At Decker Retirement Planning, we specialize in retirement planning. Over the last three decades Brian Decker has compiled and documented a list of 32 problems that retirees are likely to face, which we review with our clients when you come in to meet with us for retirement planning help. In fact, we spend around 90 minutes going through the problems during the retirement planning process, then we put strategies together to help you avoid them.
Here are 5 of the 32.
- Getting Sued Because You Have Assets
Did you know that, by law, you have to send your net worth statement when there’s any kind of an accident, so that the other party can assess whether they want to sue you or not? That’s the world we live in. That’s why we encourage everyone to have a personal umbrella policy rider on either your homeowners or automobile insurance policies, or both. Personal umbrella insurance is a type of insurance designed to add extra liability coverage over and above another insurance policy, and is usually available in million-dollar increments, from $1 to $5 million.
“We don’t sell umbrella policies, but we advise people to get them when we’re doing their retirement planning. That’s because we are actual financial fiduciaries, required to put your best interests above ours and everything else when we give you financial advice. Read ‘What a Fiduciary Is, and Isn’t.’”
-Brian Decker
Adding an optional umbrella policy could save your retirement nest egg from unforeseen events, like getting sued for bumping into someone in a parking lot, or a neighbor’s kid getting hurt on your property. Let’s face it, insurance companies get wealthy by not paying every claim, and by denying some claims. Umbrella coverage only costs around $300 – $400 per year, it’s there to help protect you from liability for bodily, personal injury, or property damage that’s not covered under a primary insurance policy.
- Not Having the Right Life Insurance
While we’re on the topic of insurance, let’s talk about life insurance. For the most part, even though we’re licensed to sell life insurance, Decker Retirement Planning doesn’t recommend it very often for retirees–we have other strategies we utilize when we are doing retirement planning. But there are certain instances where life insurance makes sense.
Life Insurance Leading Up to Retirement
One of the reasons we might recommend life insurance is to get both husband and wife over the finish line to reaching retirement. What we mean by that is, you might want to get an inexpensive life insurance plan at work to protect your spouse while you’re on the last leg of stockpiling retirement money. If indicated, both husband and wife should have it to protect each other against the risk of losing those last years of salary while you’re saving.
Life Insurance to Replace Income
The second reason we might recommend life insurance in retirement is when one spouse has a very large pension—maybe $70-90,000 per year—with zero survivability. In other words, if that spouse’s pension stops when they die, the surviving spouse is financially vulnerable. For income replacement, we might recommend life insurance on the person who has the very large pension, so that the other spouse can make sure that they’re financially whole in the case of the pensioned spouse’s death.
Life Insurance for Estate Planning
The third and final reason that we may recommend life insurance is for estate tax reasons. Even for our clients who feel that their kids “get what they get” and need to be responsible for paying their own taxes, once they see the big bite Uncle Sam will take away from their accumulated life wealth if they don’t do anything, the value of life insurance in estate planning becomes apparent.
For instance, some clients might have a portfolio of rental real estate that would have to be broken up and sold off to pay the estate taxes at their death. If you want to pass those properties intact to your children, we might recommend an “ILIT (Irrevocable Life Insurance Trust)” strategy. The way the ILIT strategy works is to establish an irrevocable life insurance trust where a husband and wife purchase a “second-to-die” policy outside of the estate.
Gifting happens to the children through Crummey provisions which permit your children (specified as trust beneficiaries) to withdraw gifts you make to the trust for a limited period of time to qualify for the federal annual gift tax exclusion. A Crummey power provision in the trust allows kids to do anything with that money, including paying the premiums on the second-to-die life insurance.
When the life insurance policy pays out after the second parent passes away, funds are available in cash, tax free, to pay the estimated estate taxes. Therefore, the estate passes intact to the children, preserving the portfolio of assets. Whether it’s a real estate portfolio, a corporation, a stock portfolio or whatever assets are in an estate, an eyelet strategy may be recommended. For around 10-15 cents on the dollar, you can purchase a second-to-die life insurance policy using an irrevocable life insurance trust to achieve estate tax mitigation goals.
“Keep in mind we have seen some people make huge mistakes by buying a life insurance policy held inside, as part of the estate, instead of outside of it in an irrevocable life insurance trust. That just increases the estate’s total value and causes more taxes to be due. It’s very important in retirement planning that you structure your estate properly and work with an experienced retirement planner.”
-Brian Decker
- Your Bleeding Heart Bleeding You Dry
When we talk about bleeding hearts, we mean the parents that have raised their children to believe that “parents’ money is children’s money.” Whether their kids have crashed their Mercedes or want to buy a new house, bleeding heart moms and dads fork lots of money over in order to feel like “good parents”–even though their kids are already adults.
The biggest extreme that we’ve seen in our office was a couple who came to us in Seattle. A husband and wife in their mid-70s had no retirement account–their IRAs were gone, they had no Roth accounts, no 401(k)s. Their savings and checking accounts were down to $10,000. They had only one asset left, and that was a house on Lake Washington. It was a nice house, it was probably worth $1.5-2 million.
When they came in to see us, they were trying to live on Social Security, but they could no longer afford to hire gardeners to mow the lawn or trim the shrubs, much less pay property taxes on the home. They had literally given everything to their children to help them through “tough times,” putting themselves at risk. They were not happy to learn from us that they’d have to sell their home.
We encourage you to love your kids enough to let them experience the financial squeeze that typically comes in your twenties when you’re getting your house in order, when you’re on your own, you’ve got your degree and you have your new job. Let them go through this stage alone so that they learn to go without, so that they learn to budget, so that they learn to be financially responsible. Those life lessons are precious and priceless–they teach them things about self-reliance, accomplishment and reaching goals that mom and dad could never teach by giving them money.
It’s not being a “bad parent” to let your children stand on their own financial feet. If they can’t afford a house, don’t help them get into a house that they can’t afford. Don’t help them get into a situation where they can’t afford the taxes, the insurance, or the mortgage payment. That’s not helping them. And it’s not helping you, in our opinion.
- Long-Term Care (LTC)
In retirement planning, we define the problem of long-term care as the risk of one spouse bankrupting the other spouse due to healthcare costs.
A lot of statistics say that around 70% of people will need long-term care during retirement. We have run the numbers, and because even one day in hospice is counted in the U.S. Census totals as long-term care, we think the actual number is a lot lower–more like 7%. Usually people just die, whether it be from a heart attack, stroke, pneumonia, a fall, a car accident, whatever. Nevertheless, long-term care should still be addressed in the retirement plan, because it could apply to you.
What we advise our clients to do when we talk to you about long-term care risk is hope for the best, but plan for the worst. What is the worst? The worst-case scenario, in our opinion, is to have a healthy body with dementia or Alzheimer’s. That’s the worst-case combination as far as we are concerned.
Here’s how it goes. The first part of this tragic healthcare journey where one spouse is diagnosed, and it is all on the surviving, healthy spouse to provide care for them. Is there any extra financial cost for all that caretaking? No. Is there an emotional cost? Yes, a big one.
The second part of the journey is where the disease has progressed and it’s too much for the healthy spouse to handle all alone. So they call for in-home care help, at a cost of around $1,500 a month–and higher and higher as you need more and more services.
The last part is when home services are no longer adequate. Maybe they have started exhibiting behavior like dressing up for a meeting at two in the morning and wandering out into the neighborhood–or out on the highway. Full-time facility care is required.
A long-term care or nursing facility costs around $8-10,000 per month. Tragically, although this last part of the journey doesn’t last for a long time–usually anywhere from 18-24 months–it’s the most costly. At $10,000 x 24 months, will you have $240,000 dollars to handle this worst-case scenario? At Decker Retirement Planning, we want to help make sure that you know the options and strategies to address the risk of long-term care. There are six of them.
Self-Insurance
Because the actual statistic is so low—7%—self-insurance is what we recommend most of the time. You can pay for nursing care in two ways. One is with the equity in your home, and the second is with the extra money and buffer that we put into your “risk bucket” of retirement assets. We will show you exactly what we mean by this when we develop your retirement plan.
Traditional LTC Policies
The second option is to buy traditional long-term care insurance. But beware. Those so-called “guaranteed level premiums” are not. You may have been told that you will be paying $4-500 per month for life. But don’t be surprised when in your late 60s/early 70s, you get a letter from the state insurance commissioner telling you that your insurance premiums have just been increased up to the legal 60% limit. We’ve seen it time and time again. “Guaranteed level” does not mean guaranteed level at all.
If your premiums do increase, the insurance company actually hopes you will drop the policy. Because they have kept all your past premiums, and now they have zero risk. Even if you lower your benefit amount, the insurance company is still happy because they now have your premium and less risk.
Whole Life
The third option is where a guy from an insurance company gets ahold of you and says that if you buy a whole life policy, for let’s say $400,000, that all that money will be paid out as your death benefit, and they will put a long-term care rider on it as well. So now, you or your heirs will get that four hundred grand back no matter what.
If you die, your beneficiaries will get the $400K. If you go into a facility, you get the money to pay for your long-term care costs. In theory, it sounds really good. In real life, it’s very expensive (about $1,000 per month, per person, for life) illustrating the quandary of traditional long-term care: If you can afford it, you don’t need it, and if you need it, you typically can’t afford it.
Asset-Based LTC
The fourth option is our favorite for clients that don’t want to self-insure. Asset-based long-term care is where you save $10,000 a year per spouse, per year, until you accumulate around $100,000 in a policy per person. When you die, your beneficiary gets double the amount each person has accumulated as a death benefit, or in this example, $200,000. But if you go into a long-term care facility, you get from 3-4 times the benefit in long-term care coverage—from $300-400,000 per person.
Furthermore, if you change your mind at any point, the policy is totally liquid and you can get all your money back. The only downside is that it can be very hard for most people to put aside $10,000 per year, per spouse for ten years in order to accumulate $100,000 for each spouse.
Safe Harbor Trust
The fifth option is called a Safe Harbor Trust. A Safe Harbor Trust is where you move all your assets into a trusted family member’s name–let’s say it’s your brother named Sam. So, you move all your assets to Sam’s name, so that when a debilitating diagnosis comes, you can qualify to go on Medicaid. Once the ill spouse passes away, the plan is that the surviving spouse gets all their assets back from Sam.
There are two problems with Safe Harbor Trusts. One, the IRS caught wind of this strategy and put in a claw-back provision that says that if you’re diagnosed within five years of funding a Safe Harbor Trust, they’re going to pull all those assets back, and you pay for your long-term care expenses yourself.
The second, bigger problem is that brother Sam can legally keep your assets if he changes his mind, with no legal recourse. So, for a whole bunch of reasons, we don’t recommend a Safe Harbor Trust to handle your long-term care risk.
Divorce
The sixth option is, tragically, the most popular. If one spouse gets diagnosed with a debilitating disease, the other spouse divorces them so that they can survive financially.
- Liquidity or Access to Cash
Liquidity used to be pretty far down on our list of potential problems in retirement, but lately it’s bubbled up to the top. We define liquidity as money that is accessible in your savings or checking account, on the next day, with no penalty. If all your money is liquid, that means it’s not working for you, especially in today’s ridiculously-low interest rate environment. If all your money is locked up, that’s equally a problem.
We find that our clients’ sweet spot for liquidity is around 30-40% of their living expenses. We carve out from $25-80,000 for liquid emergency cash, and put that into savings and checking accounts that get the highest return possible. And, by the way, because we’re fiduciaries to our clients, we’ve already done that homework. The highest-returning money markets right now are Goldman Sachs, Synchrony, Capital One and CIT. These are the four different institutions that are paying from 1.25-1.35% on their money market accounts.
In terms of retirement planning, having 30-40% liquidity in our plans is a big deal because our competitors have a bad habit of locking people up in annuities, which causes problems for them when they need to make a major purchase. Liquidity is very important, and with each yearly review of your retirement plan, we want to make sure that your liquidity score is right in there between 30-40%.
If you want to know what we would recommend to you personally to address these five problems as well as the other 27 problems in retirement that we cover during the retirement planning process, call Decker Retirement Planning for a free consultation at 855-425-4566. We have an office in Salt Lake City, plus two in the Seattle area.
