One For The Money

• Top three risks in retirement [01:09]
• Long-term care planning [03:41]
• Options for long-term care [06:40]
• What is umbrella insurance [09:46]

While there are risks in retirement, I view three as more serious. The first is running out of money via significant negative returns in the years just before and after retirement. That scenario is also known as the sequence of returns risk, which I outlined in episode 20. Significant negative returns in the few years just before or after retirement can significantly impact how long your money lasts. One way to counteract this risk is the bucket strategy. That strategy allocates a portion of funds to a conservative bucket of investments, a portion to a moderate bucket, and a final portion to a growth bucket.

The second primary risk I see in retirement is inflation, which is the persistent rise in the prices of goods and services. For example, if someone had $100,000 in a safety deposit box, and inflation averaged 5% per year, that money could buy only half as much in just thirteen and a half years. As I explained, the growth portion of the bucket strategy works to address the risk of inflation.

The third major risk in retirement is fundamentally different from the others. It’s the tremendous expense associated with a long-term medical event such as an extended bout with Alzheimer’s. The long-term care needed for such an event can top $100,000 annually.

Long-term care describes the medical and non-medical services older adults generally need when they can no longer care for themselves. These are called activities of daily living, and there are six of them. Activities of daily living include bathing, dressing, getting in and out of a bed or chair, walking to use the restroom, and eating. If you cannot complete at least two of those in your own power, you are considered in need of long-term care, and you can access the benefits of a long-term care policy if you have one. 

While most of us hope to live a full life with little to no illness before leaving for the next life, seven out of every ten people over 65 will need long-term care support. The national average for in-home health care is $59,000 per year, and a nursing home can be as high as $108,000 per year. Those are 2022 numbers, but because healthcare expenses increase quickly, those long-term care costs could double every fourteen years! Unfortunately, Medicare doesn’t cover long-term care. Medicaid can cover long-term care, but only for those poor enough to qualify.

Since Medicaid is not a desirable option, two options remain. The first is self-insure, assuming the risk and hoping a need doesn’t occur. That’s a huge risk for you and your loved ones to carry. With expenses potentially being $100,000 per year, your retirement nest egg would quickly be impacted. The second option is to share your risk with others by pooling your resources via an insurance-based solution. 

There are a few types of insurance options. The traditional standalone policies were a popular option quite a few years ago, but the insurance carriers underestimated the need and vastly underestimated the cost. This situation resulted in holders of these policies having their monthly premiums increased significantly and their benefits reduced. A huge drawback to these policies is you can’t use any of the money you’ve put into it unless you have a long-term care event. 

A newer solution is a hybrid policy. These policies use an insurance vehicle, such as life insurance or an annuity, to offset expenses. The money can go to beneficiaries if the policy isn’t used. These insurance products can offer a lot more coverage for a long-term care event utilizing the leverage of pooled insurance dollars. Some products can provide two or three times the premium paid for the coverage. That means you could have more coverage if you need it, and if you don’t, your beneficiaries will get the original amount plus a fixed rate of return. 

• Ways to Avoid Running out of Money in Retirement - Most Accidents Happen on the Way Down, Ep #20
• Cost of Long Term Care by State
• How Much Care You Will Need
• California Long-Term Care Income Tax
• Umbrella Insurance