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Safe-Money Strategies
Did you know that innovation in the financial services industry has made it possible to partially benefit from the stock market’s advances, without losing those credits during a subsequent decline? It’s true, and these remarkable and popular savings platforms—known as Fixed Index Annuities—have been available since late 1994. If ever there was a decade that dramatically demonstrates the ingenuity and suitability of FIAs—especially for retirees—the “Lost Decade” of 2000–10 is it. Take a look at the chart below. The red line shows the change in valuation (dividends excluded) of the S&P 500 index from the annuity owner’s contract inception date of 9/30/98 through each subsequent contract anniversary date through 9/30/09. The blue line represents their actual contract values during the same period.
While the differential above is impressive, three points bear making. The first is that FIAs are not designed to out-earn long-term bull markets, since they will only credit some, often most but never all, of an index’s advance, in exchange for never losing those past interest credits during a subsequent collapsing market. A second point that bears explaining is that during those years when the market declined, the client had the annual option to reallocate some or all of their account to a Fixed Interest option within the annuity, an option then yielding perhaps 3 or 4% simple interest. In lieu of the “zero interest credit” they received—one that is certainly preferable to a 30% devaluation—the annuity owner could have grown their account by better-than-CD rates of interest, resulting in an even higher end value than the one shown. The third point to be made about the chart is that the blue line represents a 1998 product-year annuity, one that is no longer available in today’s market. In fact, finding something similar would be the equivalent of finding a current-year Model T at a Ford dealership today. That blue line is an antique, when compared to the state-of-the-art FIAs available today, platforms with as many as 7 different market indices to choose from (not just the S&P 500), in any combination, along with the ability to reallocate or change that mix each year. In addition, there are now at least 3 different interest-crediting strategies to employ across those indices, and varying terms, some of which include up-front premium bonuses of 5, 6, 10, and even 11%. Bonus products require longer terms of course, but have been especially popular with retirees fleeing risk-depleted holdings for the stability, guarantees and safety of FIAs, and who use the bonus to get back some of what they lost while in stocks/mutual funds. In short, were today’s highly evolved, state-of-the-art Fixed Index Annuities available back in September of 1998, it’s reasonable to conclude that this client’s ending value would have been considerably higher, making the vehicle even more attractive to retirees seeking more age-appropriate holdings for their savings and investments. A final point: Age-appropriate investing has another component. Beyond the obvious risk/time horizon concerns of complex and speculative holdings, there is an even more important factor that retired couples need to consider, that of a growing preference for simplicity the older we get. Over the last 20 years in private practice, our associates have observed many couples suffer losses, confusion, and frustration when the “money person” in that marriage suffers a stroke or other debilitating illness. Virtually overnight, that less-involved-in-the-finances spouse now becomes both a family care-giver—with all of the time and devotion that requires—as well as the new “portfolio manager” of the couples’ complex, and still-at-risk holdings. Invariably, they’ll end up selling and buying at the wrong times, often with avoidable tax consequences, and even a dutiful and watchful adult child is often too busy with children and their careers to oversee the funds with the same vigilance their spouse once did. At Senior Financial Resources, we have met with countless couples after the fact, couples who delayed simplifying their holdings until after either a major loss—or worse—a major life-altering health event. If simplifying your portfolio is so obviously preferable, doesn’t it make sense to do so when both spouses still have their health and their wits about them, when they can do so together? We believe so, and encourage all retired couples to consider shopping for a Safe-Money advisor sooner rather than later.
Wealth Transfer Strategies
“If we could show you a way to double, triple, perhaps even quadruple the monies you now have earmarked for your children, right away, without market risk, income tax-free to your children, is that something you’d like us to include in our recommendations at our next meeting…?” We’ve asked this question of new clients hundreds of times in the last 20 years, and have yet to hear an objection. Having implemented many such innovative strategies on behalf of our clients, we can assure you that they and their heirs have been provided financial choices, generous endowments, and peace of mind. These sums have been made available for everything from trust distributions for income and college funding, to charitable bequests and legacies. The grandchildren of modest, middle-class retirees have had medical school tuition paid for them, and the adult children of high net worth parents have been given the means to pay for estate taxes on their parent’s estate, without having to borrow against or liquidate assets in a buyer’s market. At Senior Financial Resources, we believe retirees and their heirs should have every choice, every benefit, every tax advantage, and the most cutting-edge strategies available to them. To learn more, call us today.
Long Term Care Planning
The Problem: The wave of baby-boomers that will begin receiving entitlements in 2010 is unprecedented in American history. As medical advances are keeping our bodies alive longer than ever, advances in treating dementia, stroke, Alzheimer’s disease and other mentally degenerative illnesses have been slower in coming. It is now commonplace for a man or woman to suffer a debilitating stroke at 68—and live well into their 80s (2) requiring full-time supervision and medical care. A situation of this order can deplete an entire lifetime of savings, leaving the healthy surviving spouse dependent on Medicaid in her/his later years. Any inheritance that couple may have planned on leaving their adult children will have been spent, and their primary residence will be have a Medicaid lien placed upon it—equal to the amount of care paid by the taxpayers—after the second spouse’s passing. This often forces their heirs to either mortgage or sell their parent’s home to pay these debts. The Statistics: While most of us have owned auto and homeowner’s insurance throughout our lives, the purchase of long term care insurance has been far less commonplace. Statistically, Americans have only a 1-in-1200 chance of needing to file an auto-insurance claim, an even more remote 1-in-1800 chance of filing a homeowner’s insurance claim, and yet the premiums we pay for these insurances are accepted as part of our everyday lives for decades. In contrast, the odds of our needing some type of long-term care after the age of 70 are an astounding 2-in-5, yet some couples still hesitate to purchase this important coverage, in part because it’s a new reality in need of acceptance, and an expense that they’re reluctant to add to their retirement budget. In context, however, embracing this critical coverage usually amounts to devoting less than 0.5% of one’s net worth annually, to ensure that the other 99.5% of their assets do not get spent down caring for a spouse after an illness. LTCI is first and foremost asset insurance, not “nursing home insurance”, since it insures assets and provides care options elsewhere (home care, assisted living) than just in a nursing home. An uninsured couple—at the mercy of what Medicaid will cover after they’ve spent their own funds down to the poverty level—is unlikely to have such care choices. Policy Features: Today’s policies include innovations that those of just a few years ago did not. Features such as a family care-giver training allowance, return-of-premium rider, third-party pending lapse notification, and home-modification benefits (coverage for the installation of handicapped toilets, ramps, and remodeled/widened doorways), are just a few of these. Insurers are evermore aware that we would all prefer receiving care at home, in familiar surroundings, at the hands of a loving spouse, than 80 miles away in an impersonal setting not of our own choosing. Unfortunately, many insurers have taken the plethora of available “bells and whistles” to such heights that an unsuspecting applicant, scared by a salesman into believing they need every such feature, will sometimes purchase a policy that they later lapse due to an inability to afford it after the scare of the sale has worn off. At Senior Financial Resources, we believe that a policy should be designed, not sold, that it must contain relevant benefits that a couple will actually use, and that the premium must be affordable well into the future. What good does it serve to “pile on” benefits, only to have the client lapse a policy they can’t afford three years after purchase? Once lapsed, they may no longer be medically insurable for a more-relevant and affordable policy, as any changes in their health and insurability will have driven their premium cost higher still. We believe that “it’s always better to solve some of a problem than none of it”, and that the best coverage includes those features that a couple is most likely to use. When you meet with us, please be prepared to consider the following questions to help us research and design the best coverage for you:
We look forward to assisting you in the important decision to finally insure your retirement against the single biggest threat it faces: impoverishment due to a combination of sudden and devastating illness, and an ever longer life expectancy. Give us a call today.
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