Do Your Financial Risks Change Over Time?

By
Jeff Motske, CFP®
April 17, 2019
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“Don’t invest and forget.” This is a common sentiment that advisors try to communicate to their clients. We understand the importance of having a solid financial plan, but the plan doesn’t serve you if you set it and then don’t check in with it for years. A financial plan is a living and breathing document. As your life changes, so should your plan because those life changes can cause changes in your goals and your risks.

As you start your adult life, risks are generally low, and timeframes are typically long. You may be single, you may be renting. Should you hit some rough times, not that much may be rocked. This also applies to your investments. If there is a market shake-up, you have plenty of time to wait for the market to correct itself. Therefore, this is the time to be aggressive on your way to financial independence.

However, as your life changes, so does your risk. Perhaps you get married and start a family. Perhaps you buy a house or maybe you start a business. Suddenly, there is more at stake, there is more to lose. Additionally, while there is more at stake, there is less time. There is less time to save, less time to recoup any losses. These changes undoubtedly influence our decisions and our behavior in the market.

This change in risk isn’t done with the flip of a switch. Everyone’s life is different, hitting different life milestones at different times, starting to work towards financial independence at different places and having different goals to work towards. Therefore, computing risk, can be a gradual and complicated process. Working with a financial advisor can help you know when and how to change your risk so that you can steadily work towards the future and protect what you have today.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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By
Mike Loo, MBA
November 2, 2018

In 2015, Americans spent $225 billion on long-term care. That’s 7 ½ times what was spent 15 years prior, in 2000. With the great advances we have made in medicine and medical technology, people are living longer. The downside to that is that it means people are more likely to need care and need it longer. In fact, over half of people turning 65 will need long-term care at some point in their lives.(1)

Types Of Long-Term Care

When you think of long-term care, skilled nursing facilities are probably what comes to mind. However, that is actually the last step in the long-term care journey. Most long-term care is not medical; it is simply assistance with basic activities of daily living like bathing, dressing, eating, and going to the bathroom.

Even without serious medical problems, most people become less and less capable of taking care of themselves as they age. Traditionally, people would turn to family for help with such things. However, in our modern era where families live far apart and adult children are already overburdened with careers and children, more and more people have to pay for long-term care services.

The most basic, and least expensive, form of care is homemaker services. Homemaker services do not involve anything medical, but rather things like meal preparation, cleaning, and running errands. The next step up, which does have a medical component, would be a home health aide.

Once basic in-home assistance is not enough, specialized facilities are needed. Care outside of the home can be in the form of adult day healthcare, assisted living facilities, and nursing homes.

Costs Of Long-Term Care(2)

Costs vary depending on the type of care needed and the part of the country in which you live. On an annual basis, the national average goes from just under $48,000 for homemaker services to over $97,000 for a private room in a nursing home, and that number is growing about 3-4% a year.

Things change drastically when you look at specific locations. In San Francisco, homemaker services are more than 150% the national average and growing twice as fast. A private room in a nursing home averages $171,185 a year. Even downgrading to a semi-private room still costs over $141,000 a year. Twenty years from now, that same semi-private room is expected to cost over a quarter of a million dollars.

As you can see, long-term care can be very expensive, especially with the rise of dementia, where people can live a long time while needing care. In 2018, the estimated lifetime cost of care for someone with dementia is $341,840,(3) and it’s probably much higher in a state like California.

Ways Of Paying For Long-Term Care

Because of the high cost, it is important to plan ahead for long-term care. There are a number of ways to pay for care, each with its advantages and disadvantages.

Medicaid

The vast majority of Americans turn to Medicaid for their long-term care expenses. However, it’s not because it’s a great option. Rather, it’s their only option. In order to qualify for Medicaid, you have to have a low income and low assets, so it’s not really something people plan for intentionally.

Self-Insure

On the opposite end of the spectrum from the people that can qualify for Medicaid are those who have amassed enough wealth to self-insure. If you have $50 million in assets, you can afford to pay $170,000 a year for a nursing home and it won’t have a significant impact on your finances.

The danger is that sometimes people take too great a risk thinking they can self-insure. Often, care is needed later in retirement when savings have already been spent down significantly. Having $500,000 in the bank may seem like a lot of money, but long-term care expenses can eat through it very quickly. Unfortunately, it’s not uncommon for a couple to spend all of their savings on the husband’s care only to leave the wife destitute at his passing.

Life Insurance With A Long-Term Care Rider

One option for those that find themselves in between broke and very wealthy is adding a long-term care rider to their life insurance. If you have, or are planning on purchasing, permanent life insurance, your policy may allow you to add a rider that would help pay for your long-term care costs. Using the long-term care option will often lower your death benefit, but many people appreciate knowing they will receive a benefit even if they never need long-term care.

Premium Paying Long-Term Care Insurance

Another option is buying pure long-term care insurance. Like with most kinds of insurance, you pay a regular premium in exchange for receiving a benefit when you need long-term care. One downside to this for many people is that you will only receive a benefit if you end up needing long-term care. As with car insurance where you have to get into an accident in order to get money out of it, if you never need care, you never see your money again.

Asset-Based Long-Term Care Insurance

The final option has been the fastest growing long-term care option over the last decade.(4) It is a combination of long-term care insurance and single premium life insurance, commonly called asset-based insurance.

The way it works is that you pay a large amount up front and then low annual premiums. You have several times your initial deposit available tax-free for long-term care needs. If you never use it or cancel your plan, you usually get your deposit back plus interest. Some plans even include tax-free death benefits.

Choosing A Long-Term Care Option

Looking at the statistics, you can tell that planning for long-term care is an important thing to do. Failing to do so can be a costly mistake. Because the multitude of options available can be complex and confusing, it’s important to work with an experienced financial professional.

An experienced advisor can explain all of your options to you, help you consider the pros and cons of each, and decide which is the best solution for your particular situation. If you want that kind of help choosing a long-term care option, call my office at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com to set up a no-strings-attached meeting.

(1) https://www.morningstar.com/articles/879494/75-mustknow-statistics-about-longterm-care-2018-ed.html

(2) https://www.genworth.com/aging-and-you/finances/cost-of-care.html

(3) https://www.morningstar.com/articles/879494/75-mustknow-statistics-about-longterm-care-2018-ed.html

(4) https://www.525longtermcare.com/asset-based-ltci/

By
David McDonough
May 31, 2019

It’s graduation season, and there’s an excitement in the air about starting a new chapter. Mixed in with this excitement is an element of stress to make the right decisions: decisions on how things should be done, when they should be done and where they should be done. All these decisions are common, but they often distract from the purpose of what comes after high school.

We need to remember that higher education has a purpose. It’s more than an experience. The purpose of a college degree is employment. It is an investment, and as with any other investment, you should be calculating the return on that investment.  Spending $100,000 for a degree that secures a job with an annual salary of $40,000 is not the best rate of return.

There are plenty of creative ways to get a great college education without breaking the bank. Parents can start a 529 plan, the earlier the better, to help cover costs. Students can begin their higher education at a community college or secure college credit via Advance Placement (AP) exams. Additionally, students need to be sure that the field they are spending their time and energy on is going to reciprocate by providing solid career opportunities.

Making the wrong decision is not simply an unwise financial move. It can have lasting implications. Recent figures show that outstanding student loan debt has reached $1.5 trillion[i]. Our younger generation is not only struggling under this debt, they are also pushing off other personal and financial milestones, such as purchasing a house[ii], getting married or starting a family[iii]. These decisions can have long-lasting and far-reaching consequences.

Lastly, let’s not forget the countless parents who put their path to financial independence on hold to financially assist their struggling children. While wanting to financially help your loved ones is admirable, it helps no one to offer assistance at the expense of your own security. Just like when traveling by airplane, you need to put your own oxygen mask on and secure your safety first before aiding others. There are no scholarships for retirement, and you won’t have a financial safety net for the future if you don’t work towards creating it now.

College is truly an exciting time. Our young adults are learning who they are, where they want to go and how they intend to get there. At the same time, we cannot forget that college is a fleeting moment, one that is meant to arm the student with the tools needed to create a brighter and more successful future. Be sure to chat with your students to ensure that this experience does just that, rather than straddle these students with debt and stress.

[i] https://www.marketwatch.com/story/student-debt-just-hit-15-trillion-2018-05-08

[ii] https://www.businessinsider.com/student-debt-preventing-the-us-from-having-normal-housing-market-2019-5

[iii] https://www.bankrate.com/loans/student-loans/student-loans-survey-february-2019/

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

Disclaimer:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Investing in mutual funds involves risk, including possible loss of principal.

The principal value of a target fund is not guaranteed at any time, including at the target date. The target date is the approximate date when investors plan to start withdrawing their money.

No strategy assures success or protects against loss.

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