The following is an excerpt from
Big Picture Retirement Planning
A BIRD’S EYE VIEW FROM 3,000 FEET
Les Goldstein, M.B.A.
Personal Financial Strategies, Inc. PARK RIDGE, ILLINOIS
Copyright © 2018 by Les Goldstein.
The following content is for non-commercial educational use only. All rights reserved. No part of this publication may be reproduced, distributed or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other non-commercial uses permitted by copyright law. For permission requests, write to the publisher at the address below.
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Big Picture Retirement Planning/ Les Goldstein. —1st ed.
Long Term Care and Other Retirement Landmines: “The 800 Pound Gorilla in the Room”
Okay. Now is the time for me to get up on my soapbox and preach to you (again)! In my educated opinion, long-term care planning is one of the most important retirement planning actions you can take. Not paying attention to this is one of the land mines that can absolutely blow you up during your own retirement. I know this not just from our clients’ life experiences, but from my own.
About 20 years ago, when the long-term care industry was in its infancy, I told my father that he and my mother should get long-term care policies and that I would pay for it. My father, being a proud man, refused. For about 10 years, once or twice a year, I would bring up the subject again. Every time, my father would refuse. Finally, after wearing him down for over a decade, my dad relented and agreed that he and my mother would go through the medical underwriting to get long-term care coverage. Well, guess what? By that time, my mother was much too sick to get coverage. And my dad, seemingly strong, vibrant, and healthy (he still is today, even at 86!!), was turned down because he had suffered a mini-stroke. To this day, he still claims that he never had a stroke, but suffered from an inner-ear problem causing him to have less-than-perfect balance. Now, both of my parents were completely exposed to this potentially gigantic risk.
Then it happened. My mother entered the hospital, the result of many internal weaknesses. After three nights she was released, and we checked her into a local nursing home for extended care. Initially, her care was covered by Medicare. Then, after she stopped getting better, her Medicare benefits stopped. My father was now responsible for 100 percent of the cost of my mother’s long-term care stay. Even back in 2004 and in a modest long-term care facility, the cost was $6,000 per month, and my father quickly ran out of money. Do not let this happen to you!
As a comprehensive retirement income advisor, I preach to every single client about the importance of proper long-term care planning. Almost inevitably, every single client initially tells me no. However, I never give up easily, especially on this very crucial topic. As of the writing of this book, we have four clients currently “on claim.” That is, they are receiving the benefits from their policies and are receiving some form of long-term care benefit, either at home or in a care facility or in an adult day care program.
One of the benefits of becoming a PFS client is that we are not yes men. That is, we will never tell you only what you want to hear. We will simply tell you the truth, at least as we see it from our many years of experience. At every single review meeting, we will bring up the 800-pound gorilla that is the long-term care land mine. It will be up to you to decide what’s next. But, at a mini-mum, you will have been educated on this potentially life-changing land mine.
Having addressed the long-term care insurance land mine, let’s look at some of the most significant land mines the PFS team sees on at least a weekly basis. Please, do your best to eliminate these landmines as much as possible. Not in any particular order of potential impact on you and your loved ones, here they are:
- An excess concentration of financial assets in one type of asset. Lots of company stock, one type of mutual fund, lots of real estate. What if your particular type of asset suffers a substantial loss, such as the S&P 500 did in 2008 and 2009? Could you wait long enough for a recovery?
- Complacency. The bad times of 2008 seem to be long for-gotten. AT PFS, we often say “A rising tide lifts all boats,” and “Live by the sword, die by the sword.” Meaning, substantial losses have occurred in the past in the stock, bond, and real estate markets. History will repeat itself. If you are retired when they do occur and you have not added safety nets, such as recurring annuity income streams and low-correlated assets, what could happen to you if history repeats itself in the future?
- Your will is 10, 15, 20, or more years old. Or you don’t even have a will. I bet your life has changed over the past 10 or more years, hasn’t it?
- An ineffective or outdated estate plan or no estate plan at all.
- A lack of updated powers of attorney for health care and finance.
- No living trust, or a living trust that is poorly structured or unfunded (you never re-titled your assets to your living trust, something we see quite often). Most living trust estate plans we have seen dissolve upon the death of the second spouse. This leaves no creditor, bankruptcy, or divorce protection for your heirs on their inherited assets.
- Too little life insurance, or the wrong type of life insurance for your current needs.
- Too much life insurance given your current life circumstances. You may be wasting money.
- A need for disability income insurance that is not being addressed.
- No long-term care plan, in the event of a long-term disability prior to death.
- Accounts that lack primary and contingent beneficiary designations, or beneficiaries that need to be updated (i.e., ex-spouse, deceased parent).
- Potentially inadequate sources of reliable and guaranteed retirement income to meet your baseline needs.
- Not including the impact of income tax and inflation on your retirement income needs and future distributions.
- Unsuitable retirement investment portfolio. Too much principal risk, or attempting to generate income by “harvesting portfolio gains.” What if there are no gains and you are forced to sell investments to generate the cash flow you need to live on?
- Not re-positioning “forever-taxed” IRA, 401(k), and 403(b) accounts into a “never-taxed” legacy life insurance plan when beneficial and appropriate.
- No budget or handle on your income sources and income needs during retirement.
- Depending upon Social Security to be enough to live on during retirement.
- Taking Social Security too soon. Or not utilizing more advanced Social Security strategies, if available.
- No retirement income gap plan, if you have a gap.
There are lots of land mines that can blow up even the most focused saver and investor. By taking reasonable actions and turning your attention to areas that you have neglected so far, you may be able to minimize the impact of these land mines on your life and the lives of the people who matter to you.
Let’s finish this chapter by turning our attention back to long-term care planning. I can think of no quicker way to go through an entire lifetime of savings than having a life-changing event such as a spouse passing away prematurely, suffering a severe and permanent stroke, or being diagnosed with early onset Alzheimer’s disease. Here are some statistics you need to be aware of:
- Age is not the only determining factor in needing long-term care.
- About 70 percent of individuals over age 65 will require at least some type of long-term care services during their life-time.³¹
- About 40 percent of those receiving long-term care today are between the ages of 18 and 64.³²
- 5.4 million Americans have Alzheimer’s disease.³³
- In 2010, family members provided 17 billion hours of unpaid care.³
- 44.4 million caregivers (one out of every five households) are involved in caregiving to persons age 18 or over.
If you do not have the time or the skills, or you simply want to maintain your relationship with your loved one and not take on the role of caregiver, here are some sobering statistics on providing care in the Chicagoland area in 2015, provided by the Genworth 2015 Cost of Care Survey:
- Homemaker and home health care services cost almost $23 per hour, or over $50,336 per year.
- Adult day care is almost $17,000 per year.
- Assisted living facilities cost almost $60,000 per year.
- Nursing homes average $224 per day or over $82,000 per year for a semi-private room (and who wants to be in a semi-private room?).
- A private room in a nursing home is $283 per day, or over $92,000 per year.36
The possibility of having a need for long-term care is just an-other risk that must be addressed in any comprehensive financial plan. Based upon the work that we have done over the years, there are at least three ways that people address this particular risk:
1. You can ignore the risk, which is the same as assuming the risk as your own.
2. You can accept the risk and prepare for it by setting aside a large sum of dollars.
3. You can transfer the risk, typically to an insurance company.
Accepting the risk as described previously in 1 and 2 is known as “self-insuring.” That is, if you have an event (in this case, a need for long-term care services), you will pay for the expense out of your own pocket.
Right now is a good time to clear up some misconceptions about long-term care benefits.
1. Medicare does not pay for long-term care benefits. Medicare only pays for short-term stays in a skilled care facility, not for care in your own home.
2. Medicaid pays only for extended care in a nursing facility when you are completely out of money.
3. It is time-consuming and expensive to qualify for Medicaid with advanced estate planning. Out of our 400+ clients that we work for at PFS, only three have qualified for Medicaid this way, on purpose.
Now that you understand the possibilities of needing long-term care on an extended basis for you or a loved one, let’s now discuss how you can provide this type of protection for you and your family by transferring the risk to an insurance company. Here are several ways to invest in long-term care protection:
1. Purchase a traditional long-term care insurance policy for you and your spouse, if you are married.
2. Invest in a life insurance policy that also provides long-term care benefits.
3. Invest in an annuity with a long-term care insurance rider option.
Here are some examples of each.
A 55-year-old husband and his 53-year-old wife purchase individual long-term care insurance policies. They each select a 5-year benefit plan, $150 in daily benefits, a 90-day exclusion period, and a 3 percent per year compound cost of living adjustment. They also select a 10-pay option. What does all this mean?
1. A shared plan means that the total benefit pool in years can be allocated to you or your spouse. In the prior example, the 10 years of benefits selected can be used in any combination by the two spouses. Once the 10 years of benefits is used up, there is no more benefit to the policy.
2. $150 in daily benefits is the most this policy will pay each day. This daily benefit will grow by 3 percent per year, compounded annually. Most long-term care policies are known as reimbursement policies; you submit your expenses, typically on a monthly basis, and you are reimbursed up to the daily or monthly maximum dollar amount.
3. The elimination period mentioned previously is often referred to as the waiting period. This is the period of time when you will be paying for all long-term care expenses out of pocket until the policy benefits kick in. In this case, we selected a 90-day elimination period, to be in sync with the benefits currently being offered by Medicare for nursing home-only stays. Other elimination periods are available, anywhere from 0 days to 360 days. The longer the elimination period, the long-er you will pay for care out of your own pocket, and the lower the premium will be.
4. The 3 percent per year compound cost of living adjustment increases the daily benefit, in this case by 3 percent per year. This is a very important feature to have, especially for younger folks. It is also an expensive benefit to have.
5. The 10-pay option means that this husband and wife will be paying premiums for not more than 10 years. Another way to pay is the lifetime option. You will be paying for as long as at least one spouse is alive, or until one spouse goes on claim and needs his or her benefits. We prefer the 10-pay option. It is more expensive per year than the lifetime option, but with the lifetime option you could be paying for 20, 30, even 35 or more years! The longer you pay the premiums, the more opportunities the issuing insurance company has to attempt to increase your premiums. At least with a 10-pay option, you are limiting the number of years where the insurance company has the opportunity to increase your premiums.
Using the preceding couple as an example, let’s assume that they are in good health, are both non-smokers, and have had no heart disease, cancer, or major illness in at least the last five years. Now, let’s review their individual benefits. At the time the policy is issued, the total benefit pool is $540,000. How did we get to that dollar amount?
o $150 per day x 30 days per month = $4,500 per month
o $4,500 per month x 12 months per year = $54,000 per year
o 5 years of benefits = $54,000 x 5 = $270,000
o At 3 percent per year compound growth, the $270,000 in benefits will equal a total benefit pool of $540,000 in 24 years, per the Rule of 72. The husband in this example will be 79 years old, and his wife will be 75. Will they need benefits by then? It’s simply impossible to know.
Here are some more important things to know about stand-alone long-term care insurance policies of this type:
• Most long-term care policies today are written to provide care for you wherever you want the care to be provided. This can include your own home, adult day care, independent living, assisted living, or a skilled nursing facility.
• Long-term care policies are built around certain activities of daily living (ADL). These ADLs typically include feeding yourself, dressing yourself, going to the bathroom by yourself, bathing, and being able to move from spot to spot without assistance.
• When a certified medical professional verifies in writing that you cannot perform at least 2 of the 6 ADLs from the list, your policy benefits can begin after the waiting period is met.
• If you are paying the premiums with after-tax dollars (savings), the policy benefits will be paid on a tax-free basis. If your long-term care policy is a group benefit from your employer and you are using pretax money to pay your portion of the premium, then the LTC benefits will be paid to you on a taxable basis. Action step: If possible, change this now and invest in a policy that you pay for on an after-tax basis. The tax savings you are now currently enjoying by using pretax money to pay your LTC premiums will be long forgotten, especially when potentially hundreds of thousands of money paid to you in taxable LTC benefits comes home to roost and must be included as taxable in-come on your income tax return!
• When you start collecting the benefits (this is called going “on claim”) for a certain amount of time that is stipulated in the policy, the premiums stop. If you go “off claim,” the premiums can start again.
• With some shared plans, if you have selected a lifetime premium option, you have not had a claim for at least 10 years, and your spouse dies, you will then receive a paid-up policy with all the benefits accruing to you.
Okay, now for the $64,000 question. How much do these policies cost as of the writing of this book? It would be $4,213 for the husband and $6,896 for the wife per year, for 10 years. The life-time pay annual premium for the wife is $2,011 and $1,922 for the husband. Now, is it worth it? For some of our clients, the answer is a resounding no. Here is what I think their reasons are:
• I don’t believe in insurance.
• It will never happen to me!
• My kids will take care of me!
• I will just shoot myself first (I am not kidding here).
For most of our less emotional and more logical clients, their answer is usually yes. Here’s why:
• LTC insurance preserves the lifestyle of the at-home spouse (called the “community spouse” in LTC literature). If you are spending all your money to provide care for the spouse who needs care, how will the community spouse continue to have any kind of lifestyle?
• LTC insurance preserves the relationships with your adult children and grandchildren. One of the hardest (and low-est-paying) jobs out there is the job of unpaid caregiver. Talk about the stress on both the receiver of care and the family member who is providing the care! Don’t you want your children to visit with you, to enjoy the time together with you, not doing chores, feeding you, bathing you, and doing all the less attractive tasks required of a caregiver?
• LTC insurance provides significant and guaranteed lever-age. If I told you that I have an investment that, if you put in $4,213 per year for the next 10 years, will provide you with a guaranteed and tax-free annual income of $54,000 beginning in 25 years for a 10-year period, and the internal rate of return was a guaranteed 20.3 percent, would you invest? Now, it is absolutely true that you may never need your LTC policy benefits. If that is the case, you will have invested thousands and thousands of dollars, without ever a return to you in the form of benefits. We simply look at LTC coverage as a necessary evil, something we have to have, even if we never use it. Similar to home-owner’s coverage or auto coverage. Just another cost of being part of the mass affluent here in the USA.
For clients who just refuse to pay annual premiums for some-thing they truly believe they will never need, there are two more ways to invest in LTC. Here’s one possibility: invest in a life insurance policy with a LTC rider built in. You can do this by either getting a brand-new policy and paying annual premiums, or converting an existing life insurance policy with a cash value into a new policy with the LTC rider. Here’s an example of what this might look like. Let’s use the same couple from our earlier LTC example for illustrative purposes. They just happen to have two old whole life policies, his with a death benefit of $350,000 and a cash value of $55,000, and hers with a death benefit of $400,000 and a cash value of $62,000. Both polices are paid up, meaning that they no longer need to pay premiums to support the policies’ respective death benefits. They also have cash on hand, and have a desire to invest $100,000 each into a combination of long-term care and life insurance protection. So, here is what that process might look like:
1. A paramedic or nurse practitioner visited them at home, and they completed at-home mini-physicals. I call these “free checkups” for my clients.
2. The new insurance company ordered all of their medical records. This does take time, so you have to be patient.
3. Both the husband and the wife passed the exams and were offered new policies at a “standard health” rating.
Here is what their new, individual policies look like:
1. The cash value of each policy remains the same as before, $55,000 for the husband and $62,000 for the wife. The husband added $45,000 to his policy and the wife added $38,000 to her policy. So the current cash value of each policy is $100,000.
2. The death benefit is $100,000 for the 55-year-old husband and $100,000 for his 53-year-old wife.
3. The initial LTC benefit is $374,435 for the husband and $449,452 for the wife. These are income-tax-free benefits.
4. The LTC benefits for each policy grows by 5 percent simple interest per year.
5. If long-term care is not needed, the income-tax-free death benefit of $100,000 is paid upon the passing of the policy owner(s). Guaranteed by the claims-paying ability of the issuing insurance company, as always.
6. In the event that you change your mind at any time and decide that you no longer want to own the policy, there is often a 100 percent money-back guarantee of your initial lump-sum premium. You will not earn any interest on your premium, but at least you get your money back, no questions asked.
Remember, the preceding example is for illustration purposes only. Your results will vary. What can potentially determine your personal life/long-term care strategy can include your overall health, your age, family history of illness, whether you are a smoker or not, even where you live and your hobbies. Again, proceed carefully before implementing any long-term and “hard to get out of” strategy.
Does this sound too good to be true? As always, there’s at least one catch, and here’s one. For every $1 that you or your spouse spends on LTC care, the death benefit is reduced by $1, down to a minimum remainder death benefit of $0. Second, do not expect the same amount of leverage (premium to death benefit) that you can get from a term life insurance policy. The long-term care benefit significantly weighs down the future death benefit that will be paid in the event that the LTC benefit is never used, or used only partially.
For some clients, these types of policies are absolutely wonderful. They don’t believe in LTC, but they do believe in leaving a legacy to their children and grandchildren. This may truly be one way to “eat your cake and have it too.” (I don’t know what this saying means, but I know it is appropriate to use here!).
Another catch is that you have to qualify for the life insurance. Just like many things in life, if you need something really badly, sometimes you just can’t get it. The time to apply for any type of health-related insurance is when you are at your healthiest. That means today. There is a high probability that you will never be healthier than you are right now.
The final form of LTC that we use in our practice is a combination annuity and LTC rider. This LTC rider is offered only with the fixed index annuities that we reviewed earlier in the book. Here’s an example of how this type of annuity and LTC rider works:
You invest $100,000 into an annuity that offers a long-term care rider. In addition to the other features and benefits of the selected annuity, you also will receive $200,000 of long-term care benefit. This sounds good, but be aware of the catches and the costs. These can include and are not limited to
• Additional internal costs that will limit the growth and in-come potential of the annuity.
• The long-term care rider being limited only to nursing home care.
• A formula that will reduce the annuity value with each long-term care withdrawal.
• Waiting periods and exclusions.
• Age limitations at issue.
• Health status at issue.
In my opinion, riders of this nature are not a substitute for a stand-alone long-term care insurance policy. But, something is often better than nothing. The type of annuity rider described be-fore is not offered on all annuity contracts, so make sure you check for its availability before purchasing an annuity.
Here’s my last thought on this somewhat depressing topic. Just look at LTC insurance as a necessary evil. Just like auto insurance and homeowners insurance. You have to have it, so just do it.