How to Handle the Coming Inflation
One topic on economists, advisors and investors’ minds of late is how to invest in a way that benefits from inflation. To answer this question we first have to make an assumption – that we will in fact experience an inflationary cycle. That is not something I can answer with certainty, but my personal belief is that we’ve had inflation for a very long time and all the reports about little or no inflation or even deflation is nonsense. That said, should president-elect Donald Trump be successful implementing some of his policy pledges, we could have a period of greater than normal inflation. I am sure you have heard that Mr. Trump wants to reduce the tax rates on both businesses and individuals while simultaneously embarking on an infrastructure spending package upward of one trillion dollars. If these pledges turn into reality wages and prices could rise. So where do you put your money to take advantage of this potential reality?
One innvestmet avenue is real estate. If you have the means, the knowledge and the desire, you could purchase investment property. This investment could be something such as a one bedroom condominium that you rent out. Or if you have more money and experience perhaps an apartment complex, office building, or industrial property. Investment real estate can make excellent investments. If done right, you will collect rents that increase with inflation together with a property value that will also increase with inflation. At the same time, you can get very nice tax advantages from real property investments.
What if you don’t have the money or the desire to become a landlord? You can take advantage by investing in Real Estate Investment Trusts, or REITs. A REIT is an investment vehicle that trades shares much like a stock. You buy and sell shares on the open market through your broker whenever you desire. This strategy allows for much more flexibility than owning an actual piece of property and you have no maintenance to deal with or tenant vacancies to fill. REITs are also required to pay out at least 90% of their annual income to shareholders so they are generally good vehicles for income investing.
Before you invest a dime, however, do you homework and understand the risks and the possible rewards.
Social Security and Medicare Part B Increases
Monthly Social Security and Supplemental Security Income (SSI) benefits will increase 0.3 percent in 2017. The 0.3 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 60 million Social Security beneficiaries in January 2017. Increased payments to more than 8 million SSI beneficiaries began on December 30, 2016. The Social Security Act (“Act”) ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics. The Act provides for how the COLA is calculated.
In the new year, the standard Medicare Part B premium amount will be $134 (or higher depending on your income). However, most people who get Social Security benefits will pay less than this amount. This is because the Part B premium increased more than the cost-of-living increase for 2017 benefits. If you pay your Part B premium from your monthly Social Security payment, your monthly premium can go no higher than the increase you receive to your monthly benefit. Social Security will tell you the exact amount you will pay for Part B in 2017.
Most beneficiaries will not see a reduction in their 2016 monthly benefit amount because of the increase in the Medicare Part B premium. This is because the Act contains a “hold harmless” provision that protects most beneficiaries. The amount of the benefit payable between 2016 and 2017 will stay the same even though the Medicare Part B premium increases.
To learn more about Medicare Part B costs go to https://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html at the Medicare webpage.
Long-term medical bills can add up quickly. If you don’t have $250,000 to spare, how do you pay?
If you want to have a healthy retirement, there’s a big wild card you need to be prepared for: health and long term care expenses.
Medical costs, especially unexpected ones, can add up. A 65-year-old couple will need an estimated $260,000 to pay for unreimbursed medical expenses through retirement — and that doesn’t include long-term medical bills, according to Fidelity Investments.
So how do people afford to age in America? A recent post by author and financial editor Jean Chatzky and related Today show footage address this conundrum. There are several options to help cover these costs including Medicaid, Veterans benefits, a reverse mortgage, certain types of annuities as well as a couple different types of insurance. Two types of insurance are long term care insurance and a hybrid long term care/life insurance product.
Traditional long-term care insurance
Like it sounds, this is an insurance policy that can cover the cost of everything from at home care to nursing homes. The rate for a 60-year-old couple in normal health is about $2,100 a year for a mid-range policy with a $150 daily benefit, good for 3 years, and a 90-day waiting period, according to The American Association for Long Term Care Insurance (AALTC). Premiums on these policies may be tax deductible, but prices have been going up and insurers, including John Hancock, have left the marketplace.
If you’ve got assets of between about $500,000 and a few million, buying a long-term care policy can help ensure that you’ve got enough money for care if you need it. Today’s policies, however, aren’t the never-ending sort that were sold years back; most cap the number of years they’ll pay for care at 3 to 5 years, and the inflation adjustment at 3 percent.
Still, if you’ve been saving for years and are looking to leave something to your kids, this is a way to make sure that all of your money doesn’t go to pay for health care. The downside is that if you don’t need care, you have to keep paying the premiums.
A second type of policy is one that combines the benefits of a long term care insurance policy with those of a life insurance policy. These are essentially permanent life insurance policies that allow you to tap into your benefit — reducing the death benefit —if you need long term care.
If you don’t, the heirs get the money, so you don’t feel like you’re throwing away your premiums. They’re more expensive than both a straightforward life insurance policy and traditional long-term care, in part, because they do double duty.
Unlike traditional long-term care, hybrid insurance doesn’t have inflation protection built in, which means if you buy a $200,000 benefit today, it will be worth less than that in tomorrow’s dollars (purchasing power) down the road.
These policies also allow you to cancel the policy and get your premium back after a set period, generally 10 years, but they’re not tax deductible.
As above, these types of policies work for people with more than about $500,000 in assets but less than a few million (over that amount you can self-fund your care). Unlike traditional long-term care policies, which don’t have guarantees (that’s why so many people have seen their premiums pop in recent years), these hybrid policies often do. If you pay your premiums as contracted, you have a guaranteed death benefit, guaranteed cash value, and a guaranteed amount of long-term coverage. Typically, the amount of years you spend paying the premiums on a hybrid policy is shorter than on traditional life insurance — some have a single premium, others are paid for over about 10 years, but the amounts themselves are much higher.
For example, a 55-year-old healthy female could spend $75,000 on a policy (paid all at once, or $8,500 a year over 10 years) that would provide $271,000 to be used for long-term care, as well as a minimum death benefit of about $135,000, according to the AALTC (Using the long-term care benefit, however, reduces the death benefit). There is also typically a waiting period before you can access the money in the policy for care. Make sure you know how long of a wait period you’ll have.
The bottom line:
- Whether you’re looking at traditional long term care or a hybrid policy, look for a top-rated insurer.
- You also want to make sure you’re working with an agent who specializes in these types of insurance policies, because they’re changing all the time.
- Don’t wait too long. Insurers are going to look at your health history and your family history. Denials for coverage climb steadily from the 50s to 60s and beyond.
- Get quotes on both kinds of policies to see what makes sense for you — as well as the opinion of a fee-only financial or insurance advisor.
- And, consider consulting with a qualified Elder Law attorney who can help you determine your best strategy to address medical and long term care costs in retirement.
Longevity Planning – Are You Ready?
Longevity Planning is important. Proper longevity planning will allow you to maintain a high quality of life in your retirement years, avoid the dreaded nursing home, maintain and protect your assets and avoid being a burden on your family members. Not planning can be catastrophic.
Let’s be realistic. Right now, and for the next decade, Baby Boomers are retiring at the rate of 10,000 per day!! At the same time people are living longer than ever before. Many individuals are living well into their 80s and 90s. Recent studies show that one in four people over age 65 will need long term care; and, one out of every two people over age 85 will need long term care.
Uncovered medical bills, basically long term care costs, are probably the greatest threat to your retirement, quality of life and your assets. Medicare and other health insurance coverages generally protect you from expensive hospital and doctor bills. However, this insurance coverage does not help with long term care costs.
Whether you need help at home, in an assisted living environment, in an adult family home or nursing home, those costs are not generally covered by insurance. These costs are severe. In home care costs can range between $20,000 to $50,000 per year; an adult family home can run between $50,000 to $100,000 and skilled nursing care often exceeds $100,000 per year.
Sadly that’s just the cost of a room, care and meals. The cost of hearing aids, walkers, hairstyling, clothes, trips, etc. are all on top of those costs.
How do you address these costs?
It is best to work with a qualified Elder Law attorney. An attorney that merely drafts basic Wills and Powers of Attorney is not sufficient. Why? This area of discipline is extremely complex and requires a thorough understanding of Medicare, Medicaid, Veteran’s Benefits, Wills, trusts, and fiduciary duties. Additionally, the attorney must have an understanding of investments, investment products, how they function, and how those products affect your overall situation. This includes an understanding of IRAs, Roth IRAs, annuities, real estate, business investments, 401K and 403B accounts, reverse mortgages, and more.
If that is not enough, a good attorney can also help with your living arrangements. For many, remaining in your own home is the best option. However, if your residence is multiple stories, has steps to get into the house, has narrow hallways, has the washer and dryer in the basement, etc., the home may no longer be the best location unless modifications are made.
It is also important the attorney have an understanding of how your physical and cognitive health impacts your situation. Issues such as how much and what level of care is or may be needed have to be addressed. A knowledge of how benefit providers interpret medical assessments is important as well as coordinating the resources available to you to challenge an incorrect assessment.
And, if all that is not enough your attorney needs to understand the tax implications of, among other things, setting up trusts, making gifts, selling assets, cashing in various accounts, and deductions for out of pocket medical expenses.
With all these obstacles to navigate you can see why you should not try to navigate all these obstacles on your own. Nor should you rely solely on an attorney who just does “estate planning”; you cannot rely solely on your financial advisor; you cannot rely solely on your medical professionals or hospital social workers; and you cannot rely solely on residential placement agencies that get paid from a nursing facility or adult family home only when you become a resident.
When should you begin this planning?
There is no right or wrong age to undertake longevity planning. However, for most people age 60 or above longevity planning is critical. Additionally, there are vastly more planning options available for married couples than for single individuals. And, what are you after your spouse dies? Single.
Who will benefit from this type of planning?
Generally everyone can benefit from longevity planning. However, the most affluent among us probably need this planning the least. While we all have different views about who is “affluent”, I would say any person or couple with a “taxable” estate in Washington, which is $2,054,000 or more in assets, meets this criteria.
For everyone else, longevity planning is important. And for those with estates of less than $1,000,000, including your house and other resources, this planning is critical.
What will I accomplish with longevity planning?
First and foremost, you will enable yourself to enjoy the highest possible quality of life available In retirement. You may be able to avoid institutional care, otherwise known as nursing home care. You can avoid becoming a burden on your children and other loved ones. You will be able to structure your assets and income to maximize your resources to accomplish a comfortable, quality retirement. And, you will be able to protect your assets and income to provide for you and your loved ones.
So how much will all this cost?
That is different for everyone because everyone’s situation is different. You should be prepared to make an investment of several thousand dollars. However, you can be reasonably certain planning will cost a lot less than one year of even the most affordable care.
Contact us to today to see how we can help you. Hugg & Associates, PLLC
Bonds Beware – Do Your Research
Own bonds? In case you don’t closely follow the markets, bond yields recently reached the lowest level in decades. When yields drop the price of a bond rises. Conversely, when yields rise, the price of a bond decreases. Central bankers around the world have kept interest rates low for a very long time under the belief that low rates would spur investment activity. These low rates have led to years of rising bond prices. It now appears that the long bull market in bonds has either ended or is very near the end. The U.S. Federal Reserve just raised rates a quarter point in December 2016 and indicated as many as three more possible rate hikes in 2017. Rising interest rates will mean that existing bonds, paying out at lower rates of interest, will decline in value. This is due to investors wanting the newer bonds paying higher rates.
If president elect Trump is successful with his tax cuts and infrastructure spending, inflation could rise. Interest rates should follow suit to keep inflation under control, and bond prices will continue to drop. All of this sounds pretty bad if you are a long term bond holder. What should you do? First, steer clear of bonds with maturities longer than 3-5 years. Second, consider alternatives to bonds when investing for income: certain real estate investment trusts, Treasury Inflation Protected Securities, or TIPS, may be a good place to park some funds, as would be preferred stocks. Lastly, consider investing a little more in equities, preferably those whose prices are below a company’s intrinsic value.
Be sure to do your research and understand what you are investing in.
Low Investment Returns Require More Savings
The odds of making a 5% return on traditional investments in the next 10 years appears slim, according to a new report from investment advisory firm Research Affiliates. For most people in or approaching retirement this means one of two things: save more or live on less.
The company looked at the default settings of 11 retirement calculators, robo-advisers, and surveys of institutional investors. The average annualized long-term return people seem to expect is 6.2%. Just over one and half percent would shaved off for inflation. So the after-inflation return drops to roughly 4.6%. That’s before taxes.
Over the next decade, according to the report, the ubiquitous 60/40 U.S. portfolio (60% stocks/40% bonds) has a 0% probability of achieving a 5% or greater annualized real return.
One message that John West, head of client strategies at Research Affiliates and a co-author of the report, hopes people will take away is to expect lower returns in the future.
“If the retirement calculators say we’ll make 6 percent or 7 percent, and people saved based on that but only make 3 percent, they’re going to have a massive shortfall,” he said. “They’ll have to work longer or retire with a substantially different standard of living than they thought they would have.” One reason for this is most people are not equipped to alter their investment mix. They are either afraid to reallocate funds into different, potentially higher yielding, assets, or they are uninformed as to such options, or both.
Moral of the story: Since most people’s risk tolerance isn’t likely to change dramatically, the amount you save may have to.
Get Serious About Retirement Income
In a recent survey by the American Institute of Certified Public Accountants, 41% of CPA financial planners said that running out of money was their clients’ top financial concern when planning for retirement, and fully 70% said depleting savings ranked among their clients’ top three worries, along with maintaining their current lifestyle and rising health care costs. And yet…other research shows that many people apparently aren’t alarmed enough about this risk to seriously plan for it. According to TIAA’s 2016 Lifetime Income Survey, fully 65% of American adults haven’t even figured how much income they can expect to have each month after they retire.
Here are three key things you can do to increase the likelihood you’ll have sufficient retirement income:
- Begin planning early. You should start focusing on how much income you’ll need at least five or more years before you expect to retire. Many people assume that their spending—and thus the income they’ll require—will automatically drop after retiring. But that’s not necessarily the case. The best way to get a fix on your likely spending is to make a detailed retirement budget.
The years leading up to retirement are also a good time to begin thinking about lifestyle issues, as they can directly affect your income needs. If you are considering selling your home and moving to a smaller residence you’ll definitely want to check out the real estate market in your area well in advance to make sure downsizing actually makes financial sense. Similarly, if you’re counting on collecting extra income by working part-time after you retire, it’s a good idea to see what kinds of jobs are available for someone with your qualifications and what they pay.
By getting a head start on your planning rather than waiting until you’re on the verge of retirement, you’ll be better able to assess whether you’re really as prepared to retire as you think, or whether you might be better off staying on the job a bit longer.
- Develop a more detailed strategy as you near retirement. As you get closer to retirement, step up your planning efforts. One critical issue is whether to postpone taking Social Security benefits to qualify for the higher payment you’ll receive for each year you delay. The answer will depend on such factors as how long you expect to live; the rate of return you think you can earn on your retirement investments; and, if you’re married, whether you and your spouse might be able to maximize benefits by coordinating when each of you claims.
You’ll also want to settle on an appropriate withdrawal rate for tapping your nest egg. The idea is to get enough income from savings so that the money you pull from your nest egg, combined with Social Security, will allow you to maintain an acceptable lifestyle in retirement. At the same time, you don’t want to withdraw so much that you run the risk of going through your savings too soon.
With yields today so low and many investment pros expecting anemic investment returns in the years ahead, an initial withdrawal of somewhere between 3% and 4% of savings that is subsequently adjusted each year for inflation is probably about right if you want your savings to last at least 30 years. You can estimate how long your savings might last at a variety of withdrawal rates given your age, how long you expect to live in retirement, and how your retirement assets are invested by plugging numbers into a retirement income calculator found online.
- Be ready to adapt to changing conditions. A retirement income plan, no matter how carefully thought out, isn’t something you can create and then set on autopilot for the remainder of your retirement. You could incur large unexpected expenses; your investment might perform better or worse than expected; your lifestyle and spending needs could change. You will need to continuously monitor your plan to be sure it’s still on track and, if not, make the necessary adjustments to bring it back in line.
For example, if the combination of withdrawals and a severe market downturn so depresses your portfolio’s value that you’re in danger of depleting your nest egg prematurely, you may want to scale back withdrawals for a few years. Conversely, if superior market performance over several years has caused the value of your assets to balloon, you might consider treating yourself a bit. Take that trip, or buy that item you’ve always wanted. Periodically revving up a tool like the withdrawal calculator I mentioned above can help you assess whether you need to tweak withdrawals.
If you feel that creating and monitoring a retirement income plan is more than you can handle, you can always get assistance. But when it comes to something as important as turning a lifetime of savings into income you can depend on throughout retirement, you don’t want to wing it. You need to come up with a plan.
Checklist: Documents To Organize And Share
When you’re getting your estate in order, there are many accounts, policies, documents, and other information to organize—and the list of to-dos can quickly become overwhelming. But this planning checklist can help you get organized. Having all your most important information in one place can relieve a big burden on your family if anything should happen to you. Here are some of the essential documents, accounts, and types of information you should organize get into your estate and financial plan.
Money Market Accounts
Certificates of Deposit (CDs)
Recent Account Statements
Login and password information
Mortgages or Loans
Company through which mortgage or loan was given
Copy of the mortgage or loan agreement
Most recent W-2 forms or self-employment tax return
Income tax returns for current and previous year
Gift tax returns
Pension Plans and Retirement Benefit Information
401(k) or 403(b) plans
Simplified Employee Pension Plan (SEP)
Salary Reduction Simplified Employee Pension Plan (SARSEP)
Titles or Deeds to any Property
Copy of Will
Copies of any amendments
Name of attorney or law firm that helped create the Will
Declarations of Trust or Trust Agreements
Name of attorney or law firm that helped create the Trust
Bank accounts associated with the Trust
Power of Attorney
Name of person appointed to Power of Attorney
Power of Attorney documentation
Name of attorney or law firm that helped create the Power of Attorney
Safe Deposit Box
Location of safe deposit box
Safe deposit box keys or location of safe deposit box keys
Any Professionals Who Have Helped
Health Care Proxy
Do Not Resuscitate (DNR)
Proof of Identity and Relationships
Social Security Card
Armed Forces discharge papers
Automatically Renewing Medications
Names of medications
Name of pharmacy where medications are renewed
Name of doctor who prescribed medication
Hopefully you already have a comprehensive plan covering finances, legal, housing and care is already in place. But if not, this is the time to get started. Do some homework and seek professional assistance.