If you own a home do you have homeowner’s insurance?
Sure, you do because if something major happens to your house you want to be able to replace it. In 2014 only 5.3% of all homeowners made a claim on their policy and this includes everything from fire to theft.
If you own a car do you have automobile insurance? The average automobile insured person files a claim once every 17.9 years or 5.6% and this is required in most states to have this insurance.
Now consider this if you faced a 75% likelihood that you would face a $200,000 expense and you could purchase insurance to cover that expense, would you?
For most retirees, this is exactly what they face. The expense is long-term care. Recent statistics show there is a 75% probability that someone age 65 or older will face some type of long-term care event in retirement. The cost in Raleigh is about $82,000 and for men, the average duration of care is 2.4 years and for women 2.6 years and that does not even cover people that have Alzheimer’s disease which can last longer than 10 years. It is easy to see that the expense can easily exceed the $200,000.
Today people are choosing to address their long-term care needs in several ways:
Self-fund (most used option) – This is also known as having no plan and fails to leverage resources to their maximum potential.
Purchase traditional long-term care insurance, which is expensive and keeps rising each year.
Purchase a life insurance policy that has a long-term care rider on it.
Purchase an annuity that has a long-term care rider.
As an hourly consultant, I help people evaluate all the options. I can help you understand what is best for your situation before you purchase anything. The statistics are too great to ignore; if you aren’t prepared for a long-term care expense you could be putting your and your spouses’ retirement at risk.
In my younger days, I worked at a summer camp. Those summers were some of the best times of my life! The comradery between the staffs and the chance to serve as a role model for the kids made every day a great one. However, one of the challenges of being a role model came at lunchtime when they served greens or cabbage. Over the years I have eaten both and while some have tasted better than others at camp they were consistently bad. Of course to set a good example the staff was encouraged to always eat whatever was served at each meal. If you did not your kids would quickly realize what was going on and before you could stop them the whole mess hall would be standing and chanting, “ Eat your greens, Steve, eat your greens.” This would continue until they brought out a huge bowl of greens and you would shove your face in them, take a big bite and come out with a smile. You would then choke down the mouthful, raise your arms in victory and take your seat. While this may seem gross it was intended to show the importance of eating a balanced diet with a positive attitude. But what I learned was to check the menu each day, conveniently missing the meal that included the offensive greens and usually ended up enjoying lunch at my favorite local restaurant.
By this time you are probably wondering how this story can be related to financial planning or healthcare? Actually, it has a lot to do with both. Today healthcare costs are consuming a large portion of most families budgets. People feel the pressure to choose a plan from an insurance company even though the choices do not seem all that appealing. You know you need the coverage but as you look at the options they all appear unappetizing. But a choice must be made in order to cover medical costs and avoid paying the government mandated penalty. So would you avoid this “meal” if you could? Absolutely you would, just like I found ways to be off camp’s grounds during the meals with greens!
With healthcare, you have an alternative known as faith-based health sharing ministries. These ministries provide different levels of healthcare; allowing you to choose what works best for your budget and your needs. You are not forced to buy a plan that you don’t want or need; one that “tastes bad” and has a negative impact on your budget. And because these plans are exempt from the rules of the Affordable Care Act (ACA) you do not have to pay penalties and can customize your plan to meet your needs. The bottom line is you do not have to be pressured to buy an ACA plan. You can choose to go off camp and eat at Chick Fil A instead. Heck, you can afford to take your whole family out to a really nice restaurant with the money you save!
Over the last 6 years, I have become known as an expert in Social Security. My company started as a resource for education, analysis and consulting on the subject. For the last 7 months, I have been deeply involved in retirement planning for an insurance company and have seen firsthand that there are many other issues that need to be addressed in retirement. For this reason, I am expanding my company to better meet the increasing needs of people planning for and entering retirement.
In addition to continuing to provide expert analysis of Social Security benefits at a reasonable price, I am increasing the educational opportunities on the subject to individuals and financial professionals. Social Security remains the single biggest asset for most people in retirement making it imperative for individuals to learn how to skillfully manage this critical part of retirement planning.
So, what is new?
Asset location consulting. Knowing where and when to locate and take strategic withdrawals can have a significant impact on how long your money will last. This consulting works in conjunction with your Social Security strategy, because just optimizing your money from Social Security is only half of the equation. Minimizing the drawdown of assets is the second part; paying the minimum amount of taxes will help you optimize your retirement resources.
Long-Term Care consulting. There is probably no greater threat to your retirement than a long-term care event. With costs exceeding $80,000 per year for one person, very few portfolios can withstand this type of financial impact. Fortunately, there are many ways to address this need.
Self-funding the cost
Traditional pay as you go Long-Term Care policies
Asset Based Life and Annuity Long-Term Care policies that provide benefits
Qualified Asset Long-Term Care policies for IRA’s
Critical and Chronic riders to Life Insurance policies
There are many options available. I have been training agents across the country on how to use these products and now I am making my knowledge available to everyone.
Hourly Consulting. Over the past few years, individuals and small businesses have engaged my services to review their financial plans. From mortgage analysis to stock options I have found there is a need for people to get unbiased advice on various topics. I do not provide a cookie cutter plan designed to encourage the purchase of a product; instead, I help identify areas that need improvement and provide actions steps for how to address each issue. Because it is charged on an hourly basis the client can determine how much they want to tackle with each engagement. I always provide a complimentary initial consultation and an estimate of services prior to engagement.
I am extremely excited that these new services will provide much-needed education and value to those seeking to utilize all their resources to their greatest potential. I am also pleased to be working with a faith-based healthcare company to help licensed agents provide an alternative to high-cost health insurance. It is my goal to continue to increase and improve my services to meet the critical needs in retirement planning.
New Year, New President, Same problems with Social Security.
First off, Happy New Year. I hope that 2017 is one of your best years ever. After taking a break over Christmas, it is time to get back to work. Next week our country will inaugurate a new president. For some, this is a welcome relief and for others a cause for deep concern. My goal in this newsletter is to not focus on the change in leadership but to address perceived concerns on how Social Security will be impacted in the near future. Articles on Facebook, the undisputed source for information, have been extreme:
• Social Security is dead and everyone will have to panhandle in the streets in retirement.
• Social Security will be privatized and every street will be paved with gold.
I doubt either will happen, but this does not stop people from trying to scare us through various media outlets. So maybe the best option is to either block certain people on Facebook or step aside from using it as your main source for news for while and let things calm down.
On the campaign trail, President-elect Trump stated that he does not support any changes to Social Security at this time. Whether you choose to believe this or discard this is up to you but the reality is there will be some changes this year. Some of these changes will be viewed as good and some will be viewed as not so good but look for the following to happen this year:
• Unlike last year there will be a modest Cost of Living Adjustment or COLA this year. It is .3% increase for the upcoming year. This means that if you have been receiving $1000 a month, you can expect an additional $3 a month. I doubt this will make a big difference in the lives of most people, especially since most of this will be absorbed in the increase in Medicare premiums.
• The earnings test limits, which apply to people between the ages of 62 – 66 will increase from $15,720 to $16,920. This is good news for those who choose to file for benefits early and continue to work.
• The final change that will occur is the increase in the limit for income subject to Social Security taxes. This increased from $118,500 to $127,200. This will increase the tax on high net worth individuals by about $540 a year. Proposed Reform
• Change Age for Full Benefits
• Means Testing of Benefits
• Recalculating Benefits Formulas
Once Trump stated he would not make any changes it did not take Congress long to put forward some bills but most of this is politics and posturing. The big changes are to age, testing of benefits and recalculation of benefits. I expect these to get media attention moving forward, but do not expect individual proposals to have any traction. I rather expect to see some form of a commission created, as was done in the 80’s when we had a similar issue. This provides much more cover for any proposals that may not be popular. Adjusting age for full retirement.
Full retirement age is the age from where all benefits are calculated. If you take benefits before this age they are reduced and if you delay you get credits for more benefits. So, adjusting the age significantly impacts people who plan to retire at an early age. Representative Johnson from Texas suggested that the age for full retirement should be moved to 69. This is much better than what a Yale Law Professor suggested, which was 76. There is little doubt that the age needs to more accurately match the mortality rates, but the challenge will be how to present it and implement it to give workers adequate time to plan for retirement. I fully expect this to be part of any reform and the implementation to be addressed like it was in 1983 when the implementation date was gradually moved out and people had plenty of warning of the change. Means Testing
Means testing is another change that comes up frequently. Basically, the goal of means testing is to give a greater benefit to lower-income workers while reducing the benefit for higher-income workers. This is a heavy lift because of how Social Security is funded. Since people contribute financially there is a sense of ownership to the plan and some pension experts believe they have an obligation to pay the money out as a benefit. A much easier way to penalize the wealthy would be to change the way Social Security is taxed based on income. This is probably the route they will take and may be included in the change of marginal tax brackets. On a side note RMD’s (Required Minimum Distributions) may cause a significant tax increase for some people. This change will provide a great opportunity for income planning. Keep this in mind when looking at when and how to start receiving benefits from Social Security. I will update you as details come forward. Cutting Benefits
Cuts in benefits are another option and if nothing is done will probably have to happen in 2034; but only if nothing is done. Representative Johnson also addressed this in his bill. The bill would increase benefits for low-income workers and decrease benefits for high-income workers when cuts are made. As I stated earlier, this would be a difficult change on many levels. The more likely change, that would cut benefits, would be to either eliminate the COLA (Cost of Living Adjustment) or change the way it is calculated to a more favorable formula that minimizes the increase in benefits from year to year. This is important as COLA also impacts the increase in Medicare premiums. Without a change in law, if the COLA was eliminated there could not be any increase in Medicare premiums and the reduced formula proposal would limit the increase to the Medicare premium amount to the COLA increase. So you can see how this would be challenging too. Final Thoughts
The challenge is that Social Security is a very popular program and any change is certain to be politicized. A committee will be the best way to address the much-needed changes and would ensure that all parties are treated fairly. It is a complicated issue and in the end, I do not expect any significant change this year, but I do expect a considerable amount of “talking” will take place. Look to my blog and newsletter to keep up to date on any changes. Social Security education is a key component in retirement planning. We provide education, analysis and consulting to help with any question you may have. Remember that we provide a free class each month to help you and your friends make the best decisions about filing for benefits.
As always, if you have questions give me a call (919) 341-0277.
Steve Gaito, CFP®
Several years ago, at a conference, I heard a story of a commercial pilot that had taken one of his friends flying in his personal plane. After an afternoon soaring above the clouds, it was time to land. Upon approach, the pilot landed at the very end of the runway and taxied all the way to the hanger. When they arrived at the hanger his friend asked, with such a small plane why did you not land in the middle of the runway instead of the end? The pilot answered. That is an easy question. In all my years of flying, I know one thing for certain. You cannot use the runway behind you.
I love this story because it is so applicable to retirement planning and especially optimizing Social Security. You see Social Security, for most people, is a one-time decision. It is very important to get it right the first time. The challenge is like the runway some people will agonize about the decision others have made or what they have or have not done about Social Security. The good news is that through an in-depth analysis of your benefits you can know how to best use this resource in retirement. When you should apply or your spouse should apply depends on your unique situation and waiting to learn the facts like the runway will leave you with fewer options. My preference is to start to understand Social Security around age 57, but the reality is until you turn 70 you may have some options that you need to consider. The beauty of evaluating Social Security early is Social Security impacts many other areas of retirement and you can be more proactive. You see the pilot wanted to land on the end in case something bad happened. He would have more options on the ground than in the air. The sooner you learn about Social Security and how it impacts the rest of your retirement, the sooner you can make any necessary adjustments. Study after study confirm the #1 fear people have is running out of money. The challenge is that because of the decisions most make about Social Security they have actually increased the probability of this situation actually happening. One thing that I know for sure is that not everyone should wait until age 70, but without the facts and analyzing your benefits you will never know if that is your best options. A basic analysis is only $100 and if you want to know more go to the education tab and look at our online education. In retirement there is a long runway, so be sure to take advantage of all of it. If you have questions please feel free to give me a call.