#49 I Want to Retire, But What About...?!?: Step 3 How to Manage Risk in Retirement
Risks can rob you from living a great life. Focus too much on them and you can miss out on a full life. Ignore risks and you can destroy your family's financial security. If you've started planning for retirement, you're probably overwhelmed with all the things you should worry about.
This week, we'll address, head on, some of the biggest risks during retirement and help you assess how to handle them.
Important Note: If you haven't listened to step 1 or 2 of Carl's Plan you'll want to start there:
This week, you'll focus on identifying and managing some of the big risks we all face during retirement.
- Longevity risk--Will you live to 100? Here's a calculator to estimate our chances.
- Inflation risk--What could the cost of living be 15 years from now? Find out here.
- Market risk
- Tax risk
- Health care risk
- Long-term care risk
Here's Your Action Items for This Week:
- Make sure to listen to the episode. I discuss each one of these retirement risks and provide some insights into how you can plan for them.
- Review Carl's health care cost estimates. This will give you some insight into what you can expect.
- Review worksheets. Review the "Facing the Complexities of Medicare and Choosing Long-Term Care Insurance" worksheets. These will give you the basics on how to address each area.
- Complete the "Will I Live to 100?" calculator. The odds might be greater than you think.
- Complete the Retirement Health Care Cost Estimator (optional). If you submit it, you'll receive a free personalized estimate of your retirement health care costs to help you plan for the future.
- Finally, ask questions. If you're stuck or unclear about something, shoot me an e-mail. I'll do my best to answer your questions. Simply click here and ask your questions.
In week 4, we'll discuss how to organize your affairs and set a gifting strategy for those you love.
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- This week's resources
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The Retirement Answer Man Episode #49
Well, hello there and welcome to the Retirement Answer Man Show! My name is Roger Whitney and this show is dedicated, we are committed – obsessively committed, is that enough? – to helping you dream up, plan for and live out your ideal retirement. This is a show where we try to help you answer those pesky retirement questions like, well, “When can I retire?” “What’s my lifestyle going to look like?” “Am I going to run out of money?” “What am I missing?” Each week, we try to give you content to help you as you walk that journey towards retirement and I want to thank you so much for joining me today.
Now, before I get started, I want to give a special thank you to D. Will, Jensen, and Nick. Now, the three of you were kind enough to leave a review on iTunes and that means a lot to me for two reasons. One is it helps build the popularity of the podcast so we can serve more people so more people can get on that path to living an ideal retirement. But, on a personal level, it just means a lot to know that this is helping someone. I think it’s definitely helping me become a better advisor, but this show is about helping you, the listener, create an ideal retirement so it’s good to get that affirmation. Thank you so much!
Well, before we get started, I want to have that all-important disclosure so let me turn that music down. Our attorney does not like happy music when I say the disclosure so let me get that off of there. Okay.
Here’s the all-important disclosure and that is only you know your entire financial situation so you need to think of this podcast and my blog and, well, really anything on the internet as helpful hints and education because we don’t know anything about you. I’ve never met you! Now, I’d like to meet you at some point or talk with you, but before that time, you’ve got to put this in the right context and make sure, before you make any changes to your plan, you consult the people that do know you, and that could be your legal advisor, or your tax advisor, or your financial advisor. That’s just not common sense – not just common sense – it’s a fundamental principle of planning and living out your ideal retirement.
All right. We are on Week Three of “Can Carl Retire?” Now, in Week One, we dreamed up – excuse me – Carl dreamed up his ideal retirement. And then, in Week Two, last week, we helped him identify his financial resources – the stuff he has available to achieve that ideal retirement. This week, we’re going to talk about risks to his retirement – ooh, scary stuff!
If you would like to plan alongside Carl and you haven’t signed up already, you can go to rogerwhitney.com and go to the upper right-hand side and register. You’ll get free resources – a summary of Carl’s plan, a worksheet, and a video to help you complete that worksheet so you can follow each step with Carl. If you haven’t signed up already, go to rogerwhitney.com and sign up and I’ll make sure I get all those resources so you can jumpstart planning your ideal retirement as well.
Okay. Before we get started, let’s recap who Carl is.
Carl’s 51 years old. He’s a 51-year-old man, 29-year-old corporate guy, and he’s been married 27 years with a daughter in college. Based on last week’s episode, we had a couple of comments from listeners so I want to hit those or discuss those real briefly and then we’ll get into today’s episode.
First off, Gail asked, “How does she get access to Podcasts 1 through 16?” I guess they’re not showing up on iTunes. So, Gail, I can make some tweaks on my website to have those available, but I’m going to warn you, that’s Episodes 1 through 16. I had never done this before and, as awesome as I am now, I wasn’t so awesome then probably, but I’m sure there’s some valuable content. The delivery might not be the same but I’ll make sure that those are available to you.
Now, Ken, a listener, emailed in and he had two comments. One was he wanted to point out that Carl needs to make sure he doesn’t forget wedding expenses. He has a daughter who’s in college and daughters tend to get married – just like sons. Ken said he had a couple of daughters and, man, those wedding expenses really surprised him and that’s a great comment. Carl, in fact, brought this up outside of this conversation. In fact, when you see the webinar, you might see a couple of different items that weren’t talked about in that ideal retirement and a lot of the reason is it’s sort of like peeling an onion; nothing gets done all in one chunk because we think of things later on, and that was one of them, and that’s a great comment.
The other comment Ken had, I thought was very interesting. He said, “Given that Carl’s a spreadsheet guy and so intent on how he makes decisions, he thought his net worth might be larger.” That’s a very interesting observation, Ken. Here are my thoughts on that and I didn’t really present that to Carl and maybe he can comment on it but here are my thoughts. One is my impression with Carl is that he’s lived a very balanced life. He’s not working 24/7. I know he enjoys the outdoors and he enjoys his family life so I’m guessing he’s lived a very balanced life and not just focused on building up his net worth.
Second, he’s paid for college without any debt or expenses and that’s not inexpensive. Lastly, you know, Carl’s a 29-year corporate guy and anybody that’s worked in the corporate – the large corporate environment, you know – can probably attest that there’s a natural earnings arc or cycle and typically, if you’re successful in the corporate world, those top earnings years start in your mid to late 40s and really go up till about age 60. So, Carl’s 51; if he worked at a large corporation for the last 29 years, he’s really just entering those peak earnings years. It’s not like an entrepreneur or a small startup type of company where you can have tons of stock options or you’re going to have crazy cash flow because you took all the risk of owning your own business. If you’re in a large corporate world, generally, where his net worth is probably on the higher end for roughly his level and where he’s at in his career, but that’s an interesting observation, Ken.
Lastly, a listener asked, “Why is his projected lifestyle budget more than he’s spending now?” Ah, that’s a good question! Well, I think there are two reasons. One is I really pushed Carl to focus on an ideal retirement which means he threw in everything but the kitchen sink into that number and I think Carl would even admit that. More than likely – and I think he said it even in that episode, you know – this is really pushing it. This number is really high but I pushed him to that direction and I explained why in episode one. Two, I think he’s really focusing on those early years to really be active when he and his wife are younger and healthier with the idea that they’ll slow down later on. So, I think those are the two reasons.
But all of these are great questions and comments. Keep ‘em coming because I love to see that people are engaged.
Here we are in Week Three. This is all about identifying and managing the risks that face everybody as they walk their journey into retirement. What I want to do is, step one, I want to talk about some of the major risks that are out there for retirees and give you some color or insights to them. And then, I’ll play our conversation with Carl where you can hear some of the conversation that we had about some of these risks.
Let’s talk about some of these risks.
Well, the first one is longevity. If you’re age 65, the average life expectancy for male is going to be 84 and for female is going to be 86. One in four of you, if you’re age 65, is going to live till age 90. We’re looking at long-term horizons.
If we look at Carl who’s 51 and he wants to retire at 52, we’re looking at a 34-year – excuse me – a 32-year timeline that we need to make sure that we cover and have enough assets for. Odds are, as health care improves and the quality of life improves, he could easily live until he’s 90 or so. Longevity risk really changes the formula of how you plan for retirement.
It’s not like my grandfather – and we’ve talked about this before – where you are working physical labor your entire life and then, when you do retire, you’re physically worn out so you’re not as active during retirement meaning you’re not spending as much on retirement on activities and you’re not living as longer. Well, now it’s very much different. We’re retiring; even if it’s at the same age as years passed, you’re going to be a lot more active during retirement and you’re going to live longer which can create some big issues in planning because we don’t know the end date of when you’re going to die so it’d be easy if we knew, “Okay. Carl’s going to die at 86 and we don’t have to worry about a year beyond that.” We don’t know that. We don’t have that endpoint. That, coupled with a more active retirement where you’re spending more money makes longevity a really big issue during retirement, and you’ll see this addressed a little bit in the webinar where we play with some of these numbers.
One of the second major risks in retirement is inflation. Inflation, that thief in the night – as Reagan talked about it – that steals away your purchasing power. Even if you make the same amount of money over time, the amount that you can actually buy in lifestyle goes down as the price of things increase. Let’s assume that inflation’s at 3 percent and you’re 62 years old. Well, what will happen is, by the time you’re 86, you’re going to see the cost of things doubled. If you’re living on $10,000 a year from your assets – I’m just throwing out a random number – when you’re 86, that $10,000 is going to buy half as much stuff as it would when you retired. You have the slow decay of your purchasing power which you have to try to keep up with if you’re trying to maintain your lifestyle during retirement.
The third major risk in retirement is market returns and sequence risk in terms of the return cycle that we receive in our investments. The big risk there is bad timing. Negative returns in the early years of retirement can have a huge impact on our success or failure in our retirement plan. If you look at the years just before we retire and just after we retire, I call those the “retirement hot zone,” those are the years that we really can’t afford to have huge market downturns because that’s generally when we’re going to have the most amount of money that we’ve accumulated and a percentage decrease in those early years of retirement can literally wipe out the confidence in a long-term retirement strategy. The impact is really huge in that final stage of accumulation. As you get into that retirement hot zone, it’s really important you focus on consistency of returns more than the average return.
I’ve seen some studies that show that – and I’m planning on having someone on our show to discuss this – that there’s some logic to starting very conservatively early in retirement because that’s when your timeline is the longest and that’s when the impact of negative returns is the largest. Start off in a conservative allocation and slowly increase your equity exposure as you age. I’ve seen that as one strategy to help eliminate some of the risks of that retirement hot zone. We’ll actually address some of this in the webinar next week. We’ll show the effects of good markets and bad markets on Carl’s plan.
The last two I want to talk about briefly before we get to my conversation with Carl is health care. Recently, a fidelity study showed that couples thought they would only need about $50,000 to cover health care costs in retirement. But, according to an EBRI study, a 65-year-old couple would need anywhere from $151,000 to $360,000 depending on whether they’re an average expense or a high-end expense in terms of health care costs. Typically, people underestimate what they’re going to need to cover health care costs during retirement.
Some of the solutions of that – and I’m a big advocate of this – is investing in your health because that pays large dividends for years to come. The healthier lifestyle you can lead now. Second is choosing insurance wisely and making sure that you actually factor in costs into planning.
The last risk I want to address briefly is long-term care and this is one that I know a lot of people are scared about. Carl and I talk about this a little bit. According to longtermcare.gov, nearly 70 percent of those that reach age 65 will require some type of long-term care. The median rate for a private nursing home is about $83,000 a year – at least it was in 2013. This is a big scary bomb in everybody’s retirement plan.
Now, if you go to longtermcare.gov website and you look at how that breaks down, it gets to be a little less scary because, really, the percentage of people that are in a nursing facility for one year or more is only about 35 percent of us. And then, a lot of people are on assisted living or in some kind of care facility for a very small percentage. Typically, what you’re going to see is unpaid care in the house or any type of home care for a couple of years. That 70 percent are going to need some type of long-term care. It doesn’t mean that worst case scenario and that’s something we can talk about more. You’ll hear Carl and I talk about some of the intricacies of long-term care planning and how it’s not necessarily solved by a product alone and we have some concerns there.
I want to give you a few comments on Carl and my discussion on risk in retirement. You’ll notice that, although he made an estimate on health care costs, he really didn’t dig into it and I think that’s how most people are and most people don’t even make an estimate so Carl’s farther along. But they really didn’t dig into the numbers and we’re going to do that on the webinar.
Secondly, and I hinted to this a second ago, I would pay special attention to our long-term care discussion because it’s not as simple as buying a product and feeling like you have it taken care of. You hear that number of 70 percent of people is going to need some type of long-term care. That’s a scary number. It will cause a lot of people to buy a long-term care product of some sort, and it doesn’t necessarily mean it’s the wrong thing, but they’re not as simple as you think they are. I mean, there’s cost involved. There are limitations on the coverage. There’s inflation. The premiums can increase – in some cases, substantially. Really, what you’re doing when you’re buying a long-term care policy of some type is you’re making a huge commitment. You’re basically committing to paying those premiums for the rest of your life because, if you end them ten years later, you’ve basically just wasted money if you end them before you have some type of event so it’s not something to enter lightly and this isn’t something that’s really presented in the brochures. Family can be an important factor and there are a lot of different considerations before you just buy a long-term care policy and you’ll hear some of that in Carl and my discussion.
Here’s my discussion with Carl on some of the risks in his retirement plan.
ROGER: All right. Well, I’m here with Carl. How are you doing, Carl?
CARL: I’m doing well, Roger. Nice to see you again.
ROGER: Good to see you, too. I hope you’ve had some coffee because we’re about to talk about an extremely exciting topic. We’re going to talk about some insurance.
CARL: I’m on number four so I think I’ll stay awake.
ROGER: Stay awake. Audience, you drink some coffee as well. In the confines of what we’re doing here with this retirement plan live concept, it’s going to be hard to really dig into the insurance aspect of retirement as well as the estate planning which we’re going to touch on as well, but we want to at least make sure we check the boxes.
The first question I want to ask you is now you’re planning on retiring before Medicare kicks in so let’s talk about health insurance. Have you thought through how you’re going to pay for health insurance until you qualify for Medicare?
CARL: Yeah, I’ve thought about it. Up until a year ago, my employer had retirement sponsored health care and I started doing my initial kind of cash flow planning about maybe two years ago and got a lot more detailed, obviously, in the last six months but, even two years ago, I had always kind of assumed that that benefit would be gone by the time I retired so I built in a $1,500 a month plug not really knowing what it was going to be and I’d be interested in your inputs on that but, to me, it’s just a question of it raises the spending level required to fund through your investments, pensions, whatever before you can, you know, where do the lines cross? It just pushes that line up $1,500 before you can walk out. That’s kind of the way I viewed it.
ROGER: Okay. Now, for those of you that are just joining mid-retirement plan live, you can go back to previous episodes and hear our goals conversation and our cash flow and net worth conversation. If you do that, what you’ll realize is Carl is a planner so I’m not surprised that he’s factored in some assumptions for paying for private insurance before Medicare. I think that $1,500 a month is probably pretty accurate and maybe even a little high, depending on your particular health situation. But have you factored in the cost of health care once you do qualify for Medicare?
CARL: No, that’s actually a good point. I think I flat-lined the $1,500 all the way through and I’ve kind of got inflation adjustors by spending category so I’ve got an inflation adjustor for, say, health care obviously higher than your general inflation in some of my other assumptions. I probably just had that $1,500 flat-lined all the way through, adjusted for inflation, and we should talk about what is a post-Medicare cost assumption that’s reasonable. I have no idea. I haven’t looked into that yet.
ROGER: Ah! I caught the planner not planning. It makes me feel good. Now I feel valued. What we’ll do, Carl, in the live webinar that we’re going to do here in a week or so where we unroll the plan is I will build in private health care assumptions as well as Medicare costs and Medigap insurance.
ROGER: I’ll build all of those assumptions into the plan and we’ll review those as we walk through the plan so you can see how they work in this timeline of you and your wife retiring here and not too much longer, hopefully.
CARL: Oh, I hope not! I just called my pension. We have an external pension consulting company so I called them yesterday to get revised numbers. Yeah, it’s on my mind a lot.
ROGER: And it’s really hard with health care because you don’t know. I mean, even with the Affordable Care Act. I talk to insurance experts and they really don’t know what it is right now in terms of the cost projections and, more importantly, what it’s going to be a year from now or what it’s going to be two years from now in Congress and the presidency changes. That’s a really difficult area to plan so probably the best thing to do is you make your best assumptions and then make sure you have some little conversations so, as this legislative reality unfolds, you can make some adjustments earlier than later, huh?
CARL: Yeah. In a way, as much as I’m against – I’ll call it ObamaCare, politically incorrect but I really don’t care – I’m really against it. But, for an early retiree, there actually is a benefit because, you know, one of the reasons that our company used for why they were discontinuing the retiree medical coverage is that, historically, if you had a pre-existing condition, et cetera, it would be very difficult for a retiree during the gap between Medicare to potentially go out and buy third-party insurance if they had a pre-existing condition so the company felt a moral obligation, blah blah blah. They said, you know, with the Affordable Care Act now, obviously people have an option for insurance so we’re going to discontinue, and I think the reality was most companies are discontinuing it so they were just being competitive. Having said that, I do think there is an advantage for an early retiree because you do know now there is an option for health care insurance whereas, in the past, potentially there wasn’t so I think it is a good thing.
ROGER: I think you’re spot-on with that. The difficult of having a pre-existing condition, I’ll make the argument too for an entrepreneur. I remember when we went independent a little over eleven years ago, we had to go buy private insurance and I had some pre-existing conditions and, basically, I had to exclude them for – I forget how long it was but – it was a long time. You just prayed that those didn’t re-occur. So, it’s not only for the retiree but for the entrepreneur. It makes it a lot easier to make that leap because you don’t have that really significant issue.
CARL: Yeah, good point.
ROGER: Yeah, for earlier retirees, that is an old big benefit. It just makes sense as long as you’re continuing coverage to take care of those pre-existing conditions.
CARL: Yeah. Having said that, I still don’t like it.
ROGER: Yeah. Well, we try to deal with reality here.
CARL: Yeah, that’s right.
ROGER: Now, let’s talk a little bit about long-term care. That’s a big nasty bomb that sort of sits in the back of everybody’s mind when they’re retiring – whether you’re retiring early or not. What are your thoughts on that and what type of planning have you done with that?
CARL: Yeah, I’m glad you asked that because I’ve actually got an insurance guy here and we’ll talk life insurance maybe too. I’ve got some comments on what I did in life insurance specifically and this guy brought up the… Did you say long-term care or long-term disability?
ROGER: I’m sorry, long-term care.
CARL: Okay. We did talk about long-term care and, you know, when I did the math, you know, all the rates have had to come up, obviously, because, as the insurance companies got into this, and it was a relatively affordable insurance and they realized very quickly that they weren’t going to make any money at those rates so the rates have adjusted upwards. When I did the math – and all I did, again, being a planner, not as good in the spreadsheets as you are, I’m sure but nonetheless a fairly simplistic spreadsheet – the way I looked at it was I had two options. I could go out and buy long-term care insurance. I can’t remember the cost but it was pretty expensive. Or I could take that money that I would put into the premium – let’s just say for the sake of argument, I don’t remember what it was but let’s say it was $500 a month – I could take the $500 a month and invest it and assume a certain return. And then, I just ran those through, you know, thirty years’ worth of time and had the $500 a month investment grow compounded at, you know, I think I used, like, 5 percent or 4 percent, some relatively conservative growth rate. When I did that, taking the premiums and investing them, in my view, was a better decision for me because the lines crossed at, like, 85 years old – depending on what your assumption was for how long you were going to have to stay in a home and all that kind of stuff – but there is a point where those lines cross and you can basically self-fund your long-term care exposure risk. Then, if you don’t need the long-term care, it’s that much more money you’ve got left in your estate.
I presented that to my insurance guy and – you know, he sells this stuff for a living – he kind of disagreed with some of my numbers. But, at the end of the day, he didn’t really have a strong argument against it and I think some of the stuff I’ve been reading, more and more people are taking this type of a view and they are choosing self-insurance because of the cost of those premiums has gotten to the point where there is a natural break-even point at some point. I think we’re pretty close to being there.
ROGER: Interesting. I would love to see that spreadsheet because I don’t know if those numbers still work to where that crossover point is. But a lot of it has to do with your assumptions, doesn’t it? It has to do with when do you have an event and how long are you in an event. It’s not assuming the worst case Alzheimer’s long-term, really long-term assisted living.
ROGER: But I do agree with you on traditional long-term care insurance and I haven’t had an episode on it yet and I really need to because that’s a question that comes up all the time and I have the same worries with you on traditional long-term care insurance. The way I always look at it is these insurance companies don’t know what the claims experience is going to be because we’re just entering that big bubble of baby boomers, right? Right now, they’re insuring a lot of people but they haven’t had a lot of claims history to base their premiums on and we just saw a number of insurers increase their premiums in some cases over 50 percent.
ROGER: That’s without a lot of claims history yet. My big worry is people will pay for these policies for years and then, just when they really get to that sweet spot of where they might actually need the benefit, those premiums are going to start to increase on them and then they’re going to either do one of three things – they’re either going to suck it up and pay it, or they’re going to reduce their benefits to keep the same premium, or they’re just going to say, you know, “Forget it. I’m going to cut it,” and then have all that sunken money lost into it.
CARL: Yeah, I’m glad you said that because, as we said, there are assumptions that I have to make on kind of my premium investment alternative, but there’s also an inferred assumption on what your premiums are going to be. I assumed they didn’t increase. You know, it’s almost like an amortization schedule, I guess. There was a schedule that the insurance guy gave me that was what the premiums were through ’85 or whatever it was. I just used that but those aren’t guaranteed, right? You’re right. You could spend $500 a month – it might increase for inflation, whatever. You could be paying $1,000 a month and, all of a sudden, you get hit with a $300 a month increase at the time you’re living basically on your fixed retirement income. How do you suck up that extra $300 a month without sacrificing something else? There’s a risk either way you play this thing.
ROGER: Yeah, and have you thought of or were you presented some of the alternative vehicles that have come out to insure away some of the long-term care risk?
CARL: No, I bench on what you’re thinking about there.
ROGER: This is not necessarily something we can talk about on the show just for compliance purposes but there are some things that are either life insurance based that have long-term care benefits – and I’m not a huge fan of those but they’re something to at least put into the pot – and then there are these products that have come out that basically, I mean, when you buy insurance, all you’re doing is trying to lever somebody else’s money, right? You’re trying to get three or four times the power in the event something happens and then the insurance company makes the money based on it not happening too much in whoever they insure. But there are some asset-based where you put in, say $100,000, and they guarantee that it will be worth – for long-term care benefits anyway – say three-and-a-half times or two-and-a-half times. But, if you don’t need it, you still can get your money back so it’s not just sunken cost. It’s just like a one-time payment to lever in the event something happens.
CARL: Got it. Yeah, I’ve read a few things on some of those but I haven’t really studied. The other thing I’ve thought about – I’d be interested in your take on this – is potentially doing something pretty simple like a deferred annuity and you put $100,000 into a deferred annuity to start at age 85 – or not even $100,000. You can probably put $50,000 in something, defer it for twenty years, and then the compounding of the deferred annuity makes it where it’s a pretty reasonable cash flow at 85. I don’t know but I’m trying to figure out if there is a better way to do it. It’s a good topic and I think a dedicated show to it would be valuable.
ROGER: Yeah. I’ll tell you what. Probably the best long-term insurance you can get is having very independent, loving children that live near you.
CARL: I’ve got to tell you this story, just a quick little on the side because I think it’s pretty humorous. You know, I told you we have my mother-in-law living with us, right? Okay, fine. My daughter who is in college now, she was home and she was still in high school and my mother-in-law moved in and I said to my daughter – I won’t use her name, I don’t know if we’ve used her name on the show or not but I would say Jane – “Jane, you see what we’re doing for grandma?” I said, “That’s what you do, you know, when your parents get older, that’s what you have to do.” I said, “You know, in the event that I pass away or whatever and mom needs help, you know, I’d expect you to do this for mom just like we’re doing it for grandma,” and she goes, “Okay, dad.” She said, “What if it’s you that needs the help?” She wanted to know the rules, right? I said, “If it’s me, just throw me in a home. Don’t worry about it but take care of mom.” I agree. Kids are the best insurance, but it’s a huge burden as we know. We’re going through it now, right? You have to consider that as well.
ROGER: Yeah, I saw it sort of fastidiously but that is traditionally, for centuries, how families took care of each other, right? We’ve lost that a little bit in this modern society but I think that is a viable thing to consider. I mean, my parents are no longer with us; but my wife’s parents, it’s sort of the same thing. My mother-in-law, I can easily see living with us. My father-in-law, on the other hand, I’ll buck up to buy him an apartment, I’m sorry. Hopefully he won’t listen to this. I’m just kidding, Dave! But this is the issue that we’re all dealing with long-term care. I guess my point is we can put in some assumptions in the plan but it’s not as simple as a product and I think that’s the hard part. Everybody feels the pressure and are at least being told how devastating it can be and here’s a product to solve it and I think that’s the danger of even having the discussion because the product is like a pill. “Here, just take this pill and you’ll be fine.” It doesn’t work that easily and there’s a big cost to that pill. You know, just like a medicine you take, there’s a lot of side effects. Just like buying a long-term care insurance policy, there’s a lot of side effects that might hit you and might not, and that could be increased premiums or having to reduce your benefits and that’s a very difficult thing and, I’m going to admit, I don’t have the answer other than trying to just keep making the best decisions. We’ll try to factor that in but I wanted to get an idea of what you’ve done so far in thinking about that.
CARL: Good, and I also did that spreadsheet. You know, I’d look forward to any feedback you have on it and I look forward to a future show.
ROGER: Yeah, that would be interesting. I have to be careful though because a lot of these are, you know, product and I can’t talk about recommendations and products in this kind of form because of regulations. But we’ll do our best because it’s one of the most important things or big worries that people hear about anyway. Now, do you particularly worry about it or are you just told that you should worry about it?
CARL: Pretty much I’m told. I mean, I’m healthy. I run. You know, we don’t have any big health care issues in the family so I’m not really worried about it. At the same time, I’m not naïve enough to just brush it under the rug and forget about it. It’s in the back of your mind as a risk, but it’s not one… I spend a lot more time thinking about retirement and the crossover points than I do about the long-term care dynamic.
ROGER: Yeah. With long-term care, actually, the bigger risk – at least it seems like with someone in your financial situation – is not so much for you. Let’s say it’s you. Okay, Carl gets whatever and you start paying $4,500 a month for a memory care facility for however many years until Carl passes. The big risk or the worry is, man, you know, who’s that really going to affect? That’s going to affect your wife. You’re going to blow through all your assets and leave her struggling to make ends meet. That’s really where the risk is for a lot of people when they think about it.
CARL: Yeah. I guess for me, the way I look at that is there’s still my company pension and there’s a survivor pension element to that – well, you can design it any way you want but we’d probably go with a 50 percent survivor clause. As a worst case, if all the liquid assets were drained – except for the house; okay, the house is paid for so she doesn’t have a mortgage or anything like that – she’d have 50 percent of the pension and she’d have social security. You know, I guess the worst case scenario, no assets left, it’s probably a manageable situation in our case.
ROGER: Yeah, and you have the value of that pension which is fairly getting more unique than ever before. The last word I want to say on long-term care as we talk about this – and I want to get back to your specific situation – is there’s basically three groups of people when you’re trying to plan for this.
There’s those that have little assets that they’re just struggling to make ends meet and make it all work, that they can’t afford long-term care, and they shouldn’t try to afford long-term care most likely because they just don’t have the resources – whether it’s assets or income to afford it. Don’t kill yourself because you’re just at that level.
And then, there’s that middle group that has some assets that can produce income for retirement. You know, say it’s a million to two million dollars where they have assets. It’s a decent amount of assets. It can generate income and, if they lose that, they’re screwed, right? Because they don’t have a pension or anything else. That may be the sweet spot of where to consider having it.
And then, above say two to three million dollars, now you get into you can probably self-insure it – depending on your lifestyle and your situation. Then, it’s just a choice of, “Do I want to transfer the risk or do I not want to?”
Long-term care and a lot of things aren’t for everybody. It really depends on where you’re at – which one of those groups you’re in. You definitely don’t want to kill yourself to buy it if you truly can’t afford it because it really doesn’t matter anyway because you don’t have enough assets to lose and that’s a weird way of saying it, maybe, but that’s how I’ve seen it.
CARL: Yeah, it’s a tough topic. You know, the other thing that I look at, we talk about how the $1,500 a month for Affordable Care Act (ObamaCare) increases the line at which your lines cross and you can retire early. Well, a long-term care insurance is kind of the same way. If you say, “Okay. I’m going to go ahead and pay the premium,” you’ve got to commit to paying that premium all the way through or else you’ve wasted whatever premium you pay at the point that you stop paying it. Once you make that decision, you’ve got to put that into that cash flow assumption. Guess what. That raises the line as well and that just delays how much longer before your lines cross and you could retire so it’s a really complicated subject.
ROGER: Yeah, it could cost you a year or two of retirement because you have to work a year or two more to factor that cost.
ROGER: Okay. Well, let’s switch a little bit. Let’s just talk about one more topic on the protect subject and let’s talk about life insurance.
ROGER: What type of life insurance do you have right now?
CARL: Okay. What we have through work is a company-provided life insurance for 1.5 percent of your salary in the base and then there’s optional insurance you can buy above that. What I had been doing up until a year ago was buying some of the optional insurance. As I thought about early retirement, obviously, when I retire, that benefit no longer is available because it’s for working employees so I transitioned the incremental insurance that I was buying to independent insurance that I’m buying on my own and I dropped the incremental that I was buying through my employer. Looking at the two combined, I’ve probably got about $500,000 of insurance right now. It’ll drop to $200,000 when I retire. My feeling was I would probably want to keep some life insurance in place, at least through the early retirement years because, as I said, when I do pass away, my pension drops to half and I thought, just for my wife, it would be kind of a nice little injection to have a couple of hundred thousand that flows in, heaven forbid, but that would help soften a little bit the pension cut. That was my logic for doing it.
ROGER: Okay, and what structure did you choose for the independent insurance that you bought?
CARL: I just bought a pretty straight – what is the term? Life where you just pay. You know, there’s no cash value or anything like that.
CARL: Fixed premium for ten years I think is what the structure was.
ROGER: So, the idea was to get you to the late 60s?
CARL: Yeah, and, you know, it’s renewable so it’s renewable but the premium could fluctuate. I can’t remember exactly what it was, Roger – whether it was ten or fifteen years. I can get those numbers if you want for when we do the live podcast to build them into the cash flow but it was fixed for a certain period of time and then renewable for another ten years but the premium was adjustable.
ROGER: Okay. The idea was, in that early stage of retirement, to have some in flow in the event of a premature Carl death?
ROGER: Which none of us want.
CARL: Especially me.
ROGER: Especially you, okay. And you were smart on the corporate insurance and this is something a lot of people don’t realize. When you get a supplemental insurance policy or they cover one-and-a-half times your salary, basically what they’re doing is buying a one-year renewable term.
ROGER: And then, when you leave, they give you the option of continuing that insurance but they didn’t lock at a premium for you so it ends up you either lose it or it becomes fairly expensive insurance so you were smart to realize, “Hey, this isn’t going to be here when I’m gone.”
CARL: What’s your feeling? I just kind of guessed on the $200,000 to be honest. I didn’t do a lot of math on it. I just kind of said, “Okay.” Is there a recommended methodology for determining how much you should buy?
ROGER: That’s a good question and it really depends. How’s that for an answer? The way I think about it is the only reason you want insurance is because you’re leveraging somebody else’s money so I always start off with, “If I can self-insure everything, that’s the cheapest way to do it,” and what I mean by self-insure is, if I can have enough money that I don’t need insurance, why buy it? Unless it gives me something that I value from a balance sheet perspective. When I look at insurance for someone like you, I would think of it as, “Okay. If I die early, if I die today, how can I assure my wife or whoever has this standard of living for the rest of their lives?” and then, “If I have the assets…” and whether that’s including the pension and social security and whatever assets you have in your balance sheet or income you have from properties, I factor all of that in there and then I say, “Okay. If I die today, what would be their lifestyle with no insurance? Is that comfortable for them and is that appropriate?” and, if it is, awesome. “Wow. If I die and my pension goes to half,” say in your case, “This is what her lifestyle looks like it might be,” and that’s not what we want then you can look at buying some insurance to fill that gap.
ROGER: I think of it from a lifestyle perspective. “How do I want my wife/husband to live if I happen to die prematurely?”
CARL: And then, do you kind of look at the 4 percent rule as a guideline to say, “Okay…” I haven’t done the math but $200,000 would be $20,000 so about a little less than $10,000, I guess. Do you look at, say $8,000, do you look at that as a 4 percent of the life insurance value as what that would contribute to their annual lifestyle? Is that a reasonable way to look at it?
ROGER: That’s a good down and dirty way to look at it. I would look at it two ways. One is you could look at it if you have debt – say you have a mortgage – it could be you do it to pay off the mortgage and, if you have let’s say $2,000 mortgage payment, all of a sudden that goes away and then you can factor that into what the lifestyle cost would be because you’ve taken that outflow away. But what I’d really do is I’d factor it into a little bit more sophisticated using the Monte Carlo simulation which we’re going to do in the live webinar as we unwrap your plan to the world and to you because you’re not going to see it until everybody else does and we’re going to see you cry on air or just jump around in joy. But what I do is I factor it into a Monte Carlo scenario to really bake it right into the plan of what happens with investment experience and cash flow experience.
ROGER: It’s a little bit more than the 4 but the 4 percent rule is a great down and dirty way of doing it.
CARL: Okay. Good. That’s helpful.
Well, thank you so much for joining me for this week’s session of “Can Carl Retire?”
Now, next week is our last week – Week Four – where we’re going to address Carl’s estate plan and giving strategy and talk about some issues and things that you need to think about as you work to tie up your affairs and give assets to those that you care about most.
And then, that Friday the 30th is the big webinar where we’re going to present Carl’s plan and stress test it against a lot of the common risks that we’ve talked about today – inflation, bad markets, long-term care. Stay tuned for that next week.
If you haven’t signed up yet, you can go to rogerwhitney.com and register to plan alongside Carl and reserve your spot for that exclusive webinar on January 30th.
Until next week, this is Roger Whitney, the Retirement Answer Man.
RESOURCES MENTIONED IN THIS EPISODE
Roger’s YouTube Channel - Roger That
BOOK - Rock Retirement by Roger Whitney
3-video Series: 5 Minute Retirement Makeover
Roger’s Retirement Learning Center
The Retirement Answer Man Facebook Page