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Wealth Preservation For Retirees

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There are now 40 million Americans over the age of 65, comprising 13 percent of the population. Twenty-five percent of these folks will live past age 90, and 10 percent will live past age 95. What’s more, by 2030, one out of every five Americans is expected to be over age 65.

Failure to plan for care needs in later life can result in the loss of a lifetime of savings and failure to leave a legacy. Nationwide, the average annual cost of nursing home care is more than $90,000.  Couple that with the fact that 70 percent of all Americans will need some form of LTC—half of us in a nursing home—and you have the recipe for financial disaster.

The problem here is that none of us know if we will need long-term care and from what age we will need it. You may develop a condition like MS or Parkinson’s that can strike at a relatively young age regardless of family history. You may have a fall that causes a head injury and need long-term care because you are otherwise healthy but have lost your mental facilities.

The Affordable Care Act, for all its benefits, doesn’t pay for any LTC. Neither does Medicare, which, at best, may cover short-term rehabilitation under very limited circumstances. Medicare provides no coverage whatsoever for custodial care, such as for individuals who need help getting in and out of bed, dressing, bathing or with other activities of daily living.

Thus, we aging Americans are either forced to fend for ourselves and pay for LTC out of pocket (either privately or through insurance) or rely on Medicaid, which was originally intended to be a program for the very poor.

In January 2010, a section of the Pension Protection Act of 2006 took effect. That generated excitement because the law permits federal tax-free treatment of withdrawals made from annuity combos to pay for qualifying long-term care expenses.

Fixed annuities, those CD-like investment vehicles that can provide an income stream for life, are a tough sell in the current low interest rate environment. However, if you’re a risk-averse shopper who can’t pull the trigger on a use-it-or-lose-it long-term care policy, an LTC annuity may be worth exploring.  It’s generally a lot less expensive than a long-term care policy.

The 3-to-1 Annuity/Long-Term Care Hybrid Annuity should be considered for money you are using to self-insure for all or part of potential LTC expenses. You instantly multiply the amount that is available for LTC to two or three times the amount you’ve set aside. You continue to earn safe interest on the money and have some access to it. If you are fortunate enough not to need LTC, the money passes to your loved ones.

You have long-term care benefits that are up to three times the annuity’s value. If you deposit $100,000, you now have up to $300,000 of LTC coverage. The cost of the LTC coverage won’t increase over time and won’t reduce your principal. Interest earnings increase your LTC coverage.

As with a standard long-term care insurance policy, the LTC benefit is triggered when you can’t perform two or more of the six activities of daily living (determined by a licensed medical professional) or are cognitively impaired. Eleven long-term care services are covered, including adult day care, home care, homemaker services, and residence in an assisted living facility or nursing home. There’s no waiting period for reimbursements for home health care or respite care, and a 90-day waiting period for other types of care.

Since this is an annuity, your deposit and accumulated interest are available for other uses. You can withdraw up to 10% of the contract value each year or schedule regular annuity distributions, such as a single life annuity or a joint life annuity covering the lives of both you and your spouse. The amount you don’t distribute or use for long-term care can be transferred to your heirs or other beneficiaries. Keep in mind that any lifetime distributions reduce your LTC benefit.

Another annuity available is a Longevity annuity.  Longevity annuities are much simpler than their name would suggest. In essence, a longevity annuity allows you to to trade a fixed amount of money for the promise of a future stream of income that will begin at a fixed age and continue for the rest of your lifetime. Unlike immediate annuities, which begin to make payments right away, longevity annuities are deferred income annuities, with payments set to start years or even decades into the future.

Earlier this year, the Treasury Department established new rules covering the use of longevity annuities. These insurance products are designed specifically to help retirement savers plan for their future income needs in a predictable way.

The new rules allow participants in 401(k) plans and other employer-sponsored retirement plans to incorporate these longevity annuities into their plan offerings without running afoul of guidelines that require minimum distributions of retirement-account assets past age 70 1/2. Yet even though retirement savers will be able to use annuities more freely, the big question is whether it makes sense for them to do so.

The main benefit of longevity annuities is that they give investors the certainty of knowing they will receive a certain amount of money no matter what happens in the financial markets. Moreover, for those who exceed the typical life expectancy, longevity annuities pay off by ensuring monthly payments as long as you’re alive to receive them.

By putting a portion of your savings aside toward a longevity annuity, you’ll be certain that even if you run out of other assets, you’ll have a minimum baseline income on which to survive. In that way, longevity annuities provide the same financial stability that Social Security does, with the federal payments also continuing until death.

Fixed indexed annuities, however, will continue to be a bright spot in a persistently low interest rate environment, as both a retirement savings accumulation vehicle offering a principal guarantee and growth potential, and as an attractive alternative to certificates of deposit.

Fixed indexed annuities can provide retirees with one of the most reliable and efficient sources of retirement income. “Savvy savers have long understood the merits of indexed annuities, but now a broader cross section of the investing public has entered the marketplace in droves.

With the economy still on shaky ground, many near retirees worry they’ll be working much longer than anticipated. Fixed indexed annuities are a virtually recession-proof bulwark against those kinds of concerns.”

If you know you won’t have a long lifespan, purchase a Life Insurance Combo plan.  It’s an easy sale, because people do want long-term care.” They may like standalone long-term care products, “but they don’t like knowing that if they don’t use it, they will lose (the money they put into) it.” For those people, the life combo — which pays for care if needed and/or at death — is “an attractive product.

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Tuesday, December 23rd, 2014 Wealth Preservation

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