The long list of risks facing today’s retiree is enough to strike fear into even the most-prepared among us. The risk of another major stock market decline looms, an unprecedented level of government debt threatens the very underpinnings of our economy, not to mention growing taxes, and a weakened Social Security system. As if that list isn’t enough to contend with, we have to consider inflation for our clients. They’re thinking about it, so we had better be proactive in talking about it and preparing them for the worst.
If you research the subject of inflation-fighting investments, you’ll discover countless articles that tout inflation hedges such as TIPS (Treasure Inflation-Protected Securities), Commodities, Real Estate, and equities. All of these investments have demonstrated positive correlation to the rise in consumer prices. In other words, when prices rise, these investments tend to go up. Problem solved, right? Actually, that depends: Who exactly is your client and how are they planning to spend their money in the future?
If you work with retirees, you may want to dig a bit deeper before dispensing the standard investing advice. According to the Bureau of Labor Statistics’ Consumer Expenditures Report, retirees spend less in almost every spending category as they move throughout retirement than they did when they began retirement. The exceptions? Housing spending remained stagnant as a percentage of income, and the other change – you guessed it – health care. In fact, the “retirement smile” spending curve, demonstrating a consistent reduction in spending throughout retirement, only trends up (thus forming a smile-shaped spending curve) at the end of life because of the steep rise in medical spending.
What this means is the inflation fears that retirees have (and we should be planning for) are driven almost exclusively by medical costs. The standard list of inflation-fighting investments is thereby missing a notable entrant: long term care investments. For if we don’t allocate resources to long term care, aren’t we neglecting the very cause of the inflationary effect of our retired clients real spending?
Consider sharing these four distinct options with your clients for funding their long term care costs:
Self pay – Choose to pay for any care needs out-of-pocket or from investment assets and/or spend down those assets until Medicaid begins to pick up the tab. It may be possible to do some legal estate planning to move assets out of the client’s estate to avoid a full spend-down before qualifying for Medicaid. Consult an estate planning attorney to ensure this is done correctly.
Buy traditional long term care insurance – Purchase policies that are designed to pay for your care during your life. Unfortunately, this type of long term care insurance typically leaves nothing to loved ones after death. If you’re fairly certain that you’ll be a long term care candidate, and still qualify medically, this can still be a very effective strategy for getting help with your care needs.
Link long term care benefits to a life insurance policy – By using a specially designed policy, there will be a pool of money available to pay for long term care expenses. If no long term care is needed, a tax-free death benefit passes to your loved ones, meaning the money was not lost to the insurance company.
Link long term care benefits to an income annuity – The Pension Protection Act of 2006 enabled certain annuities to have an “income doubler” that will enhance your guaranteed income payout by a factor of two for up to five years when qualifying long term care is needed. The effect, like the long term care-linked life insurance, is one where you actually get the use of your money whether you need long term care or not. If you don’t use the annuity income or long term care benefits during your life, your beneficiaries receive the money.
Because some of these options were newly-introduced within the last few years, the landscape has changed, as have the conversations surrounding long term care. It’s no longer a use-it-or-lose-it proposition.
For people who live to age 65, there is a 40 percent chance of becoming a resident of a nursing home. If this happens to your client, how will they be paying for it? It’s your job to find out.
It’s not enough to discuss inflation-fighting investments if we’re not helping our clients become clear about the true cause of inflation. While long term care insurance is not the only possible remedy for health-care induced inflation, avoiding the conversation leaves families exposed to their most costly risk in retirement.
By simply using the list above in your conversations and newsletters, you will initiate new and very powerful planning discussions in your practice. Even if you don’t have all the answers right away, pledge that you’ll become their advocate and their inflation-fighting hero. They may owe you a huge debt of gratitude if you simply take the first step.