In 1967, the Beatles released the song, "When I'm Sixty-Four." The lyrics are a preemptive plea to secure a relationship, especially as the realities of old age set in. Now, as the nation's largest generation whistles this tune into retirement, the question seems less rhetorical:
Who is going to take care of us in retirement?
Not everyone will need long-term care insurance (LTCi), but everyone needs a long-term healthcare plan. That's the big takeaway from this week's final installment of our risk management series. (If you missed our discussions of disability income insurance, life insurance, or home and auto insurance and can't find them in your inbox, please just hit reply and I'll send them to you personally!)
We'll distill this complex-to-the-point-of-confounding insurance product this week while also updating you on a crazy (good) week for the markets--and don't miss out on our Quote O' the Week that you should probably tape to your computer to remind you of how to remain a successful long-term investor.
Welcome to this week's edition of the Financial LIFE Planning weekly!
In this FLiP weekly you'll find:
Financial LIFE Planning:
- "When I'm 64" - An Exploration of LTCi
Quote O' The Week:
- Jason Zweig
Weekly Market Update:
- Earnings Season, Part Deux
Financial LIFE Planning
"When I'm 64" - An Exploration of LTCi
Like I said in the open, not everyone will need long-term care insurance (LTC), but everyone needs a long-term healthcare plan.
Your long-term care plan should incorporate the following: facts about you (and your spouse, if applicable), your age, your personal health, longevity of lineage, your retirement income and assets, your tolerance for risk, the costs and demographics of long-term care in your geographic area, and information about any long-term care insurance that you own or have considered owning.
Long-Term Care Insurance Primer
One very important thing to remember is that Medicare does not cover the costs of most long-term care needs. Allen Hamm, in his book, Long-Term Care Planning, shares the following statistics:
- 71 percent of Medicare recipients mistakenly believe Medicare is a primary source for covering long-term care.
- 87 percent of people under the age of 65 mistakenly believe their private health insurance will cover the cost of long-term care.
In reality, Medicare will only pay for 100 days of skilled nursing care. Thereafter, the insured is responsible for 100 percent of the cost. But a risk manager does not automatically assume that the reflex response is to purchase a long-term care insurance policy with all the bells and whistles.
The annual average cost of assisted living care in in the United States is $54,000. The cost of full nursing care tops $100,000, and cost by state can vary greatly! Regardless, we’re dealing with a significant amount of additional expense which most retirement plans are not prepared to support.
If you have liquid assets north of $2.5 million, you *may* consider self-insuring the risk of a long-term care event as long as your retirement withdrawal rate is not rapidly depleting your nest egg. Conversely, if your net worth is below $250,000, a long-term care event would likely exhaust it so quickly that paying insurance premiums is likely prohibitive. If you’re in that situation, you will likely qualify for Medicaid—medical care for the impoverished—shortly after your infirmity sets in.
Long-term care insurance is sold most often in daily increments, so you would purchase a policy that would pay $100, $150, or $200 per day for a stated number of years or your lifetime. LTC has almost as many moving parts as LTD. Here are the most important to understand:
- Facility daily benefit is the cost per day that the policy will cover. It is a good idea to ask for quotes based on a policy that would cover you for $100 per day, because then you can determine a higher or lower multiple of that policy rate easily based on the round number.
- Facility benefit period is the length of time over which the policy will pay out. The average stay in a long-term care facility is already low—around two years—but most people utilize care for even less time. The numbers are skewed upward by the relative handful of folks who suffer from dementia or Alzheimer’s for a particularly long stretch. If your tolerance for risk is very low, you may consider a lifetime benefit, but if you are focusing more on the probability, consider a five-year benefit.
- Home care daily benefit is the percentage of the policy benefit that could be applied to skilled care in your home. As the preferred method for most people, you should probably only consider plans offering 100 percent of your benefit to be applied to home care.
- Inflation protection describes how the future inflation of health care costs will be factored into your benefit. With the future costs of health care expected to rise at a pace above the normal inflation rate, this should be a primary concern for the prospective insured. If you are in your 50s or 60s, strongly consider compound inflation protection. Unlike the quirky long-term disability COLA factor, this feature does what you expect it to do—go up every year. If you are in your 70s or older and considering a policy, the premiums are likely to be extremely costly, so you may consider a simple inflation protection calculation or no inflation protection to reduce the costs of the policy.
- Facility elimination period is the initial time frame in which the policy will not pay. Because Medicare will typically pay for the first 100 days, consider an elimination period of 90 days or more.
- Marital discount may provide a significant discount for couples who are purchasing LTC together. Many insurance companies now offer "shared care" policies offering less stringent underwriting and reduced costs; but be sure to conduct your LTC plan before choosing this insurance option. A spouse with a history of heart disease may have a higher probability of dying in an instant from a heart attack (and, therefore, may consider opting out of LTC), whereas a spouse with a family history of dementia or arthritis should strongly consider applying for LTC before major symptoms occur (because by then, you’re likely to be turned down).
The Problem…and the Solution
In addition to making sense of the myriad of moving pieces in the policies, the problem that scares away most prospective insureds is the bottom line price. If you buy the policy designed to insure virtually every possible scenario you may encounter—say, a $250 per day benefit guaranteed to pay a benefit for the rest of your life—you will, indeed, find shocking premiums that may send you packing.
The solution, however, for many people is to partially-insure the risk of a long-term care incident or incidents. Consider a policy with a reduced benefit, like $100 or $150 per day, and a shorter benefit period, like three or five years.
Simple Money LTC Guide
1) Be honest with yourself. When considering your age, health, lineage, retirement income, assets and tolerance for risk in their entirety, is transferring all or a portion of your long-term care risk through insurance a wise move? (The default answer is "probably.")
2) Consider getting a quote for long-term care insurance based on the following policy template:
- Daily benefit—$100/day to start.
- Benefit period—Lifetime would be nice, but expensive; start with five years.
- Home healthcare benefit—No one wants to be forced out of their home; get 100% home healthcare coverage.
- Elimination period—90 or even 120 days if you can afford it.
- COLA—Yes, please, but consider reducing the cost with a CPI increase, not a static amount.
- Marital discount—If appropriate, this will likely save you some dough.
3) Adjust the policy to reflect your personal risk characteristics and financial situation.
Like with many insurance products, there are knowledgeable and professional sales agents out there, but their economic bias is still so overwhelming that I recommend you do your homework and consult with a fee-only advisor who doesn't accept comissions prior to engaging an agent.
Weekly Market Update
The rally continues...
- + 3.95% .SPX (500 U.S. large companies)
- + 5.01% IWD (U.S. large value companies)
- + 6.06% IWM (U.S. small companies)
- + 6.27% IWN (U.S. small value companies)
- + 3.19% EFV (International value companies)
- + 3.37% SCZ (International small companies)
- + 1.05% VGIT (U.S. intermediate-term Treasury bonds
Contributed by John Marske, CFP®, a Notre Dame grad and generally good guy.
Earnings Season, Part Deux
The first week of earnings season was filled with decent reports from the large financial institutions. The past week of earnings was filled with dismal earnings from most of the big tech companies. Nonetheless, we started the week higher and ended the week higher, on track for a strong month of October, after a miserable September.
The Dow has surged more than 14% in October, putting it on track for its best month since January 1976. The Nasdaq has gained 5% while the S&P 500 is up 9%. This was the fourth straight positive week for the Dow index. The S&P 500 increased roughly 2.5% for the week, closing above 3, 900 for the first time since mid-September.
The stock market started strong on Monday, buoyed by the prevailing sentiment that the Fed is looking to slow down its policy tightening. A report from the Wall Street Journal, and various comments coming from important Fed officials, suggested that the decision on a 75-basis point hike in November would go as expected. However, starting December, the Fed would be debating whether to continue with its stringent tightening that has occurred the last few meetings.
The day started on a mixed note, however, with the major averages oscillating around the flat line as the 10-yr Treasury note yield tested the 4.30% level. Selling quickly subsided in the Treasury market and stocks built upside momentum. The S&P 500, which slipped below 3,500 on October 13th, briefly traded above 3,800 before ending just below that level.
One notable area of weakness was Chinese stocks and U.S. stocks with high exposure to the China market. This comes after Xi Jinping secured an unprecedented, third five-year term to serve as China's leader. That wasn't surprising, but it did come as a shock to many investors that he managed to surround himself only with loyalists who are apt to help him pursue tighter regulations and the continuation of China's zero-Covid policy.
Tuesday’s pre-market activity looked as if we were going to give up some of Monday’s gains. However, once the market opened, buying momentum carried through the day. The NASDAQ index led the gainers as most investors hoped tech earnings, which would start with reports from Google and Microsoft on Tuesday evening, would not disappoint.
On Wednesday, we again saw pre-market losses, with the NASDAQ getting hit especially hard on earnings reports from Alphabet (Google) and Microsoft. By the opening bell, the NASDAQ was the only index in the red, as the non-technology stocks were again being pushed higher at the onset of trading. Much of the advance could probably be attributed to the yield on the ten-year Treasury falling 16-basis points, to 4.07%. Meanwhile, Enphase Energy (ENPH) advanced 14% on strong earnings, helping to advance many of the “green energy” stocks.
While the tech-heavy NASDAQ index got crushed on Thursday, the Dow managed to gain for the fifth straight session. Nonetheless, big tech dominated the headlines with GOOGL, TXN, MSFT and META (Facebook) all disappointing. META stock fell over 23% on the day, falling under $100 for the first time since early 2016.
There was some good economic news on Thursday, which helped boost industrial stocks. After decreasing -1.6% in the first quarter of 2022, and -0.6% in the second quarter, the initial report for real GDP was +2.6% for the third quarter. We also saw good inflation components in the GDP data. This helped push down the 10-year treasury yield to 3.94%.
On Friday, another big tech company, Amazon, bit the dust on lower earnings. The stock initially fell more than 10%, before ending the day lower by “only” 6.8%. But this was a day where all the major indicies were up more than 2.5%, led by Apple stock, as well as strong earnings from the oil & gas companies. Apple was the sole tech winner this week, ending up over 7.5% on Friday. It’s not that their earnings were especially strong, but they were higher than the low expectations baked into the stock price.
There was no stopping the stock rally on Friday, despite the fact that a key gauge of U.S. inflation favored by policy makers (PCE) stayed stubbornly high in September (+6.2% year-over-year). Ten-year treasury yields jumped back over 4%. Get ready for more inflation talk next week, when the Fed is expected to implement another 75-basis point rate hike.
And, in case you forgot, we will also have mid-term elections next week. Thank goodness all the political ads will be coming to an end.
Here's to hoping your weekend comes to an end slowly!
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Oh, and BTW, The information in this article is for educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. That should really come from your financial advisor. I'm thrilled to work for Triad Financial Advisors, but what I write is my opinion, and not necessarily theirs.