Founder & Chairman
At Sawchuk, we have spent the better part of the last 15 years helping people to plan, save and invest for their future, and specifically for retirement. Frankly, an area that we believe needs our focus today is “total risk mitigation.” We have spent an inordinate amount of time managing investment risks, and we feel it’s necessary to address the other risks that could affect all the planning and investing we have done. We are taking this opportunity to discuss the risks here, and offer some solutions that make sense.
Longevity risk is exactly what it sounds like, the risk of simply living longer than you expect to. You know the old saying… “There are lies, damned lies and government statistics.” let us show you an example of the latter. Life expectancy is not an average, it’s a mid-point, and to illustrate that point consider that half of all men age 65 will not live to age 85. That also means that half of those men will live LONGER than age 85. Half of all married couples will have one spouse live to age 92, meaning most will pass age 92, and there is a 25% chance one of them will live to 97. According to the Wall Street Journal, the number of Americans who live to age 100 or greater increased 43% from 2000-2010, from 50,454 to 71,991. To put this into the proper context, when planning for your future, assuming that you only need to plan to have financial resources to make it to age 90 is a mistake. Proper planning is to assume you will need resources to live to age 100. The worst that can happen is you leave a little more to your heirs than you might have thought you would. If you take the opposite approach, you may find that your heirs didn’t plan properly either and won’t have the funds available to take care of you!
Longevity Is A Risk Multiplier
Longevity is not just a risk, but a multiplier of the other risks. Years ago, people were able to reply on the pension from their employers to provide a guaranteed lifetime income. However, as company paid-for pensions become more and more rare, individuals are increasingly being forced to find this source of guaranteed income by themselves. Insurance companies offer a variety of products that can help fill this need. A discussion is required to determine which option could be right for each person. The longer you live, the more risks you put on the table. Inflation risk, deflation risk, withdrawal rate risk (taking too high of a percentage of income from your portfolio annually which leads to running out of funds before you die), healthcare cost risk, investment performance risk, etc. are all examples of risks you will face. The only way to properly manage these risks is to make sure you have a guaranteed lifetime income stream (such as a pension) that covers your basic living expenses. It’s simple math: since you don’t know how long you will live, you have no idea how much money it will take to cover your expenses for life. The only way to do this is to make sure you have your basic expenses covered by a guaranteed-for-life monthly paycheck. PERIOD. Any other approach brings on additional risks that you may not want to bear. It’s a mathematical, scientific and economic fact that having a guaranteed lifetime monthly check is the safest way to cover your basic living expenses.
HEALTHCARE COST RISK
Let’s start with some basic statistics again. According to the 2010 sourcebook for LTC, 72% of Americans will need some form of long-term care (an extended stay in a facility or in your home) that isn’t covered by health insurance or Medicare. There’s no getting around the fact that having a conversation about this particular risk is somewhat unpleasant. Nobody looks forward to either themselves or a loved one having to go to a nursing home, but it is irresponsible to “bury your head in the sand” over this topic. The flippant responses such as “I let Smith and Wesson handle my long-term care”, or “My kids will take care of me,” are knee-jerk reactions and outright negligent when it comes to this risk. In our opinion, this particular risk is the single biggest way to devastate a lifetime’s worth of work and savings. The risk is not simply financial, it is also personal. If you’ve ever known anyone whose spouse was stricken with dementia or Alzheimer’s disease you know that the care-giving spouse is at an enormous health risk, and it’s all to common to see them age dramatically and even die prematurely due to the stress of the situation. Ultimately, long-term care is not about YOU, it’s about your family. They are the ones that will most likely bear the burden of care, so buying insurance to help cover this risk is about relieving a part of that burden so they can have some quality of life while their loved one is being cared for.
Buying long-term care insurance is about spreading the risk among a large pool of people. You can either pay for the cost of care out of your own savings, or you can transfer a majority of the risk to an insurance company who covers a large group and has deep financial resources in most cases. This really is a no-brainer. Assuming that one qualifies for reasonably affordable coverage, it usually makes the most sense to buy the insurance. According to New York Life Cost of Care Survey, the private pay rate for a nursing home facility is $76,416 per year (2008 survey). The private pay rate for Medicare-certified home health care is $25.86 per hour. Even if the need is only 20 hours per week of care, that’s a minimum cost of $2,000 per month. Remember there is a 72% chance of needing some form of care; the math absolutely supports the insurance if you qualify. The decision goes way beyond simple math, however. There are additional considerations, such as total control over where you go and who provides your care. You are much more likely to get into the facility you want if an insurance company is paying the bill, rather than Medicare or if you simply pay it out of pocket. You can even use the coverage to pay who you want to come into your home and provide custodial, or even skilled, care. Having insurance means YOU control the quality and location of your care. It also means your family won’t be quite as stressed over having to bear the entire burden. You also control how you spend your money, meaning that insurance gives you the choice to spend your money on what you want to spend it on, rather than what you have to spend it on. Most importantly, in many cases, it simply guarantees that you won’t spend the family assets on custodial or skilled care and leave your spouse destitute.
We believe the biggest reason most people don’t have long-term care insurance is because the selling agents seem to lean towards the Rolls Royce of coverage, which is usually unnecessary and cost-prohibitive. We take a radically different approach as there are many different ways to cover this risk to get partial or even full coverage for this risk. Insurance companies offer a variety of products to cover these risks. They also offer dual-purpose policies that have both long-term care AND death benefits, to single-purpose long-term care policies, there are a number of cost-effective ways to handle it. Furthermore, for most of our clients, it’s not the 6-month stay in a nursing home that’s the problem; it’s the 6-year stay that could be devastating. The best way to handle the risk is to be prepared to pay 25-35 percent of the total cost out of pocket, and be prepared to pay 100% of the first 6 months of care of out pocket. You will be amazed at the cost-savings that you can garner by making simple but smart choices in the policy design.
TOTAL RISK MITIGATION
It’s always been our belief that there are two significant aspects of a successful retirement: planning and investing. Planning is what we are focusing on in this report. A robust plan will provide financial security no matter what the economic conditions may be- but it doesn’t end there. As we have discussed in this paper, there are additional risks to consider, and if those risks aren’t addressed the plan is neither complete nor robust. We ask that you strongly consider what we’ve written here, and take the opportunity to sit down with us to discuss these various risks and what we can do to mitigate them. There is no cookie cutter approach to the problem, as each individual financial situation dictates the ultimate approach. Some of you will remain self-insured either by choice or by health (meaning you may not qualify for insurance due to health concerns). The rest of you will have choices in the way you address the risk, and having options is always better than the alternative. Timing is also a factor, for as you know, insurance does not get cheaper as we age, and there are no guarantees that tomorrow your health won’t change and possibly take some of those options off of the table.
CALL TO ACTION
This is simple, straightforward, and to the point. Call our office and get on our calendar. Quite frankly, this is a conversation we should have already had, and is one that is too important to put off any longer. Melissa or Krystal are both ready for and expecting your call, and we have made ample space in the calendar available for these meetings. We have limited our marketing activities for the time being, as we feel this topic deserves our full and undivided attention. To make it easier, our phone number is 248-269-9700. We look forward to seeing you very soon.
Visit www.sawchukwealth.com to review past issues of The Marketview.
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