Long Term Care Insurance: Protect your nest egg

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You spend your entire working career putting aside money in order to have a sufficient nest egg in retirement so that you can do the activities that you enjoy with the people you care about most.

There are risks to that goal that you need to be aware of and you need to take steps to mitigate that risk.

One of those risks is that you or your spouse will become ill and need some type of expensive assisted living care for an extended period of time.

Cost of care in Missouri

In the state of Missouri the average cost of assisted living care is $54,000 a year.  Consider what impact a three year, $162,000 stay would have on your portfolio while a spouse is still living at home with the usual bills.  Or, if you are single, you will often still have your usual day-to-day living expenses because family members are often hesitant to sell your home, in the hopes that you will return, or they are not yet ready for the task of selling.  Now consider the fact that healthcare costs are increasing faster than the standard rate of inflation and you can see how an extended stay could be a risk to your retirement goals.

Purchasing a policy 

A Long Term Care policy can cover different types of nursing care ranging from in home care to a private room with fully-assisted living care.

You can purchase a policy to cover the majority of the cost, or even just a portion in order to help offset the cost, if something were to happen to you.

Purchasing a LTC policy can help preserve your assets so that they can last your lifetime, and help financially protect a spouse should one of you require expensive care.

What is a stock index?

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A stock index is a list of stocks that are created to represent a certain segment of the market.

A stock index is not an investment, although there are investments that are designed to mimic stock indexes.  More on that in a future post.   For a definition of a stock, see my prior post where I answered the question “What is a stock?”

Stock index – segmenting the market

Let’s take the United States stock market as an example, it can be segmented many different ways; Large Company stocks, Mid-Sized Company stocks, Small Company stocks, Large Company Value stocks, Small Company Growth stocks, the list could go on and on.  There is even a St. Louis Stock Index called the Bloomberg St. Louis Index.  One or more indexes (or lists of stocks) can be created for each of these segments.

What the purpose of a stock index

The purpose of a stock index is to give you a quick measurement of the performance of that segment of the market that day and over time.

Large Company Stock index

Even within one segment of the market, there can be more than one index created to represent that segment of the market.  Take the United States Large Company stock market for example, three common indexes that represent the US Large Company stock market are:

  • Dow Jones Industrial Average: “The Dow”, 30 companies on the list, does not represent all industries
  • S&P is 500: 500 of the largest companies in the US; covers 75% of the US equities
  • Russell 1000: approximately 1000 of the largest companies in the US; covers 92% of the US equities

Dow Jones, S&P and Russell are all companies that compile the list of stocks that comprise each respective index.

With lists that range from 30 stocks to 1000 stocks to represent the Large Company stock market it is easy to see why the indexes do not move in lock step.

The Dow or S&P 500

According to The Dow Jones Indexes website, the Dow was one of the first market indicators, which is probably why it is quoted every day, it is tradition.  However, 30 stocks is not a very good representation of the overall Large Company stock market, especially considering it is not representing all industries.  That is why you also hear the S&P 500 index quoted as well.  There are some days in which one of these indexes ends the day down, and the other ends the day up, even though they both represent the Large Company stock market.  They can not measure the segment in exactly the same way since they are looking at two different lists of stocks.

Retirement Planning: What do I need to know about my pension plan?

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When you retire, your paychecks will stop.

But you want to have fun.  You have been putting off so many things, thinking “When I retire, I am going to {fill in the blank with that thing you really want to do, but have to put off until you have more time }”.   How will you pay for retirement if you are not getting a paycheck?

That is where retirement planning comes in.

The idea is to make sure that the nest egg you have accumulated, plus income from sources like Social Security and pensions will be able to pay for your expenses in retirement.

I have written about expenses to consider in retirement.  If you are fortunate enough to have a pension, let’s look at a few tips to help you when gathering information about your pension to prepare for retirement planning.

Where to find information about your pension

Information can be found in the Summary Plan Description for your pension.  It can usually be found on the website for your pension or from your human resources department.  Or if you are in a union, talk with your union representative.

What kind of plan is it?

Is this a pension or a cash-balance plan?  A pension is not portable, if you leave your employer then the pension will stay with the employer until you are of retirement age.  If it is a cash-balance plan and you leave, it is portable; you may keep it with the employer, or roll it into an IRA.  There are other differences as well.  Consult your Summary Plan Description for the details of your plan.

Important ages or milestones for your pension

Knowing what ages or milestones are significant for your plan may impact your decision about when to retire.  Keep in mind this could also be a combination of your age and years of service.

  • Find out the age at which you become fully vested in your pension.  Vesting means that you keep contributions made on your behalf by your employer.
  • Find out the earliest age at which you could retire with a pension.
  • Find out the age at which you get your full benefit, any benefit taken before that age will be a reduced benefit.

How can you get your money?

Each plan has different options.  Find out what your plan offers.  Can you get a lump sum?  Can you take a partial lump sum and the rest in monthly payments for the rest of your life?  Does your plan offer a survivor option so that if you pass away, your spouse will still receive an income?

Is there a Cost of Living Adjustment?

A Cost of Living Adjustment, or COLA, would mean that the monthly payment would go up each year to adjust for inflation.   This is an unusual benefit, most employers do not offer this on their pension plans.  Many union plans do.  The Missouri Teacher’s pension is an example of a pension that has a COLA.  If your pension has a COLA, find out how yours works.

How much money can you expect?

This is the fun part of the information gathering exercise; finding out the estimate of how much money you would get at retirement.  There is usually a website where you can run pension benefit estimates, if not then talk with your human resources department or union representative.  Find out pension benefit estimates for the age at which you would like to retire and the age at which you get the full benefit.   Also look at other ages so that you can compare the amounts based on different retirement ages.

Does your pension plan set a maximum benefit?

What does it take to max out the pension?  Can you buy credits to increase your pension payment?

Investing time now in understanding your pension will reap rewards in retirement, allowing you to make the most of your benefit.

Should we pay off our mortgage?

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“We have a lot of cash in our savings account.  Should we pay off our mortgage or invest the money for retirement?”

When you give financial advice “by the hour” you get asked questions like these.  And the answer is… it depends.

It depends on;

* your attitude about owing money

* how much of a nest egg you have accumulated for your retirement because you will need cash to pay bills after you stop working and therefore stop getting paychecks

* what other financial goals you have and if you are on track to achieve them

* what interest rate you will pay on the mortgage and the assumed rate on the investments, and other assorted mathematical inputs

“Should we pay off our mortgage?” is a question that is more than a math calculation.  After the math is figured, take it a step further and think about how you will feel during retirement with and without a mortgage payment.

No mortgage in retirement

I have never heard anyone say they regret paying off their mortgage.  And there are ways to tap into a portion of the home equity if needed.  However, many retired folks have shared with me that they wished they had been wiser in their approach to mortgage debt so they didn’t have a mortgage while retired.  I have sometimes noticed during an initial meeting when I meet with a couple who have a mortgage, they seem more concerned about market fluctuation than other couples who do not have a mortgage.

Mortgage in retirement

There are a few couples that I can remember meeting with that have a mortgage in retirement and they were comfortable with it.  They outlined the math in a logical way and how it made sense for them.   They liked that it left them with more available cash in retirement.  I agreed with them, that it seemed to work for them.

When to pay it off? 

If your last mortgage payment is due after the day you would like to retire, jump on one of the many financial calculator websites and figure out the extra payment you would need to send each month in order to time your last mortgage payment with your retirement date.  You might be surprised to find how little additional money needs to be sent in order to pay the loan off by your retirement date.  How great would that feel?  Be sure to call your mortgage servicer to be certain that you do not have a pre-payment penalty, pretty unlikely, but just in case.  Make sure that you can still afford to make enough of a contribution to retirement accounts so that you can retire on time!  And that you are able to save for any other financial goals that are important to you.

What not to do

What I think is unfortunate, is to see a young couple that has heard that it is good to pay off your mortgage sending every available dollar to the mortgage company – with no emergency fund!  And they have not been saving in the company retirement plan, no savings for vacations or other goals.  A balance is needed.  Get the emergency fund created first!  Then create a prioritized list of goals and send money to each based on your priority.

The mortgage problem

The mortgage problem of having a large mortgage when retirement time rolls around isn’t usually created with the starter home, it usually happens when people move up into a series of bigger and bigger homes or take out cash to remodel.   That is when it is especially important to check to see if you can afford to pay the mortgage off by your target retirement date.

What To-Do?

Write down the approximate date that you would like to retire.

Write down the date that your mortgage payment will be done.

If the mortgage will be done after you retire, satisfy your curiosity and find out how much extra you would need to send in to pay your mortgage off in time for retirement.

You could call your mortgage company and ask them.  Or you could use an online mortgage payment calculator and the amount of principal left on your loan, how many months or years until retirement, the interest rate on your loan and find out for yourself.  Just remember that the monthly payment it quotes you is just the principal and interest, if you have your taxes and insurance escrowed you would add that on top of the principal and interest.

Invest just a few minutes, and you could be on track to having your mortgage paid off in retirement.

Retirement Plan: 10 Expenses to Consider

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Part of the process of determining if you can afford to retire, is to run the numbers to see if the amount of money you have saved plus any expected income you may receive from pensions and Social Security will cover all of your expected expenses throughout retirement.

After working with people for so many years, the one thing I have noticed is that many people have faithfully kept spreadsheets of their day-to-day living expenses and have used those figures to help create their retirement plan.  People often come to me to check their thinking, when they are a few years away from retirement, to make sure they are on track to retire.

However, I often discover that people overlook the irregular expenses when planning for retirement on their own.   And it is the irregular expenses that can derail a retirement plan, and cause stress and sleepless nights.  The tricky thing of course is trying to see into the future and figure out what possible expenses can occur.

Here is list of some of the potential items that you might consider adding to your retirement plan.  They won’t all pertain to you, but I hope they will get you thinking about what your retirement could look like, and help you plan for your future.

Replacing cars

I often hear people say that they will just use the same car throughout retirement.   And if you do not work with retired people on a regular basis like I do, I can see where you might think that.  When you are pre-retirement age, retirement seems like a phase of life that is a mysterious unknown.  So I ask them how often they replace their car, and I usually hear answers like every 6 years or every 10 years, and everything in between.  A married couple that retires at 65 and drives until 85, replacing cars every 6 years,  will buy 6 cars in retirement.  I wrote a blog about the impact of inflation on car prices in retirement, many people are very surprised when I show them the expected price of the last car they will buy in retirement.

Travel for fun

When I ask people what they want to do when they retire, travel is one of the first things people say.  If you see travel in your future, think about how often, and what type of travel, do some internet searching to get a ball park estimate of the cost that would be involved.

Travel to see the grandkids

Don’t forget about travel to see the grandkids, I mean your adult children.  Who am I kidding?  You are taking a trip to see those adorable grandkids!  If your family is like so many these days, you might have to hop on a plane to feel those little arms wrapped around you.  With Skype, you don’t have to be there to see them anymore.  But no technology can replace an in-person visit.   Trust me; you will want to plan for this expense.

50th Wedding Anniversary Celebration

In this day and age, fifty years of marriage is an especially wonderful milestone.  Some families have a dinner reception, inviting extended family and close friends, which can be the size of a small wedding reception.  I have also seen couples treat families to Disney vacations or to cruises.  If you have dreams of recognizing a milestone with a special celebration, don’t forget to plan for it so that when the time comes, you can relax and enjoy it.

Medicare

What?  It isn’t free?  No, I am sorry to have to tell you, it isn’t.  And I find that I am often the first to break this news to people.   Because if they have never had to help a family member through the process of signing up for Medicare and they are more than a few years away from retirement, then researching “How does Medicare work?” usually hasn’t crossed their mind.   Luckily there are some good resources such as www.medicare.gov and for Missouri residents https://missouriclaim.org/.

Long Term Care/Nursing Care

In 2012 the average annual cost of care in a nursing home in Missouri is approximately $55,000.  The cost of nursing care has been increasing considerably faster than inflation.   One way to offset the risk to your portfolio is to consider Long Term Care insurance that would cover a portion or all of the cost of care, depending on your risk tolerance and the affordability of the premium.  I am a fee-only advisor so I do not offer insurance products, but I have recommended that some clients get Long Term Care insurance.  Other clients have been able to self-insure, each situation is different.  But you do need to consider the impact a stay would have on your portfolio.  To learn more read my blog post Long Term Care Insurance: Protect your nest egg.

Big delayed purchases

Have you been dreaming of a cross country trip in a motor home?  Or does the water call your name so a boat is more to your liking?  Don’t forget to set aside some money for upkeep and repairs.

Home Improvements and Major Maintenance

If you are in your forever home, factoring in the large inevitable maintenance projects such as replacing a roof or HVAC system will help prevent money stress later on down the road.  Also, after a few decades, kitchens and baths tend to need updates.  Remodels with an eye toward aging gracefully in place are also becoming quite popular.  Consider the age of your home and prior remodels when planning future income needs.

College and Wedding/Rehearsal Dinner

Depending on the age of your children, you may have college and wedding/rehearsal dinner expenses in retirement.

Care for a Family Member

Will a loved one be financially dependent upon you, such as a parent or a special needs child?  If so, you might consider meeting with an elder care attorney or estate planning attorney that specializes in special needs trusts.

These are a few areas to consider in addition to everyday living expenses when you are creating your retirement plan.