What You Don't Know
Can Hurt You
to Maximize Social
Tips for Funding a
"Just in Case" Account
More Tax Efficient
What You Don't Know
Can Hurt You
As a nation, America grows older every day. According to the U.S. Census Bureau, the
median age in the United States has been rising steadily, and the last of the 76 million
baby boomers will reach age 65 by 2030—doubling the elderly population.
With this demographic shift comes the
realization that as people live longer, they
may need some type of extended care services.
Planning for the later stages of life is something
that some people may not have done—at least
not in a comprehensive way. This lack of
planning may be partially due to confusion
around the topic of long-term care (LTC)—what it is, what it costs and who pays for it.
Misinformation Is Widespread
A recent study found that just 28% of Americans
over the age of 50 with at least $150,000 in
investable assets realized that the Affordable
Care Act (ACA) does not pay for the cost of
long-term care. Similarly, more than three out
of four affluent boomers think of long-term care
as nursing home care, while in actuality, nearly
half of all long-term care services are delivered
in individuals' homes, about 25% take place in
adult day care and only the remaining 25%
occur in nursing homes.1
This same group estimated the annual cost
of long-term nursing home services to be
about $36,000.1 In reality, the median cost of
a private room in a nursing home now tops
$85,000 a year, while assisted-living communities
average about $42,000 a year nationwide.2
The U.S. Department of Health and Human
Services estimates that 70% of Americans over
the age of 65 will need long-term care services
at some point in their lives. When you add
this likelihood to the cost, long-term care
insurance (LTCI) should become part of
most individuals' planning discussions.
Good, Better, Best—Long-Term Care Insurance Policy Costs, 2013*
(Annual coverage for age 55 couple)
*Source: American Association for Long-Term Care Insurance, 2014 LTCi Sourcebook. Policy data is based on 2012 applicants for individual policies. Visit www.aaltci.org for more information.
**Guaranteed Purchase Option (GPO) enables you to decide whether
or not to increase your coverage each year, usually in a 5% increment.
Premiums for the increased benefit are typically based on your age at the
time you exercise this option. This means the cost to increase your coverage
gets higher each year.
Get to Know LTCI
LTCI has evolved from the
traditional nursing home
model to include an
expanded array of service
settings, such as home
health care and assisted-living
needing long-term care are often not sick in the traditional sense. Instead, due to chronic illness
or disability, they may need ongoing assistance performing one or more basic activities of daily living such as dressing, bathing or eating.
Neither the ACA, Medicare, Medicare supplemental nor standard health insurance cover long-term care in any meaningful way. Futhermore, in order to qualify for those services that are covered by government programs, individuals must first deplete their personal assets and property paying for care.
A Solution for Shielding Assets
Given these variables, LTCI may provide the asset protection that many individuals and couples seek. LTCI policies vary widely, as do premium costs, based on a number of factors, including:
- Your age at the time of purchase.
- Your overall health.
- The daily benefit you choose. This is the dollar amount the policy pays per day for care, and typically ranges from about $200 to $300.
- The length of the coverage period (in years).
- Whether you opt for an inflation adjustment feature, which increases the daily benefit each year by a set percentage.
- The length of the elimination period. This is the period of time the insured must
wait before he or she can begin receiving benefits. The longer the period, the lower
the premium cost.
Before comparing the nuts and bolts of policies, verify that the companies in question are licensed in your state and carry favorable ratings from well-known ratings agencies such as A.M. Best Company, Moody's Investor Services and Standard & Poor's.
Determining whether long-term care insurance should be part of your overall financial plan
is a personal decision based on many factors. Your financial advisor can help you sort through the issues and create a plan that
makes sense for you.
1Source: Nationwide.com, "Most Boomers Mistakenly Think Affordable Care Act Covers Long-Term Care Costs," January 21, 2014.
2Source: Genworth 2014 Cost of Care Survey, March 2014.
to Maximize Social
When it is time to start collecting Social Security, it is important to think through when and how you will receive benefits. Two lesser-known approaches could have a significant impact on the lifetime amounts that you and/or your spouse receive.
File and Suspend
A strategy that many married couples may find valuable is the "file and suspend" option. Here is how it works:
If you are at full retirement age—currently 66 for most claimants—you
can apply for retirement benefits now
and have the payments suspended, while your spouse applies only for spousal benefits. (Your spouse can be as young
as 62 when claiming benefits, however
his or her benefit would be reduced if claimed before full retirement age.)
The file and suspend strategy works
best for couples with different earnings histories, where the higher-earning spouse would like to keep working, while the lower-earning spouse wants to retire and would be better off with the spousal benefit (which is typically about 50% of the higher-earning spouse's full benefit) than with his or her own benefit.
By delaying the receipt of retirement benefits on each of your individual earnings records, file and suspend
allows your combined benefits to continue to grow at 8 percent per year until the age of 70—the maximum
age to begin taking benefits.
Once you start to collect benefits,
perhaps as late as age 70, your spouse converts to his or her own full benefit,
and as a couple you enjoy increased
Social Security payments—receiving potentially thousands of dollars more over your lifetime.
"Restricted application" for spousal benefits is a similar strategy for boosting
a couple's Social Security income, especially in situations where there is
a notable discrepancy in the benefit amounts of the two spouses. In this case, the higher-earning spouse delays filing for his or her own benefit until age 70
in order to receive delayed retirement credits, while also claiming the spousal benefit on the lower-earning spouse. Although the couple gives up some income in the short term, over time,
the delayed retirement credits earned
will likely make up the difference.
You can file a restricted application for spousal benefits on the Social Security website, but remember that a current spouse must have reached full retirement age in order to qualify. Note one important caveat: widows/widowers, survivors of a
deceased ex-spouse, or a claimant who
is caring for a child (under age 16 or a disabled adult child) who is entitled to
that child's benefits may file a restricted application even though they have not
yet reached their full retirement age.1
In both of these scenarios, delaying
Social Security benefits until age 70
is key to realizing a successful outcome. Therefore, it is important to do some advance planning to ensure other supplemental income (i.e., personal savings and investments, pension income and/or employment income) is available
to you in the meantime.
While these provisions were put in
place by Congress under the Senior Citizens Freedom to Work Act of 2000, they could be overturned at any time. Further, due to the complex nature of these strategies and their potential tax implications, it is prudent to consult
with your financial and/or tax advisor before making any decisions.
1For a full explanation of these and other benefits provisions visit the Social Security website or your local Social Security office, or call the Social Security Administration at 1-800-772-1213.
Tips for Funding a
"Just in Case" Account
A layoff from work. A sudden illness. Major car repairs. A leaky roof. These are just a handful of emergencies that may require you to come up with a significant amount of money in a short amount of time.
Financial experts recommend storing up about six months' worth of net income in a cash account to cover life's unexpected events. But Americans have never been very disciplined about saving for a rainy day. A recent study by Bankrate.com found that only half of U.S. consumers have more savings than credit card debt—and 17% have no emergency savings at all.1
If you are not currently saving or you are saving less—and less frequently—than you would like, you'll need to find a way to build some basic savings habits and exercise them a little every day. Pretty soon, you'll be saving more without even realizing it.
Three Steps to a Disciplined Savings Habit
Here are three quick ideas for giving your emergency fund a needed boost.
1. Make saving automatic. Money you don't see, you don't
miss. Have money deposited directly from your paycheck
to a dedicated savings account or other liquid account.
By putting your savings on auto pilot you are taking the
first step to reinforcing a healthy savings habit.
2. Make and keep a budget. We all have heard well-intentioned savings tips such as, "bring lunch to work," "eliminate your daily latte," and "buy only what's on sale." While these types
of spending choices are important, they alone can't ensure you will meet your savings goals. To do that, you'll need to establish a comprehensive budget that accounts for "must haves" (fixed expenses), "nice to haves" (discretionary spending), as well as savings for the future. In short, a good budget should be a personalized tool that helps you identify areas where you can cut back and maximize your savings effort. Keep the following tips in mind when developing
and using your family budget:
- Start tracking your cash flow. The amount of money coming in and going out each month. Create a simple table or spreadsheet that allows you to record all sources of income and your fixed and variable expenses.
- Involve the whole family in budgeting decisions. Ask everyone for ideas about prioritizing goals and saving money. Post your best ideas in an easy-to-see place like the refrigerator door or a bulletin board. This may make the process more fun for kids and help them develop money management skills.
- Review your budget every few months. Life changes quickly and so can your financial needs. Make any adjustments needed to keep your budget in sync with your personal spending and savings goals.
Think It Through
While three to six months is a good starting point, everyone's situation is different. You may need a larger emergency fund if you have a mortgage, children and/or a non-working spouse.
3. Make use of "extra" money. If you typically receive a tax refund and/or a pay increase or bonus each year, earmark at least a percentage of that extra cash for your emergency fund.
Managing finances on your own can be difficult. A financial professional can help you create a budget that will help you live within your means and build healthy savings habits to address all of your financial goals.
1Source: Bankrate.com, "Only Half of Americans Have More Savings Than Credit Card Debt," February 18, 2014.
More Tax Efficient
When you retire, you may have assets in tax-deferred accounts, such as a workplace retirement plan or an IRA, as well as fully taxable accounts. Which accounts you take money from first could impact your long-term financial outlook.
Investment gains in fully taxable accounts are subject to taxation every year. Yet gains in tax-deferred accounts are exempt from taxation until you begin to make withdrawals in retirement.1 So withdrawing assets from taxable accounts first—and allowing your tax-deferred investments to potentially compound for several more years—may help your money last longer.
Source: Wealth Management Systems Inc. For illustrative purposes only. Example assumes a $700,000 original account balance equally distributed in taxable and tax-deferred accounts. It also assumes a $32,000 withdrawal in the first year, subsequent annual withdrawals that increase to keep pace with a 3% rate of inflation, investments that earn 6% annually, and withdrawals that are taxable at the 28% federal income tax rate. Actual investment results will vary.
Keep in mind that the tax rate imposed on investment gains in taxable accounts depends on how long you owned the assets. Short-term gains on investments held for one year or less are taxed at ordinary federal income tax rates, which can be as high as 39.6%. Long-term gains on investments held for more than one year currently do not exceed 20%.2
This communication is not intended to be tax advice and should not be treated as such. Each individual's tax situation is different. You should contact your tax professional to discuss your personal situation.
1Withdrawals will be taxed at then-current rates. Withdrawals prior to age 59½ may be subject to an early withdrawal penalty.
2The 20% rate on long-term capital gains may apply to taxpayers in the top income bracket. Taxpayers in the 10% and 15% brackets pay 0%, while all others pay 15%. State tax rules vary. Note that these rates do not include the 3.8% Medicare surtax on investment income that may be due for higher-income taxpayers (generally, those with incomes over $250,000 if filing jointly or $200,000 if single).
The opinions voiced in this newsletter are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested in directly.