should be considered in any retiree’s spending strategy, be it Social Security, an annuity, or a reverse mortgage.  Not only do the amounts of these cash flows affect your spending budget, but when they occur also plays a big role.

For example, if you retire at age 65 and can delay your Social Security benefits until age 70, you may be able to withdraw more from savings during those first five years to cover the deficit and smooth out your income streams.

Negative cash flows play a big role, too.  Your SWP isn’t going to account for the high healthcare costs you could easily accrue 20 years into retirement.  You’ll need a holistic look at your personal situation to determine how much you can afford to spend each year and how much you need to reserve for the future.

Votaire’s dynamic and holistic financial planning platform looks at your specific situation.  We use your known and unknown assets and liabilities to come up with actuarial projections for your income and expenses throughout retirement.  Forget the SWPs—we have the know-how and the power to help you plan along the way.

Medicare Basics

Medicare eligibility begins at age 65 (some health-related issues could trigger earlier eligibility). But it will require you to make some choices. First off, there are 4 “Parts” plus various Supplemental plans:

Part A is free for most people. In 2017, the standard Part B premium is $134, but most people will pay less (Medicare.gov cites the average premium as $109). Premium amounts for Parts C & D and MediGap plans vary, based on the specific plan you purchase. Medicare Part C (Medicare Advantage) is a combination of Parts A, B, and sometimes D. Importantly, Parts A through C leave you open to out-of-pocket medical expenses like deductibles, copays, and coinsurance. MediGap covers that “Gap” of out-of-pocket expenses.

At a high-level, your two options are:

  1. Elect Medicare Parts A and B, buy a Medicare Part D drug plan, and buy a Medicare Supplement (MediGap) plan; or
  2. Buy a Medicare Part C plan (Medicare Advantage) and buy a Medicare Part D plan if it’s not included in that Part C plan.

While the first strategy may appear more expensive and complicated, it may cover more of your out-of-pocket costs. The second strategy may seem to be cheaper but could leave you with charges resulting from unforeseen out-of-pocket costs.

So if you are unhealthy or have a family history of disease, you may want to consider the first strategy. Additionally, because the upfront premiums for MediGap plans usually cover most, if not all out-of-pocket expenses, budgeting should be easier.

If you’re confident in your health or you want to avoid the higher upfront premiums, you may want to go with the second strategy.

Keep an eye out for upcoming Votaire blog posts about specific costs and your MediGap options.

Robo-Advisors: Where does Votaire fit in?

Robo-advisors are the latest craze in wealth management.  They use software to automate investment management.  They are almost always cheaper than traditional wealth managers and their returns are usually equal to or greater than human advisors.

BUT…they are limited in providing retirement advice.  Retirement planning is a two-sided coin:

  • Accumulation, or investment management
  • Decumulation (in which people choose how much to withdraw each year & healthcare)

Robo-advisors ignore the latter.  We don’t.

Finally, there are no robots behind Votaire.  Only humans.  Super smart humans.

Healthcare: What if I Retire Before Age 65?

High healthcare costs mean that you shouldn’t jump into retirement without first doing some research.  If you retire prior to age 65 and don’t have coverage through a spouse’s group plan or some other means, you’ll need to find a way to continue health insurance until Medicare starts at age 65.

You can often continue coverage through your employer via COBRA coverage for at least 18 months, but you’ll have to pay the full premium (which is likely much higher what you paid as an active employee) plus a 2% administrative fee.

Another option is to get a plan through the Affordable Care Act exchanges.  Be careful with these, though, as the premiums are age-rated, meaning a 64-year old could be paying up to three times as much as a 21-year old!  Fortunately, government subsidies can help offset the costs of these plans.  Tools like this one from the Kaiser Family Foundation can help you estimate your costs and the government subsidy you’ll receive.

What We Do

Our decades of experience talking with near-retirees tells us they often have these questions…

Questions Answered by Votaire

 

1. How do I make my retirement savings last my lifetime?

2. What will healthcare cost me?

3. How much can I withdraw every year?

4. Can I afford my goals?

We answer all of these.  But we avoid generic rules of thumb.  Instead, we plot a strategy that is personalized to your financial situation and goals.

Why We Do What We Do

Generations

My Grandfather lived until he was 97. I was fortunate to have him play a big role in my life. I always admired that despite his humble job as a telephone lineman, he somehow saved and sacrificed so he could send all six of his kids to college. The guy had his priorities straight.

When he retired after working for the telephone company for four decades, the guys on his crew threw him a party and he walked away with a pension for life and a generous healthcare plan. He spent his long retirement traveling around the country with my Grandmother to do what he loved most – spend time with his kids and many grandkids.

My Dad is a lot like my Grandfather. He’s a hardworking guy who sacrificed for his four kids. He provided for his family and helped with our education. Now he’s 65 and my Mom is 64. Neither will have a pension or employer-provided healthcare in retirement. They are diligent savers and they should be okay. But they are concerned they’ll outlive their money.

We all know Baby Boomers like my parents. That’s why we’re doing what we’re doing: to, as my Grandfather would say, do good for the people around us.