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Retirement Crisis Looming

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Inability to plan, save and invest incomes has been identified as the major reason why working class people end up broke and financially down during and after their working life.  The future is unpredictable, so there’s no way to account for every possible scenario.  The country is facing a retirement crisis as its citizens live longer, which will result in greater demands on their assets. Yet many workers are failing to save enough — or anything at all — for their golden years.

However, Americans are living longer and we all want to age with dignity, independence and choice but that requires planning that few undertake.  Personal income management as one of the fundamental elements for a secure future.  The message is that when you fail to plan, you are planning to fail.

In 1950 the life expectancy was 68 and now it’s closer to 80, so that means that this whole generation of Baby Boomers is going to live in retirement 20 to 25 years, [compared with] the previous generation of 14 years.

With the shift to investment plans such as 401(k)s, that puts the onus on workers themselves to contribute money to their retirements.  Even when Americans do put away funds for retirement, they’re often making an investment misstep that could lower their long-term financial prospects.

The gap between the reality of Americans’ low participation in saving for retirement and their very real concerns about running out of money may reside in the economic realities facing many workers.

If you’re nearing retirement, make sure one of the most important and expensive aspects of your golden years—your future health-care needs—is not overlooked   Blowing through hundreds of thousands of dollars for medical expenses in retirement is a reality for many people.  People spend the most on health care during the last 10 years of their life.

Few boomers recognize that most who reach age 65 will need some form of long-term care. Government has no plan in place to deal with the needs of millions of aging boomers and few have set aside money to cover costs. In retirement, you may encounter expanding healthcare needs or even experience a life-changing disability. When trying to cover these health costs, you may realize that health insurance and Medicare fall short when it comes to providing ongoing, long-term care.

For instance, if you don’t need the care of a doctor, but need custodial care for daily living activities, such as bathing, dressing or eating, those costs are never reimbursed by traditional health insurance or government programs. People mistakenly associate long-term care with nursing home care, but most care actually takes place at home or in the community.  Either way, the costs are significant as is the toll on loved ones who typically are called on to provide care. Long-term care insurance can be an affordable option but many wait too long so it’s not available because they’re either too ill or it’s too expensive.

The biggest costs come from co-payments, deductibles and excluded benefits, along with out-of-pocket costs for prescription drugs and the cost of premiums for Medicare Part B (basic coverage) and Part D (prescription drug benefits).  Premiums for Medicare are based on income; the higher your income, the more you’ll pay. Beyond basic coverage, there also are other options that come with additional costs.

On top of all that are long-term care needs that arise from chronic illness, disabilities or other conditions that require daily assistance. Medicare doesn’t pay for continuing care in nursing homes, assisted living or home-based aides.  Medicare doesn’t pay for long-term care in a nursing home. The most it will pay for is 120 days. And that’s if you are improving the entire time you’re there. Improvement doesn’t always occur, so the period Medicare would pay for could be even shorter than that.

There is another program that will pay for a nursing home “Medicaid” and how do we qualify for that?  You have to have a medical condition that requires the medical attention provided in a long-term care facility. The income and resource amounts change from year to year. This year your monthly gross income can’t exceed $2,161, if you are the only one applying for Medicaid. If you and your spouse both apply, the income can be as much as $4,326.

And you must have a limited number of assets. What’s the limit on that? That depends on whether a person is singe or has a spouse who is not going into the nursing home and upon whether the assets are ‘countable resources.’ Some things, like your home, a car, a life insurance policy less than $1,500 cash value, a pre-paid burial policy and burial plots, aren’t ‘countable resources.’ If you were single, you would have to spend down any countable resources to $2,000.”

If married the difference is if one of you has to go into the nursing home, the other is considered the ‘community spouse.’ Congress decided some years ago the spouse who stays at home shouldn’t be impoverished just because a partner is in the nursing home.  So they put all yours and spouse’s countable resources in a pile, then they divided them in half. If Mom is the one staying at home, she gets to keep half of those assets up to $117,240. Also, since Mom’s income, even after allocating your income to her is still less than $2,931, some of your half of the assets can be invested to produce an income stream for Mom up to that amount.

It is recommended that you closely examining your options—especially because chances are that medical expenses will increase as you age. It’s [typically] the end of life when you have the really bad stuff that costs a lot of money.  This is where long-term-care insurance comes in. The cost is based on many factors, including your age when you purchase the policy and particular choices in coverage. Long-term care (LTC) insurance policies were created to pay for daily care expenses. They reimburse you for a pre-selected daily amount of care either in your home or in a nursing facility.

The cost of a LTC policy depends on several factors such as your age when you purchase the policy, the daily coverage amount, the number of years of coverage and any optional benefits you choose.  While having LTC insurance sounds like the perfect solution for getting the care you need, the reality is, there are challenges with these policies. One problem is getting the coverage to begin with. If you’re in poor health or are already receiving long-term care services, you can be turned down. Unlike regular health insurance, which can’t be denied to those with pre-existing health conditions, most LTC policies require medical underwriting.

Another problem is the availability of long-term care insurance. Due to an environment of rising health care costs, increased longevity and low interest rates, in the past five years, 10 of the top 20 providers (such as MetLife and Prudential) have gotten out of the LTC insurance business.  For providers offering LTC insurance, it’s possible they’ll be forced to raise premiums to remain profitable.  If LTC premiums go up, one way to manage the cost is to reduce your coverage. For instance, you could shorten the benefit period from five to three years or reduce the daily benefit amount from $100 to $75.

In the worst case, if LTC premiums become unaffordable, you might have to abandon the policy altogether without getting any benefit from it. Unfortunately, no other type of insurance can completely replace it; however, there are other options. To protect yourself or a loved-one from the rising costs of long-term care, consider these alternatives to regular LTC insurance:

Fixed Indexed Annuity (FIA) – is a financial product sold by an insurance company. The insurer guarantees to protect your principal and give you the potential for growth linked to an index, such as the S&P 500.

An FIA offers the opportunity for growth through a steady, guaranteed lifetime income stream, all while protecting your principal from the uncertainty of market volatility. You don’t actually invest your money in the stock market, but you can receive some of the upside potential of growth without putting your money at risk.

In addition to receiving guaranteed income for retirement, many FIAs offer annuity riders that provide additional financial security to pay for unexpected health care expenses, such as long-term care.

For instance, a nursing home rider may allow you to increase the monthly income on an annuity or to withdraw from your account to pay for care in your home or at a nursing facility. Another option is a terminal illness rider, which allows you to access a portion of your account value if you’re diagnosed with a terminal illness.

Having coverage through LTC insurance or a fixed annuity with optional riders gives you peace of mind for future health costs. If you carefully consider all your options and plan now for future long-term care expenses, you’ll be prepared to cover the care you need when you need it.

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Friday, October 31st, 2014 Wealth Management

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