The Money Class (34 page)

Some good companies currently writing new LTC policies as of late 2010 are Berkshire Life (part of Guardian Life), Country Life, Genworth, Mass Mutual, Mutual of Omaha, New York Life, Northwestern Mutual, Prudential, State Farm, and Transamerica.

Being able to qualify for long-term care insurance is a precious gift. If you can get it, I encourage you to do so and not allow anyone to talk you out of it. LTC coverage, in my opinion, offers more than financial protection for you. If your children don’t have the money to pay for your care, they may wind up making really difficult lifestyle choices in order to care for you themselves. They may have to give up a promising career that could affect their ability to pay for your grandchild’s college education. Or they may have trouble maintaining a committed relationship because your care becomes their first priority. This is why I want to leave you with the thought that long-term care insurance is really about taking care of your family and preserving your dignity.

LESSON RECAP

We should have a special graduation exercise for making it to the end of this class. It feels more like you’ve earned a degree, given all the topics we have covered, than having taken a class.

I want you to know that I understand just how easy it can be to read through this class and be overcome with anxiety. It’s a huge amount of information to process—and it’s not just facts and figures; every fact carries an emotional component. There is no way that the subject of retirement finances can be discussed in a lab, devoid of the human cost of every calculation. Add to that the anxious economic news of the past several years and it creates a cauldron of worry. I get it. But I also know that misinformation and ignorance are what anxiety thrives on, and the only way to combat it is through knowledge and action. That is why the information imparted in this class is so dense and so comprehensive. Now that we’ve reached the end, I hope I’ve at least been able to alleviate your concerns about not knowing what to expect. The emotional impact of the information I cannot dismiss so easily, but I can tell you what you need to know and what you need to do to face down that vast unknown territory just over the hilltop of your working life. I’ve been down that road with many of you before. It’s where I started when I wrote my first book.

When I wrote
You’ve Earned It, Don’t Lose It
in 1994, I thought the retirement planning process was complicated enough. But in retrospect, retirement in those days could still well be called the golden years. The majority of my private clients had old-fashioned pensions to look forward to; our work was to figure out what the best payout method for them was. Today the issues are so much more complex; you must set aside your own money in retirement accounts, you must figure out how to invest that money, and then in retirement it’s up to you to figure out how to withdraw that money without risking that the well runs dry before you die. And fifteen years ago far fewer people within a decade or so of retiring were still staring at huge mortgages and massive bills for their children’s college education. Nowadays, you may have earned it, but the ways in which you can lose it are much more varied and in many ways more treacherous.

I’ve been asked numerous times over the years to update my first book or to write a new book about retirement. I resisted, until now. As you can see from this chapter, the subject is a complex one in so many ways: from the changes in legislation to the seismic economic jolts to the way we see ourselves aging in society … this is one tough subject to tackle. Maybe the toughest. But there was no way to write a book about the New American Dream without a top-to-bottom reconsideration of retirement. The image our grandchildren will have of us in our golden years will no doubt be radically different than the way we viewed our grandparents in their dotage. And so our Act III will shape their notion of the American Dream. It’s just one more reason—not that you needed another!—why it is so important to make the most of these decades that precede retirement. Reimagining the American Dream is the legacy you will hand down to future generations. I urge you to face this challenge with all the courage you can muster and a generous amount of hope. Here’s to a better tomorrow, and the best possible retirement in a decade or two.

Once more, let’s run down the major points of this class:

• Consider paying off your mortgage before you retire.
  
• Start planning for how you will be able to keep working well into your 60s.
  
• Save more today so you will be okay if you can’t afford to save in your 60s.
  
• Make it a goal to delay when you start drawing Social Security, so you can earn a benefit that could be 80% bigger than if you start early.
  
• Make sure all your retirement accounts are invested to complement one another.
  
• Decide no later than age 59 if long-term care insurance should be part of your retirement plan.
  

CLASS

LIVING IN RETIREMENT

THE TRUTH OF THE MATTER

The impact of the recent financial crisis has made life anything but easy for today’s retirees. Believe me, I know: Those of you who are living off your savings and Social Security have been among the hardest hit these past few years.

Ever since the downturn took hold in 2008, the Federal Reserve has aggressively reduced the federal funds interest rate in an effort to encourage businesses to borrow and lend more. That may have helped our economy avoid an all-out depression, but as every retiree knows only too well, the Federal Reserve policy means that all short-term interest rates are now at near record lows. In early 2011, a six-month certificate of deposit (CD) has a yield of less than 1%. In 2008, before the crisis, that same CD was yielding 5%. Let’s say you had $250,000 that you kept safe and sound in CDs. Three years ago that portfolio might have generated $12,500 annually in interest. In early 2011 the same account would be earning just $2,000. How are you supposed to make ends meet on a fixed income, when your income just fell by nearly 85%?

And then there is the frustration with Social Security. For two straight years there has been no cost of living increase added to your benefit even though many of your daily expenses cost more today than they did in 2009. And even if you had the energy and determination to go back to work part-time to bring in some extra cash, it’s not exactly an easy time for anyone, especially retirees, to find work.

It is indeed a very tough time for retirees. Tough, but not insurmountable. Even if you are living on a fixed income, there are steps you can take today that can help. The core of this class is instruction on how to maximize your savings so they earn as much as possible for you. That entails a lesson in knowing what to do—invest in dividend-paying stocks—as well as what not to do: Avoid long-term bonds and bond funds.

I look back to 1995, when I published my first book,
You’ve Earned It, Don’t Lose It
, and the temptation is to see it as a much simpler time. True, we tend to view times past with that kind of nostalgia, but in this case, the description fits. My advice back then was focused on how soon-to-be-retirees and retirees should handle their retirement income. Most of my clients back then came to me with a fairly simple task: how best to take their pension from their employer. Those ample pensions along with Social Security were a solid foundation for being able to live comfortably.

But for so many of you today, you may not have a pension, or your benefit was frozen years ago. Another interesting trend is that many of you may have opted to take a lump sum from your pension, and now you are struggling with how to make that lump sum last, and generate income for you.

In 1994 investing for income was relatively easy. Back then we could earn more than 4% in a 12-month Treasury bill. As I write this in early 2011 the current rate is 0.29%. And back then, if we chose to lock in higher yields in longer-term bonds, the risk was far less than what you face today. In the mid-1990s we were still in the early stages of a cyclical decline in interest rates from a high that had peaked in the early 1980s. As you may know, when interest rates fall, the price of bonds rises, so even though the yield we could earn on bonds was falling, the value of those bonds was climbing. Today we face the exact opposite scenario. We are now at the end of that long cyclical decline, and in the coming years we will see interest rates climb. When that transpires bond prices will drop. That makes it an especially dangerous time for retirees today; if you are venturing into long-term bonds and bond funds because of their higher yields, you may well find your portfolio stung by falling bond prices going forward when rates rise.

And we have to be honest: Some of your income may still be going toward paying down debt. Unlike the majority of my clients from 15 and 20 years ago, today’s retirees tend to have more debt than retirees of generations past. The prevalence of retirees still with mortgages or home equity lines of credit is higher today than it was 15 and 20 years ago. Nor have retirees been able to steer clear of credit card debt. At the same time, medical costs above and beyond what is covered by Medicare keep growing at a rate that exceeds the general rate of inflation.

There is no question that living in retirement today is more challenging for more of us than it has been at any point in the past 75 years—probably since the Great Depression. That may sound like cold comfort, but some hard-to-find perspective could be your greatest asset right now. I have heard from so many of you how devastated you are that your sizable retirement portfolio lost $100,000 or more during the recent bear market. You are right to be upset; a loss of any magnitude is hard to swallow. But let’s think through how that loss impacts your month-to-month living. As I explain later in this class, you probably don’t want to withdraw more than 4% of your retirement fund each year. So let’s say your $500,000 portfolio fell to $400,000. At a 4% annual withdrawal rate that means you might need to reduce your withdrawal from $20,000 a year to $16,000. That’s $333 a month. I realize that is not an inconsequential sum. But in practical terms that is easier to manage than a onetime $100,000 hit. Convert it into its tangible impact on your life today—$333 a month—and it becomes a little easier to cope with. The challenge then becomes how you might rein in your spending until your portfolio recovers.

Because everyone could use help in navigating this passage, I have organized this Retirement Class into six lessons:

• Home Finances: Stand in the Truth of What Is Affordable for You
  
• Coping with the High Cost of Healthcare in Retirement
  
• Stick to a Sustainable Withdrawal Rate
  
• Avoid Long-Term Bonds and Bond Funds
  
• Earn Higher Yields by Investing in Dividend-Paying ETFs and Stocks
  
• Double-Check Your Beneficiaries and Must-Have Documents
  

LESSON 1.
HOME FINANCES: STAND IN THE TRUTH OF WHAT IS AFFORDABLE FOR YOU

If you are already retired and you’re feeling the pinch of a mortgage that is yet to be paid off, I must ask you to consider if you can truly afford to stay in that home. I recognize the weight of that consideration and how upsetting an idea it can be when you first confront it; after all, having to leave your home was probably not a part of a retirement forecast made years before. But I am making a few assumptions here: First, if you are reading this chapter you are likely in your late 60s or your early 70s. Your income-earning days are probably behind you, yet there is a very good chance you have at least another 15–20 full and rich years ahead of you. If a mortgage payment is already weighing you down each month and causing anxiety, then that stress will not get better with time, as you grapple with other rising costs, such as healthcare not covered by Medicare; it will only get worse.

If you recognize yourself in the paragraph above, then I encourage you to read the advice I give in the prior class about paying off your mortgage on an accelerated schedule. Beginning on
this page
you will find a detailed strategy for how to tap retirement savings to pay off the mortgage.

The first crucial question you must address, of course, is whether you can indeed afford to pay off your mortgage. That is, if you were to use a portion of your savings today to pay off the mortgage, would you still have enough in your retirement accounts to support you for years to come?

This is your stand-in-the-truth moment. I need you to summon a lifetime’s worth of courage and honesty. For if the truth is that paying off your mortgage would deplete your retirement savings to a level that could impact your ability to live comfortably, then we need to face the fact that perhaps it is time to consider moving to a less expensive home, perhaps in a less expensive neighborhood or region of the country.

What about a reverse mortgage? Yes, this is indeed an option. But as I explain in the Home Class, if you feel the need to do a reverse mortgage in your 60s and early 70s, that is a signal to me that your finances are already too stretched. The costs and trade-offs of a reverse mortgage are indeed steep. Please read that section of the Home Class and then ask yourself if it makes sense to stay in your home or if it is the unspoken root of your anxiety.

I have to tell you that as hard as the decision may be for you today, it will be a gift for you and your family if you can summon the strength to make that decision sooner rather than later. What I see so often is retirees refusing to contemplate the affordability issue, and then in their 80s it falls to their kids to make that most difficult of calls. And if you need to move at that juncture, the upheaval will be so much more taxing emotionally and physically.

I encourage you to make this a family discussion. Let’s all be realistic here: In the coming years your adult children may need to step in with some financial assistance—just as you may have done for your parents. That is part of the rhythm of life across the generations. My suggestion here is that you ask your grown children for their input. It may be that your children have the ability to help you get the mortgage paid off today; and if you and they believe that staying in your home is the best course for all parties concerned, then that could be a wonderful option. But perhaps in having this conversation you get your children to open up about their financial situation as well. And the fact is, many of them may already be stressed over how to make their own household’s finances work. The prospect of needing to help you as well—now or later—could be something that is already of concern to them. It’s not that they don’t want to help; it’s that they don’t know how they will be able to help, given their own retirement concerns, lower home equity, and financial commitments to their own children.

So I ask you to please start talking, so you can decide together and examine how these financial decisions will impact other generations. And if you haven’t yet read the Family Class, please make it your next stop. As I suggest in that class, in some families it might be worth considering combining households, be it with your children, siblings, or cousins. I know, I know—that will strike many of you as a horrendous idea that compromises your fundamental independence. But I take issue with the stigma that seems to be attached to this idea. Not only can it be a great financial move, it can also provide companionship for all. Countless studies have shown the health and psychological benefits of elderly people staying engaged with family and community; and we know in our hearts that grandparents can enrich the lives of their grandchildren in so many meaningful ways. In my opinion, it’s certainly something worth considering.

LESSON 2.
COPING WITH THE HIGH COST OF HEALTHCARE IN RETIREMENT

If you are already enrolled in Medicare you no doubt have come to realize something important: It doesn’t cover everything. Now, one bright spot for many of today’s retirees is that your former employer may be subsidizing your healthcare expenses that aren’t covered by Medicare. But that benefit too could be heading toward extinction for those not in public-sector jobs. The percentage of large firms (500+ employees) that offer retiree health coverage has fallen from 40% in 1993 to 21% today. The percentage is far lower for employees of smaller firms. In most instances the retiree is wholly responsible for paying his or her premium cost.

A reality we must all accept is that the price of medical care is rising at a pace that far outpaces the general inflation rate. And to date, Washington has yet to address ways to bring costs down to a more manageable growth rate. So the likelihood is that your out-of-pocket medical costs will keep eating up a greater percentage of your annual income. I mention that not to scare you, but to focus you on reality. Any extra saving you can do today means more money you will have to cover those costs.

If you don’t yet have long-term care insurance and you are still in relatively good health, I also want you to carefully read through the LTC lesson in the previous class. As I explain, the ideal time to purchase LTC insurance is before age 59, but that does not mean you cannot or should not purchase a policy if you are older. Yes, the premium will be more expensive. And that may mean you will need to consider a policy with less coverage than you might have been able to afford if you had purchased a policy in your 50s. But there is still so much security to be gained from purchasing a policy today, if in fact you can afford to do so.

And I would urge you to include any grown children in this decision. I think a family strategy for LTC insurance is something that can have a huge benefit for both generations. Let’s say you get a quote for an LTC insurance policy that is for $4,000 a year. You crunch the numbers and know that all you can truthfully afford is $2,500 a year. Before you walk away from the idea, or ask for a new premium quote with lower benefits, please talk to your children. If you have two grown children who can each pitch in $750 a year (less than $63 a month), they can help you afford the $4,000 premium. And I have news for you: They are not doing you a favor; you are doing them the favor. I can’t overstate this fact: While your kids will do anything and everything to take care of you in your later years, many of them are in a slow panic over how they will be able to afford helping you while also supporting their own family. By asking them to help you purchase an LTC insurance policy, you have just given them an incredibly affordable means to protect themselves from much of those future costs. Please do not get trapped in misplaced pride. Asking your children to share in this insurance cost is ultimately an act of caring.