Your Insurance … with Brian & Bob – Controlling rising medical costs during your ‘Golden Years’

Published in the January 10 – 23, 2018 issue of Gilroy Life

As baby boomers and older Americans progress through the retirement years, they are likely to find themselves spending less money on certain aspects of living — for example, dining out, travel, and other forms of entertainment. Most will be long past saving for a house or for children’s college education. In fact, many of life’s big ticket expenditures will either be almost paid off or off the balance sheet altogether. There is one exception most are not prepared for completely: health care.

To better understand the concerns related to health care, one must understand why health care costs are rising. With health care costs accelerating at a rate that far exceeds inflation, health insurance plan deductibles will continue to rise and out-of-pocket expenses will too for those who utilize their coverage. With wages and salaries that do not keep up with the rate of health care inflation, many Americans are finding themselves unprepared for the drastically rising costs of health care. In addition, diet and exercise are playing an important role in lengthening our life spans. The 2015 tables for valuation of life expectancy indicate that of healthy Americans aged 65 today, almost five in 10 men and six in 10 women will reach age 90. Chronic illness and end of life medical care expenses should be carefully planned for both emotionally and financially

Long term care is projected to be needed for 3.2 years for men and 4.4 years for women. In fact, 18 percent of women and 10 percent of men turning 65 from 2015 to 2019 are expected to need chronic illness care of five years or more. To further complicate matters, recent studies show that one in three senior citizen’s will die of Alzheimer’s or dementia; which can last years and quickly deplete one’s retirement portfolio putting financial stress on loved ones.

Given that retirement can now last 30 years or more for older Americans, financial advisors should be carefully evaluating three core objectives:

1. Ensure clients have a predictable stream of money for daily needs like food, clothing, and shelter.
2. Focus on achieving portfolio growth for long term needs.
3. Provide clients with enough portfolio flexibility so the plan can be refined to meet life changes in retirement.

There are many ways to create predictable income streams to secure a “foundation” in retirement years no longer funded by wages and salaries. Social Security is the certainly a steady income stream but isn’t a lot of money relatively speaking. Defined benefit pension plans have been a proven supplemental retirement income source for some, but with pensions on the decline, they are available to fewer workers leaving more Americans concerned.

For a portion of a person’s retirement portfolio, many have turned buying an income annuity to help bridge the income stream gap between what they can expect from pensions and social security. The guarantees of growth, protection from market downturn, initial premium bonuses, and nursing home riders can make this financial vehicle a viable alternative to being invested directly in the market.

Cash value life insurance is another financial planning tool that can be helpful in dampening the blows longevity and inflation can play on a portfolio in retirement years. Using life insurance for protected cash growth and tax-free supplemental income can often be advantageous when strategizing how to pay for costs in retirement years. The biggest advantage to these policies is that withdrawals or loans from policies are received tax-free lessening the burden of financial obligations in the form of taxes. Furthermore, certain riders in policies can address chronic illness and long term care needs by advancing a portion of the death benefit tax-free to policy holders. For these reasons many see these types of policies as an asset class, invaluable to their family during years of medical hardship.

If you take away one thing from this column, it should be that proper planning and asset allocation are more important now than ever before.

Bob Price and Brian Harrigan are with Executive Plan Design. Contact them at (408) 767-2572.