by Dave Kutcher
You’ve heard us talk about ways to mitigate market volatility and how zero can be your hero at retirement when devising a distribution strategy that will give you the best probability of success … success being measured as your ability to be sure you do not outlive your retirement income/assets.
We’ve discussed the 4% rule at length and how it is almost impossible, even in a managed portfolio to position yourself to exceed the 4% distribution guideline. To improve on this 4% rule, we need to be sure there is insurance for the downside risk inherent in investment performance.
In the analysis of managing downside risk, we understand that there is a cost to everything. If we are going to be protected from negative investment results, there tends to be a cost to us in being able to capture all the upside of the markets when they do occur. For many, the sacrifice of some upside to eliminate all the downside is a price we are very willing to pay.
In many ways, the best offense in beating market volatility is putting the best defense you have on the field at the right time.
The same concept holds true when looking at other significant risks that will impact your ability to achieve success during retirement and one of those other risks is the ever-rising cost of long-term care.
Chronic health issues are a very real concern for retirees. People are living much longer today than they ever have, but the extra years come with risk. 1 out of 2 people will suffer chronic illness during retirement and will find themselves in need of custodial care that is NOT covered by government programs such as Medicare.
Whether this care is provided in a traditional long term care facility such as a nursing home or if a care giver is hired to provide care in one’s own home, the cost of long-term care is rising as fast or more as any other significant and necessary expense we may face in our lifetimes.
The median cost of a private room in a nursing home today is over $100,000 per year and that cost is expected to be over $140,000 by 2030, just a few years away.
The statistical risk of needing care is approximately 50%. Again, one out of two of us will need such care and thus endure the costs of that care.
For those of us quickly approaching the goal line for retirement, the cost of long-term care when we would most likely need it, 15-20 years from now, will likely exceed $200,000 per year.
Think about that statistical risk … 1 out of 2 will need it, the average length of stay is slightly over 2 years, and the likely expense will exceed $200,000 per year. That is an impending risk of over $400,000 for just one spouse. If both spouses need care … well, you can do the math.
So, what can you do about this risk? There are lots of solutions out there today and the financial services industry has become quite creative in trying to devise solutions that serve multiple purposes. The most efficient tool we have seen and one we have employed on numerous occasions with our clients are what the industry calls “linked-benefit” policies.
Whether those linked benefit plans sit on an annuity or a life insurance chassis, the concept is similar; provide leverage to multiply the value of cash or death benefits in those plans to provide access to funds that can be used to pay for long-term care that would otherwise not be available to you.
In many cases, these plans will take a $1 of funding going into the plan and immediately provide a multiple of 2X or 3X that amount as a pool of resources for your long-term care expenses. So, as an example, if someone were to put $100,000 into one of these plans they would establish an immediate pool of $200,000 or $300,000 that can be used for long-term care expenses … and the benefits are typically received income tax free if being used for long term care expenses.
There are several different solutions to help manage this impending risk and we are well heeled in our ability to help you navigate this question.
Protecting your money from downside risk at retirement is only one step in the right direction when it comes to achieving success during the retirement distribution phase of your life. Managing and protecting yourself from a risk that can literally turn your financial plans upside down is just good defense. Maybe it is time for you to go on the offense and employ a good defense against the potentially catastrophic financial risk that looms ahead.
I am Dave Kutcher, a retired Marine Corp Captain and founder and owner of Kutcher Financial Services in Eagle River. We are on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio. Kutcher Financial Services, 10928 Eagle River Road; Eagle River, AK 99577, (907) 795-7452.
Be the first to comment