Archive for the ‘Income’ Category

Disability Insurance Isn’t Sexy!

Friday, May 18th, 2012

 

 

We are constantly bombarded with stats about dwindling Social Security funds; especially as they relate to retirement – but what about disability? Every bit as important, disability funding is more relevant for working people because it is a benefit that may help you now.

 

According to statistics sited in National Underwriter Magazine, the year end Federal Disability Trust Fund balance for 2011 was $154 billion in assets, down 15% from last year. Funded by a 1.51% payroll tax, the total amount generated in 2011 was $109 billion, which was down 19% from 2010.

 

These numbers suggest the fund may be depleted as early as 2016, two years earlier than previously projected. Adequate funding is anything but reliable in the long term.

 

More Hurdles to Consider

 

Funding issues aside, if you avoid insuring your family’s income because you can file for and receive benefits, think again.

 

Social Security Disability Insurance is a dicey issue at best. Only 35% of SSDI applicants are approved for benefits on their initial application and an additional 10% are approved after appeal. Translation: over half of all SSDI applicants are denied coverage.

 

Part of the reason for such a high denial rate is the SSDI definition of disability is often more stringent than that of a commercial insurance company. SSDI defines disability as the inability to perform a job due to a medical condition. Conversely, many commercial insurance contracts define disability as the inability to perform the job for which you have been trained or educated to perform.

 

Think about that a moment…

 

Take for example an electrician that is trained to work on business and/or residential electrical systems. If said electrician has a back injury that renders him incapable of physically demanding work that would be required of an electrician, he would most likely qualify for benefits under a commercial disability. That same electrician will most likely not qualify under SSDI if he would still be able to perform another type of work, such as answering telephones.

 

These defining terms can often be the difference between receiving benefits and not receiving them. Bearing this information in mind, it is scary to think of the ramifications attached to the dismissal of addressing these issues. Why then, do so many of us neglect to protect our family?

 

The Cost of Complacency

 

The lack of appropriate planning usually stems from several things. Exasperation at the thought of having to deal with yet another thing definitely plays into it. All we want to do when we get home from work is tune out and relax, right? The last thing on our minds is contemplating the pros and cons of disability insurance. Cost, like with anything else, plays a big role too. Yet cost, in this case, has to do with your family’s security.

 

The cost of protection may be more than you want to spend on the surface, but the cost of complacency in the event the unthinkable becomes reality, can be devastating. We all think it won’t happen to us, but the statistics tell a completely different story.

 

Here are some eye opening stats related to disability and the workforce:

 

1. A 35 year old has a 50% chance of a disability lasting 90 days or longer before turning 65.

 

2. Most people in the US are better prepared for death than a disability even though chances are 3 to 5 times greater that a disability will occur (based on age).

 

3. About 1 in 7 people between ages 35 and 65 can expect to be disabled for 5 years or longer.

 

4. About 110 million people have NO long term disability insurance.

 

5. Benefits from disability insurance from an employer sponsored plan are usually taxable while benefits from a privately purchased plan are tax free.

 

Take Away

 

What we spend our money on is a direct reflection of how we choose to allocate it. Cost, in reality, is truly not the deciding factor. Who isn’t a master at finding ways to buy things when you’ve got a big hankering for something?

 

Disability insurance isn’t sexy; it’s not something you’ll ever have a ‘hankering’ for, nor is it mandatory, like auto insurance. When it comes to spending money on things we can’t see, touch or feel immediately, our normal inclination is to back burner it.

 

When you move protecting your ability to earn income to the front burner, the good news is, cost is a very flexible thing. Personally tailored planning will provide you with protection conformed to budget.

 

Kurt Rusch CLU, ChFC

How to Interview a Planner

Wednesday, February 29th, 2012

 

Staying away from illegal interview questions is vital according to a recent CBS News blog. Do not screen people for: race, color, sex, religion, national origin, birthplace, age, marriage and disability status. You can, however, “re-work some legal alternatives”.

 

If you want to know how old someone is, ask them if they’re “over the age of 18”. If you want to know if they have kids, ask them if they’re “willing to travel”. That last one is interesting, because it naturally assumes people with kids don’t want to travel – who does, really? (For work, that is.)

 

Keeping these guidelines in mind, what should you ask the person you may ultimately entrust with your personal and confidential information?

 

Query Their Professional Age

 

You do want to know how long this person has been working in the business. Short of “carding” them, ask them to tell you about their work experience. How long have they worked with the carrier(s) and brokerage house(s) they represent? When did they get their accreditation(s) and how long have they held each of their industry licenses?

 

A word of caution: If you run into someone who advertises or speaks in terms of “big returns”, “no risk”, or “guaranteed appreciation”, run for the hills! The SEC and a slew of other governing agencies haven’t caught up with them yet.

 

The financial services industry is strictly regulated with regard to the way financial professionals are allowed to talk about their services. This pertains to anyone handling: stock/bond/commodity trades, life insurance, annuities, retirement accounts and the like.

 

Get a Complete Service List

 

When you hire a professional advisor, look for one who can shed light on your big picture. Those who handle life, health and property insurance, in addition to financial services will be able to serve your interests best with a complete profile in hand.

 

The key theme here is to avoid the pitfalls of mixing apples and oranges. The last thing you want to do is spend more than you have to with cross over coverage or waste money on products you don’t really need. Working your complete profile will also avoid the demise of ineffective protection and planning.

 

Fee or Free?

 

Many planners market themselves on the premise that charging fees guarantees honest service. They say this because charging you like an attorney demonstrates they are not beholden to any one service provider.

 

Working with a Planner/Advisor that is a Broker (who won’t charge you fees upfront) can also provide objective placement on your behalf. Professional planners who are brokers contract with multiple insurance carriers and investment houses that pay them commission on orders they place. (Keep that in mind if you opt to work with a fee based planner – use it to negotiate cheaper billing rates.)

 

On the opposite side of the spectrum are “captive agents” – those who work for (and are beholden to) a single carrier or investment house. While they do not charge fees for their services they are employees.

 

In recent years some insurance carriers such as, Allstate, have branched into financial product lines. To date, however, they do not provide one advisor to serve their customers’ multiple needs. In this scenario, finding the best advisor for your needs is left to chance.

 

Take Away

 

Look for someone with professional designations licensed in multiple product lines. Ask them to share their experience with you and request a complete list of services.

 

Work freely with a Broker Advisor. Planners who are brokers have access to numerous companies which gives them an edge on finding the best solutions for their clients.

 

If your Cousin Joey is a captive agent with State Farm, don’t shy away from working with a professional planner. Just make sure to let your advisor know about everything you have in place.

 

Kurt Rusch  CLU, ChFC

 

New Medicaid Laws May Impact Families

Tuesday, November 1st, 2011

 

We just received confirmation from our Elder Care Attorney that the Illinois Medicaid Laws will change January 1, 2012.  Current and future planning needs are now at crucial issue.

 

Why should you care?

 

The current state laws are much more favorable to applicants and their families; the new laws will make it more difficult to receive Medicaid benefits.

 

This is extremely important news for all senior parents and adult children – those with current need and those who have yet to reach that advent.

 

Legislated changes such as these can severely impact assumed expectations. Assisted and higher level care can drain an average middle income estate very quickly; for those without long term care coverage, pre-planning for Medicaid in the event it may be needed should be of paramount consideration.

 

There are many changes to the Medicaid system which will take place in the coming year. These highlights examine the issues of timely application (all assets do not have to be spent down prior to filing a Medicaid application) and asset protection.

 

Applications Filed Prior to January 1, 2012 Will Fall Under Current Medicaid Laws

 

Under the current laws if a nursing home or supportive living resident applies for Medicaid benefits the applicant is required to provide three years for all financial records to verify their assets. This includes all bank, investment, pension and retirement account statements, life insurance policies, and tax returns.

 

Medicaid is particularly concerned with whether the applicant has given anything away during the three year “look back” period, such as a gift to help pay for a grandchild’s college tuition or to a son or daughter in need. The current laws allow any ineligibility created from the gifts to begin tolling immediately when the gift is given. This offers the Medicaid applicant an important advantage in avoiding any penalties which may result from the gift.

 

NOTE: For those who are planning to enter nursing home or supportive living facilities before January 1st,  it is essential to determine if Medicaid application should be filed before the implementation of the changes in Illinois law.

 

Applications Filed After January 1, 2012 Fall Under New Medicaid Laws

 

Applicants will be required to provide five years for all financial records to verify assets. More importantly, gifts will not begin to toll until the applicant is already spent down. This is a significant change between the old and new laws.

 

Under the new law, applicants will likely have to try to recoup any significant gifts that were made within five years of filing a Medicaid application. In the event that the applicant cannot recoup the funds that were given away, then they will have an opportunity to plead for a hardship waiver and hope that the waiver is granted in order to obtain Medicaid benefits. The criterion in which a hardship waiver will be granted is somewhat unclear at this time, but it is anticipated it will be a very difficult process.

 

The current laws allow the spouse (community spouse) of a Medicaid applicant to protect all the assets that the community spouse has held solely in their own name (for three years or more) prior to filing for Medicaid. Current laws also allow applicants and their spouse to divide their joint accounts in half, so that the community spouse can keep half of the joint accounts.

 

Under the new laws, joint accounts will not be permitted to be divided between spouses. The community spouse will be allowed to retain a specified amount of account funds (currently $109,560). This amount is also subject to change from year to year.

 

For many families, it may be extremely advantageous to file a Medicaid application prior to the law change from an asset protection planning standpoint. After January 1st, asset protection will become more difficult to navigate under the new rules.

 

Please consider these options now and do not hesitate to contact me if you are unsure of the timing regarding your family situation at hand.

 

Kurt Rusch CLU, ChFC

 

Many thanks to John Belconis, JD, for his help in sharing this information with us.

 


 

 

 

 

 

What if you couldn’t work and pay bills?

Wednesday, September 21st, 2011

 

 

According to statistics provided by the Social Security Administration, 3 in 10 workers entering the workforce today will become disabled before they retire. If that stat isn’t staggering enough, consider the fact that 71% of Americans would find it very difficult or somewhat difficult to meet their current obligations if their paycheck was delayed by just one week. This is a potential recipe for disaster.

 

A full 64% of wage earners believe that they have a 2% or less chance of becoming disabled when the actual percentage is more like 30%. Another misconception is that Social Security will pay disability benefits. While this is possible, it is only true to a small extent; 65% of new disability claims with Social Security were denied in 2009. For the fortunate 35% who were able to receive benefits, the average monthly payment was $1065.

 

Consider further the fact that 90% of disabling events happen outside the workplace, where Workers’ Comp does not apply, and we are looking at major gaps in one’s financial plans. Bottom line? There is a gross underestimation of the chances of becoming disabled over one’s working lifetime.

 

Biggest challenge? Being able to initiate and continue funding a financial plan. In the event of a disability, you will potentially lose anywhere from a month to a lifetime of future income that will make funding any other hopes and dreams for your future difficult if not impossible.

 

Overcoming Obstacles & Putting the Pieces Together

 

The common argument against additional planning is that there is no money left after allocating standard premium dollars for car, house, health and life insurance. The good news is that often, by simply changing the terms of your current contracts, you can obtain protective coverage with little or no additional out of pocket expense. While statistics show this is too important to ignore, 67% of workers in the private sector still have no provisions for long term disability.

 

More than worthy of further investigation, there are numerous variables that will influence the amount premium paid for disability contracts. Firstly, your current health is a big factor to qualify for this contract. Influences include height/weight ratio, chronic conditions including not only medical issues but injury history as well. The usual readings for blood pressure, cholesterol and the like will also influence the situation.

 

Next is occupation. Since the likelihood of becoming disabled in a physical pursuit such as a mechanic is much more likely than it would be for an accountant, the rates will be reflected accordingly.

 

The monthly benefit amount received will be very important in determining the premium. Insurance companies will typically limit you to about 65% of your current income which approximately reflects your current take home pay. The reason for this is that the insurance company does not want you to be better off financially on disability than working nor support a financial disincentive to get back to work.

 

One key point to keep in mind when considering how much coverage you desire: personally paid for disability insurance benefits are not subject to Federal Income Taxes. That provides savings at a time when you will need it the most.

 

The benefit period you choose is also of paramount importance. You can select a 1 year policy all the way up to a lifetime policy which will typically pay your benefit until the time that you typically would be retiring from work.

 

Finally, the elimination period for disability insurance is like a deductible. This reflects the time after you are unable to work before you can begin to collect benefits. The longer you wait before you begin to collect benefits, the lower the premium.

 

Putting all these pieces together in a strategic manner should be your main objective. It is highly possible to customize a plan that will not only provide security to you and your family but also work within the parameters of your budget.

 

Kurt Rusch  CLU,ChFC

The Top 2 Things You Can Do To Battle Market Fatigue

Monday, August 22nd, 2011

 

You need only turn on the TV, radio, or skim a newspaper to realize we are right in the middle of some challenging economic times. The BIG question is what can we do when our individual abilities to change the quagmire we’re stuck in is minimal? Here is the shortlist.

 

#1 Look at your personal situation and choose the best plan of action

 

If you are trying to accumulate funds for retirement, do you really want to retreat to the safety of CD’s or money market funds when returns are struggling to yield 1% on your money? Yes, you would at least have a guaranteed return of your money but at these rates, even the slow but sure tortoise would give up the race.

 

Historically, the market is a very predictable and much higher yielding place to be. That being said, the number one prerequisite of market investing will be your ability to weather the volatility that is inherent in equity investments. Simply put: don’t be a jack rabbit about it.

 

Investors who cycle through euphoria and misery only to jump in and out of the market typically do so at precisely the wrong times. The scenario plays out something like this:

When the market is doing well, investors feel renewed confidence it is the place to be. They plunge wholeheartedly in, at a point that reflects a price that is much higher after two years of outstanding returns. The market may or may not continue on its upturn for a while. However, at some point, the market will sour and begin a hasty retreat. These same people who got in at or near the top begin to panic. They decide they can no longer stomach the volatility and opt out after the market has been in a free fall for some time.

 

This is a recipe for disaster and one reason why we see such a roller coaster of reports in the news each day. If you lack the fortitude to invest in the market and weather the vacillations, don’t jump in and out – stay out. Buying high and selling low is not the way to go.

 

#2 Consider alternative strategies for investing in the market

 

An example of a strategy that may take some of the trepidation out of investing in the market is using the strategy of dollar cost averaging. This is already inherent in payroll deduction retirement plans. Since the funds are invested on an ongoing and regular basis, investors will automatically get the benefit of purchasing more of the investment when prices are low and less when they are high.

 

This same strategy would work in investing non-qualified money. Instead of investing it all at once, take the sum to be invested and invest a certain portion each month over a period of time instead of plunging it all in at once. This way, if the market does go down, you will be able to capture a lot more shares or units at the lower price.

 

Kurt Rusch CLU, ChFC

Segregated Planning for Life and Death

Thursday, June 9th, 2011

 

Death and dying is definitely one of those subjects none of us likes to talk about; equally so with funeral planning. I will admit, it hadn’t been on my radar until my wife and I recently went through the process of shopping for and pre-paying my in-laws’ funerals. It was an eye-opening experience both emotionally and financially.

 

Documenting our personal wishes is a gift to those we leave behind – for adult children, spouses, family and friends. This is but the first hurdle; an emotional ashes to ashes tug of war. Most people I have talked to have some inkling as to their parents’ burial wishes – not so much for themselves. Whether an actual plan is paid for, is entirely another matter. In our case, my in-laws had purchased burial plots; that summed up the wish part pretty well. So, what about the cost of funerals? In one word, ASTRONOMICAL!

 

The Billion Dollar Funeral Industry


Funeral Services are a ten plus billion dollar industry. It is also an industry that can expect a guaranteed raise in revenues over the next 30 years or so due to the boomer generation. How do you think the law of supply and demand will play into that?

 

To give you a feel for cost, the National Funeral Directors Association (NFDA) published a report of  national averages last fall. Here’s how the numbers played out in a five year period between 2004 and 2009 for basic funerals:

 

 

On the surface, these numbers don’t look too bad; $6,560 for an average funeral; $7,755 with a vault. (The vault is the cement box the casket goes in.) What these numbers don’t reflect are the following costs: Flowers, ($200 – $800), Hair Setting, ($75-$125), Death Notice in Paper, ($200-$275), Death Certificates ($15 for the first one and $5 for each additional – you’ll need 5-6), Opening & Closing fees per Grave, (we were quoted $2,085), Grave Markers, ($700-$1,800+, depending on what you want), Marker Setting Fees, ($200-$300+), Funeral Luncheons, ($500- $2,500+) and Sales Tax on the casket, vault and marker.

 

When these additional fees are added in (on the low end), the average funeral cost comes in around $12,000. Cremation can be cheaper, but if you want to have a wake before cremation, the cost is close to the same. (The Dignity Memorial funeral chain charges $1,400 to “rent” a casket for wakes before cremation.) You may also consider buying your “tangible property” items elsewhere than from the funeral home. Believe it or not, you can buy caskets online (by law, the funeral homes must accept these types of purchases), with free 24 hour turn around shipping at significant discounts. We investigated Best Price Caskets online and found that some $2,500-$4,000 funeral home caskets were available for $1,200 and less.

 

The biggest fixed amount reflected in this chart is the “non-declinable basic services fee”. This is where every funeral home starts their pricing – an arbitrary figure that’s non-negotiable – kind of like the sticker price at a car dealership. And, “car shopping”, is exactly what you’ll feel like you’re doing when you sit down and start banging out all the “extras” you’ll need to put together an entire funeral from start to finish.

 

Funeral Funding


The most glaring item in the chart above is the accelerated rate of inflation the funeral industry sustains – almost 18% on average – far beyond the national rate of inflation.

 

The funeral industry’s high rate of inflation is an extremely important factor to keep in mind for planning purposes. For example, let’s say I took out a $12,000 funeral policy today at the age of 51. In five years, at the industry average rate of inflation of 17.9%, the average funeral will be $14,148, a difference of $2,148 beyond my policy. In 10 years, my funeral would cost $16,680; another $4,680. In 15 years, $19,665; in 20 years, $23,185, almost double the original $12,000 I planned for.

 

Naturally, I’m hoping I’ll live to 91, at least. In that case, an average funeral 40 years from now could cost more than $45,000, making that initial $12,000 policy of little help to my loved ones. Pre-pay is the way to go – no pun intended.

 

Veteran Planning


Those familiar with Veteran benefits know there are reduced rate funeral programs. In Illinois, that means any honorably discharged vet (and their spouse) can get a complete church funeral and burial (net of a luncheon) for $3,985 at a “national cemetery”.  The closest ‘national cemetery’ in the Chicago area is Lincoln Memorial in Joliet.

 

In the Chicago area, the local Veterans organization provides alternatives for simple funerals at lesser costs, cremation and waking at a Vet sanctioned funeral home on the northwest side of the city. Though burial in Joliet was not an option for our family, we were still able to utilize cost reduction Vet benefits in our pre-payment plan.

 

NOTE: To receive veteran rates, you must go through the Chicago area website: www.chicagoveteranscare.com. Veteran funeral benefits also differ by state; search your “state name + veteran funeral benefits” to find local contact info.


Next Step


Funeral funding is executed through life insurance. Many people look at life insurance solely as an instrument to pay for their funeral; this can be a costly mistake. While there are some types of policies that factor in inflation, they do so at the national average rate of inflation – far less than the funeral industry standard.

 

There are several options you can take to secure a solid funeral plan. You can work directly with a funeral home to execute a pre-pay funeral in the form of a designated trust or funeral life policy. While this option would lock in today’s rates, it will not provide for your loved ones.

 

Alternatively, segregated planning may be your best option: work with a funeral home to lock in today’s prices with a small funeral specific policy (via payment plan) and work with your financial advisor to protect your estate and provide for your family. Boomers, in particular, should seriously consider this approach due to today’s extended work life and mortality rates.

 

Kurt Rusch, CLU, ChFC

The Most Costly Mistake

Thursday, May 12th, 2011

 

According to a new report, “The cost of long-term care services continues to rise”. I don’t think any of us would consider that to be a newsflash by any means; quite the contrary really. Rising healthcare costs are and have been a nationwide topic du jour for quite some time. Why would long term healthcare costs be any different?

 

This latest study, published by John Hancock, incorporated “11,000 U.S. providers, including nursing homes, assisted living facilities and home health care agencies” into the mix. It was the fourth such study done by Hancock in the years, 2002, 2005, 2008 and 2011. Using a 9 year average to produce this year’s reported cost figures, results provided the following:

 

Average cost for a home health aide ($20 hourly/$37,440 annually) has risen an average 1.3%  per year.

Average cost for a month in an assisted living facility ($3,270 a month/$39,240 annually) has risen an average 3.4% per year.

Average cost of a semi-private nursing home room ($207 a day/$75,555 annually) has risen an average 3.2% per year

Average cost of a private nursing home room ($235 a day/$85,775 annually) has risen an average 3.5% per year.

 

Just for kicks I searched for the 2008 study to see how the numbers flowed – I would have preferred looking at the ‘02 or ‘05 report, but Hancock’s website did not provide archives that far back. In the same categories, and true to form, here are the 2008 figures:

 

Average cost for a home health aide ($19/hourly) has risen an average of 1.4% per year since 2002

Average cost for a month in an assisted living facility ($2,962 a month/$35,544 annually) has risen an average of 4% per year since 2002

Average cost of a semi-private nursing home room ($183/day/$66,795 annually) has risen 2.7% per year since 2002

Average cost of a private nursing home room ($204/day /$74,460 annually) has risen an average of 3.2% per year since 2002.

 

What neither of these studies provide is the average cost of long term care premiums per annum or month. This is due to the fact that long term care policies are extremely customizable offering a robust benefit menu of options to pick and choose from. Most people are surprised to learn they can personalize cost effective plans to fit their needs. Think: Cadillac vs. Chevy vs. Used Car; that’s how diverse it is. When you factor in inflationary, actuarial and other industry factors, creating an average cost across any year cannot provide realistic comparatives.

 

To provide a better grasp for value, understanding how and when long term care comes into play is essential. The following scenarios will give you a feel for how long term care works using simple round numbers:

 

Jean buys a long term care policy at the age of 55. The annual premium is $3,500; she can pay the premium semi-annually, quarterly or monthly. At age 65, Jean suffers a physically disabling stroke and needs to bring daily help into her home to assist her with ADL’s (Activities of Daily Living). She exercises her policy benefits and meets her elected 90 day “elimination period”, (deductible requirements), to avoid using her monthly pension income to cover home care costs.


Up until this point, Jean has paid in a total of $38,500 in annual premiums; now is when she will begin to reap the benefits of her long term care investment by putting her premium dollars to work for her. She hires 4 hours of help 7 days a week at $20/hour for a cost of: $2,427 per mo / $29,120 annually. She will recoup 56% of what she paid in over 10 years within the first 12 months of care: $38,500 Total Premiums Paid for 10 years – $29,120 Total First Year of Home Help Cost – the 90 Day Deductible total of $7,281. By the end of the second year, the benefits paid out for home care will be higher than the total premiums she paid in.


NOTE: When long term care benefits are activated, premiums are no longer due. The amount of total benefit payout is chosen by the policyholder at the time of purchase between maximum and unlimited amounts.

 

The next scenario illustrates what Jean’s self care cost would be without long term care insurance:

 

Jean receives a monthly pension of $2,000 plus another $1,000 in social security income providing her a tidy sum of $3,000 per month / $36,000 per year. Her annual fixed costs are as follows: $6,000 Property Taxes (her home is paid for), $ 1,800 Supplemental Health Insurance, $600 Prescription Drug Coverage, $700 Auto/Home Insurance, $ 3,000 Estimated Tax Payments, for an annual total of $12,100 / $1,008 per month. Her monthly daily living expenses for food, gas, electric, entertainment, dental, clothing, gifts and miscellaneous is budgeted at $500. Her monthly retirement income minus her total monthly expense of $1,508 leaves her with $1,492 a month for home care expense. Given her monthly home care expense is $2,427, she will have to tap into her retirement savings to cover the $935 deficit each month, $11,220 annually, to keep up with her expenses.


Realizing she will have to begin to drain her assets to pay for home care, Jean looks for ways to tweak her budget. She can’t drive herself anymore, but she needs to keep her car for care-giving services. Selling her home and moving into a single bedroom condo could pay off but she hesitates to do so in the event she’ll need a second bedroom for live in care down the road; at 65, she knows she can easily live another 15-20 years. She decides to live frugally and hope for the best.


Does Jean have enough retirement savings to draw upon for the next 15-20 years? In just 10 years she will liquidate $112,200 of assets, paying out $73,700 more than if she had a long term care plan – just to cover part time help.

 

How will Jean cover her costs if she needs to up the amount of home care to 8 hours a day or more? She may not, and outlive her retirement savings. If that happens, she will then need to go on Medicaid, which means she will have to live in a nursing home because neither Medicaid, nor Medicare, as many people mistakenly think, do not pay for home care expenses in the long term.

 

Conversely, the most costly mistake people make about long term care insurance is the assumption that the money spent on long term care premiums won’t pay off unless they need long term care whether in a facility or at home. Why would you pay in $3,500 a year for 10 years or more for something if you never need the benefit?

 

The correct answer to this question is: leveraged amounts are an available contract option. Simply stated, people can tailor their policies to execute the following actions if they do not use their benefits: 1) The balance can be transferred as a tax free death benefit to their heirs. 2) The contract can be cancelled and most or all of the paid premium dollars are refunded. This is known as a “liquidity” feature.

 

Jean’s scenario succinctly demonstrates why long term care plans should be a part of planning for retirement. When care is needed, policy holders will not have to worry about tapping into, nor bleeding dry, their investment/retirement accounts to cover expensive care out of pocket. If care isn’t needed, optioned policy values can be transferred tax free to their heirs or recouped upon contract cancellation. For people with little or no retirement savings; long term care becomes a crucial planning tool.

 

Kurt Rusch, CLU,ChFC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

College Saving Misconceptions

Tuesday, April 26th, 2011

 

 

Scholarship Relief Parents are often off base when planning for their child’s college education funding. For example, 56% of parents expect scholarships to help pay for college. In actuality, the largest percentage of students receiving scholarships in any year between 1999 and 2008 was 6.9% Therefore, if your plan is to have your child’s education at least partially funded by scholarship, chances are, you will be in for a big surprise.

 

Financial Aid Restrictions Another common misconception is that having a 529 college savings plan will severely restrict a student’s ability to qualify for financial aid. In truth, the financial aid formula assumes that a student will contribute 20% of their assets toward college expenses while parents will only contribute 5.6% of theirs. Since 529 plans generally have the parents as the owners, amounts saved in these plans will generally have a smaller impact on the financial aid formula.

 

Cost Estimates Expense estimates can also easily be misconstrued due to inflationary rates, tuition increases, type of schools, tax affects and other like criteria.

According to CollegeBoard.com, the current average cost of tuition and fees at a private four-year college is $27,293 per year and the average for state schools is $ 7,605 – not including (in either case) the costs for: room and board, books, supplies, transportation, other living expenses and so forth.

 

Inflationary rates and tuition increases will further affect the mix. While there is some debate regarding this rule of thumb, the college inflation rate is roughly 2% higher than the average annual rate of inflation and the current average annual rate of tuition increases is 8% per year. If these rates hold true to form, parents with newborns today can expect to pay more than three times these amounts by the time their child goes to college: $81,879 and $22,815, respectively, per year.

 

Tax benefits will vary by the State you live in. Illinois residents will gain some additional benefits for  contributing to the Bright Directions Plan and can reduce their Illinois taxable income by up to $10,000 for a single person or $20,000 for a married couple filing jointly if they contribute to a Bright Start 529 plan. With the recent increase in Illinois personal income tax rates that became effective January 1, 2011, this could reduce the Illinois taxes owed on a married couple by up to $1,000 on a $20,000 investment. Furthermore, the Illinois law also allows the deduction for rollovers from other 529 plans into the Bright Start Program. Therefore, it may be in a friend or family member’s best interest to roll assets from out of state plans to the Bright Start program in Illinois to take advantage of the state income tax benefits.

 

Take Away

 

* Scholarship money is not a valid college planning tool.

 

* Parent owned 529 plans have a small impact on financial aid calculations.

 

* Inflationary rates, annualized tuition hikes and taxes should be included in cost projections.

 

 

Economic Rebounding: Use the Rule of 72

Thursday, March 17th, 2011

 

The economy is slowing turning around, albeit much slower than most of us would like to see. Rebounding from devalued investment, savings and/or retirement accounts  continues to be a challenge. Learning The Rule of 72 is one of the best tools you can embrace for help in putting a rebound plan together.

 

Simply put, The Rule of 72 is a quick and easy formula that will give you the number of years it will take to double your money. Using a simple interest rate of 1%, which varies above and below the current bank rates being paid on savings accounts, it would take you approximately 72 years to double your money using the Rule of 72: 72 divided by the rate of return; 1%. Accordingly, a 2% return rate would double your money in 36 years.

 

A Googled search du jour on CDs, provides for the current average interest rate somewhere between 1.06% for one year CDs on the low end, leveling off at 1.86% for three year CDs. At 1.86%, it will take 38.7 years to double your money. FYI: IRA CD returns were even less.

 

Discover and Capital One are currently offering a ten year CD at 3% for minimums of $2,500 and $5,000 respectively. It will take 24 years to double your money in this case. Conversely, an invested mix of stocks and bonds with a hypothetical return of 6% would cut that time period in half to 12 years: 72/6 = 12. It is a simple formula to wrap your head around.

 

The chart to the right (double click to enlarge) further illustrates the relationship between the hypothetical rates of return and the number of years it takes to double an initial investment with  all earnings reinvested.

 

While CD rates are fixed and may be insured by the FDIC, they offer relatively low returns. On the other hand, stocks and bonds tend to offer higher rates of return, but come with higher risks of loss. Similarly, fund yields and returns may fluctuate and fund shares are not insured. Still, you may be risking the possibility of NOT reaching your goals if you strictly stick to low yielding investments such as CDs.

 

Consider further, the current annual rate of inflation; 2.11% last month. Economic rebounding is slowed when inflation rates are higher than invested rates of return. The Rule of 72 may provide that a mix of investment vehicles tailored to your own return thresholds and timing needs could be the best plan to work toward.

 

Kurt Rusch, CLU, ChFC

 

Retirement Confidence Survey

Tuesday, March 8th, 2011

 

Up three percentage points up from an all time low in 2009, the percentage of American workers who feel “very confident” that they will have enough money for a comfortable retirement is 16%.

Not to play Devil’s Advocate, but we really need to rephrase that: 84% of the American workforce doesn’t think they’re going to have enough money to retire comfortably.


When the Employee Benefit Research Institute (EBRI) sent out a press release on the 20th Annual Retirement Confidence Survey last week, the headline read “New Research from EBRI”: Between 4–14% More U.S. Households “At Risk” of Running Short of Money in Retirement Due to 2008–2009 Recession.

 

Choosing their copy wisely, EBRI notes that: the likelihood of becoming “at risk” because of the economic crisis depends to a large extent on the size of the retirement account balances the household had in 401(k)-type plans and/or individual retirement accounts, as well as their relative exposure to fluctuations in the housing market.

 

No matter how you slice it, way more than the majority of us working folk have little confidence life will be grand after we stop working. This is not a good thing. Further workforce results provide:

Covering Basic Expenses 29% are very confident they will be able to cover their basic needs

Unaware of  Goals 46% don’t know how much money they will need to retire comfortably

Not Enough Savings 54% say the total value of their savings and investments excluding their home and any defined benefit plans is currently less than $25,000

No Savings At All 27% say they have less than $1,000 in savings (up from 20% in 2009)

 

In 2010, 33% workers were polled as saying they expect to retire after the age of 65. For workers who fall into some of the categories above, the amount of money they will need to save from unpreparedness and unawareness will be overwhelming to say the least. But what of the people who did/do have good plans in place? How much will these workers need to save to recoup their losses from the economic crisis?

 

“Early Boomer households, will generally need to save between 1 and 4 percent of compensation  more each year between now and retirement age”,  provides EBRI. (These amounts will vary to the personal and market profile of each worker.) While another 1-4% may not sound that bad, it may become quite challenging in a climate of increased taxes, higher employee benefit deductions and every changing inflation rates.

 

When it comes to providing for retirement, overall confidence may not be high, but it is changeable. Decide what you would like to have, try out some online tools such as, retirement calculators, to get a feel for your  goals and sit down with a professional advisor to construct the best plan for you.

 

Kurt Rusch  CLU, ChFC