Jason and Bob discuss questions and answers about retirement planning.
Below is the full transcript:
Announcer: Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas and strategies designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement. Now here is your host, Jason Parker.
Jason: America, welcome back to another round of Sound Retirement Radio. I’m so glad that you’re here, and it’s my good fortune to have Bob Harkson on the program again with me this morning. Bob is the newest adviser to our team. He’s a certified financial planner. He’s been in the business for a long time.
Bob Harkson, welcome back to another round of Sound Retirement Radio.
Bob: It’s great to be here, Jason.
Jason: I am looking forward to it.
You’re listening to Episode 92. Remember that we archive all of these programs for you. You can listen to them online at SoundRetirementPlanning.com, and we have a new image that we’re going to be using for the radio show for our podcast listeners. You’ll have to let me know what you think there. Instead of looking at my ugly mug, we got a picture of the front of the book on there. I thought that might be more appropriate given that a lot of these concepts that we share over the show is also you can read about them in my book, which is Sound Retirement Planning.
Before we get too far into the program today, I’d like to start the morning right by renewing our minds. I have a verse here. This comes from John 15:9. It says, “Jesus says, ‘As the father has loved me, so have I loved you. Now remain in my love.'” All right. That’s awesome.
Bob, I tasked you with coming up with a joke for this week. What do you have for us?
Bob: It’s an oldie but a goodie. How do you keep a rhinoceros from charging?
Jason: How do you to it?
Bob: Take away his credit card.
Jason: Yeah, you’re going to fit in real well around here, Mr. Harkson. “Take away his credit card.”
All right, you’re listening to Episode 92, more of a retirement question and answer I guess you would say. A lot of the questions that we hear from people over the years, and we’re just going to try to hammer through these things, Bob. We get about 25 minutes, so let’s try to answer as many questions as possible in the next couple of minutes.
Bob: Sure. One of the questions I wanted to pose to you, Jason, was that I had a client one time tell me that they were listening to the radio at a financial show. They said, “If you have lots of income and have significant retirement savings, you really don’t need to purchase a Medicare supplement policy.” I was wondering what you thought about that.
Jason: I love that question. It’s similar to the kind of argument that people make against long-term care insurance. They say, “I have plenty of assets. Why buy insurance?” You don’t hear this as often with health insurance as you do with long-term care insurance, because of course the argument with long-term care is, “It’s never going to happen to me.”
Most people know, Bob, that Medicare, it doesn’t cover 100% of the costs associated with your healthcare needs. It’s 80/20 insurance. They cover 80% and you’re responsible for the 20%. Most of the people that we work with choose to buy a Medicare supplemental insurance for that 20% of cost. There’s more options for people today than there were just even ten years ago, because now not only do we have traditional Medicare supplemental plans to choose from, but they also have Medicare Advantage plans to choose from. Those can vary significantly from county to county. Premiums can be very significantly different. The nice thing about the Medicare supplemental plans, the traditional plans, they’ve been around a really long time.
Here in the sunny state of Washington they are standardized, so all of the companies basically offer the exact same plan. That’s really what I’m the biggest fan of. I do recommend people consider Medicare supplemental insurance for that 20%, because if you end up with a million dollars worth of healthcare expense, which you can do that these days … I’ve even heard about some prescription medications that can get you pretty close to a million dollars, and you don’t have insurance to cover that or maybe only cover 80% of it, and all of a sudden you have to figure out how to come up with $200,000 cash. Most people would rather pay $200 a month to make sure that they never find themselves in that position.
What’s your takeaway? You’ve been doing this a long time. What do you think is the solution there for supplemental insurance?
Bob: I think its education. Oftentimes people who don’t have large retirement assets fail to purchase it or know that it’s available and then have a hospitalization and be presented with a huge bill and put them in a real financial bind. I had a client who had a mild stroke and forgot to pay her premium and didn’t have it, and all of a sudden there are huge bills from the hospital. I think in either way to make that some sort of gap plan or advantage plan a part of your retirement plan.
Jason: One of the things our listeners want to remember too, and one of the things I would say is, we refer a lot of people to experts in this area of health insurance and Medicare supplemental insurance. It’s not something we do in-house. We’re not helping write these types of policies. There’s a lot of nuances you want to be careful with. We have a couple of resources we can refer people to. There is an open enrollment period with those where if you enroll a couple months before your 65th birthday and a couple months after there’s no health qualification, so it’s a guarantee issue in the state of Washington. I don’t know if that’s the case with Medicare supplemental around the country, but in the state of Washington it’s a guarantee issue. You don’t want to miss that, especially if you have some health issues going on. You want to get that supplemental plan in place while you can.
I know with the Affordable Care Act maybe some of that’s changing because healthcare is changing. It seems like anybody can get health insurance now. If you’re getting it during an open enrollment period, there’s a lot of changes happening with how that works.
Bob: One of the great things of working with somebody who has expertise, particularly one that carries multiple companies … I’ve worked with a company in the past where they will keep you in tune. For example, if the premium is going to go up in your current plan but not on another plan that has the exact same coverage during open enrollment they’ll suggest you make the switch and you can save some money. Having a relationship with someone like that who understands how the plans work, help you make the choices.
Another thing is that if you’ve got some expensive prescriptions, you want to pick your plans really carefully, because the out-of-pockets can be very significant on some of those if certain plans don’t cover them and certain do. You want to look at the cost of that medication, because some of these medications they have, like for arthritis, can be $2,500 a month, so you want to be absolutely sure that you pick the right plan that’s going to lower your overall cost of health insurance.
Jason: I’m a big fan of Medicare.gov. They’ve got some really great calculators on there for people to go in. They can put in information about the medications they’re taking. This calculator will show you all the different plans that are available, all the different prices that are available. It’s really pretty amazing actually. As long as you’re comfortable getting on the computer and clicking through a couple of yes/no, maybe so kind of questions, is really a helpful tool, not to just evaluate prescription drug plans but Medicare Advantage plans and traditional Medicare supplemental, at least maybe a good starting point for people.
I’d encourage you, if you’re getting ready to turn 65, that’s the magic number for Medicare. Go to Medicare.gov and check out their website and start to educate yourself. Then when you’re ready to really talk to somebody that’s an expert, you can reach out to us, and if we have a resource that’s in your neck of the woods we’ll try to point you to somebody that could maybe help give you some counsel there.
Bob: You bet. Another very common question and it’s bantered about a lot is, “Should I buy long-term care insurance?
Jason: Long-term care insurance. I’m glad you brought that up. That is one of those questions where you just can’t give a plain vanilla answer to it unfortunately. It has to be appropriate for everybody’s situation. I will caution people that I’m a fan of long-term care insurance. I own it myself. I think it makes sense if you have assets to protect and you’re in good enough health you can quality for it. If you can afford the premium without it changing your lifestyle, I think long-term care insurance is something that a lot of people that haven’t considered it probably should.
The reality is, Bob, there’s a high probability that, I think Medicare’s recent report said that if you live to age 65, if a married couple makes it to age 65, there’s a 70% probability that at least one of those people is going to end up needing some long-term care. Again, long-term care in a facility around here is expensive. It could be $10,000 a month to go into a nursing home, and you could instead of paying $10,000 a month you could pay $2,000, $3,000 a year for insurance or maybe a little bit more. It all depends on how old you are at the time that you buy it.
To be able to really answer the question of whether or not you buy insurance, you’ve got to have a plan. A retirement plan helps us stress test against those types of concerns, and we say, “Okay, if you end up needing long-term care, what impact does that have on your cash flow? What impact does it have on your spouse?” Then we use that data to say, “You should own long-term care insurance, or maybe you shouldn’t own it. Maybe you have plenty of assets. You don’t have to think about that.”
Generally speaking, unless you have at least two to three million dollars that you’re not going to use, and that’s the key, because a lot of people today, if they have two to three million dollars, they’re planning on using that money to supplement their income. If you have two to three million dollars that’s not earmarked for retirement income, it’s separate money, it’s extra money, then you might have enough to self insure that risk. Even then some of the wealthiest people I know buy insurance all the time. They buy it because they understand risk mitigation. It’s not an investment to them. It’s just they would rather pay a small amount of money in premiums than have a big chunk of money come out in expenses.
Again, in my book I have a whole chapter on long-term care and some of the different questions you should be asking, but there’s a lot of denial around the subject, Bob. A lot of people, they say, “I’m healthy. I eat right. My parents never needed long-term care. So therefore it’s not going to happen to me.” I would just say that people are living longer. Medicine and science and technology is getting better all the time. I think there’s a pretty good probability … Medicare says there’s a pretty good probability that you could end up needing some care.
I know that you’ve had a little bit of experience with The Partnership Program that’s available in our state and some other states around the country. Do you want to just touch on what The Partnership Program is?
Bob: If you purchased long-term care insurance after 2006 what the plan says is you take the total … People are sometimes concerned that what if they spend all the benefits and the insurance runs out.
Jason: Because long-term care insurance doesn’t last forever.
Bob: It doesn’t last. It’s not an unlimited policy. There are very few of those and not being written anymore.
Jason: Even if they were, you generally don’t recommend that you buy that kind of policy.
Bob: The expense gets…
Jason: It’s the Cadillac of insurance.
Bob: The Cadillac. It would be very, very high. What the state of Washington has done and several other states, it says if the insurance company, if you spend your whole benefit, let’s say the insurance company pays out $300,000 on your behalf, then that portion of your estate is preserved for your heirs, and so once you spend down your current assets down to whatever that amount was, 300,000, then you automatically qualify for Medicaid and the state takes over. The purpose of that plan was to encourage people to purchase long-term care. In the states that have implemented, they’ve actually lowered the cost of the expense on Medicaid, the state output to pay for Medicaid. It’s a win-win type situation.
Jason: The state wants to encourage people to buy insurance because the state’s biggest expense is Medicaid. Everybody’s going broke trying to pay for healthcare.
Bob: Absolutely. We treat it like it’s some sort of entitlement, and the thing is it’s not sustainable. The other thing with long-term care insurance is you get a choice of where you get cared for. The new plan is just not about nursing homes. It’s about being cared for at home or in an assisted living facility, or like my dad right now, he doesn’t have long-term care, but it will pay for an adult family home in a residential setting.
Jason: Some will. Not all policies. Again, there’s an area where we refer a lot of people on long-term care, because I think if you’re going to look into it you want to work with somebody, that’s all they do all day long, because there’s a lot of different companies. There’s a lot of different options. There’s a lot of moving parts. There’s a lot of different underwriting requirements.
Jason: There’s another area that we refer a lot of people when it comes to making that decision. Initially, what we want to do is the retirement plan to see, does it makes sense, should they consider it, is it affordable, is it suitable, do they have assets to protect, can they afford the premiums. If we answer yes to all those, then we’ll put them in touch with a facility that specializes in long-term care insurance.
Bob: Affordability is critical.
Jason: Not just now but you’ve got to be able to afford it for the rest of your life. It’s not a one-time shot.
Bob: Fortunately, most of the plans will weigh the premium once you’re in care.
Jason: One of the things we should talk about too, insurance companies are savvy. They understand that people want different types of plans. One of the things that we’ve seen them come up with over the years are these hybrid policies where sometimes they’re structured on life insurance where you can buy a life insurance policy. Then if you end up not needing long-term care, you have a death benefit that’s paid to your heirs, but if you need long-term care, then it leverages your money. You actually get to access the death benefit. We’ve also seen there have been annuity contracts that have been structured in similar ways. I call those have-your-cake-and-eat-it-too. Again, this topic that I touch on lightly in the book where some of these new hybrid strategies for paying for long-term care rather than just buying more of a traditional insurance policy.
Bob: Absolutely. I think if you’re thinking, “I’m going to set money aside for long-term care,” oftentimes you can leverage that money significantly with the same funds, and double and triple the benefit that the company will pay out for care. If it’s like, “I want to leave that to my kids. I don’t want to spend it on insurance,” then you can do both. If you do need the insurance you have access to it.
Jason: It’s not bad if you’ve got, especially, generally speaking, unless you have at least, at least $50,000 that you can just set aside, that’s really probably not the best planning solution for a lot of people, but if you have at least $50,000 that you’re willing to park and say, “This is my emergency fund” and you want to leverage that up a little bit to protect against long-term care or dying, some of those policies can be effective.
Bob: Absolutely. Another big topic we hear is about annuities. There’s a lot of talk about that. The question I want to ask you, Jason, is are annuities a bad thing to own? Are they neutral? How do you feel about that?
Jason: They could be. The problem I have … I was just talking to a guy about this recently. Annuities can be both good and bad. It’s like anything. Any financial tool, you’ve got good and bad out there. Unfortunately, though, there are some guys out there that that’s the only financial tool that they have available to them. If there’s guys out there that are insurance licensed and the only financial product they have is an annuity, well, guess what they’re going to recommend to you every single time. It’s always going to be an annuity, because that’s the only thing that they can work with.
I don’t think that the contracts are bad necessarily, but I think sometimes they’re sold to people that don’t really need them. At the same time if you get a room full of economists together, they will probably disagree on just about everything. You ask a room full of economists what they think about using something like a single premium immediate annuity to help create an income floor, and you’re going to be hard-pressed to find the academic world that says that that’s a bad idea. It’s actually a very fee-efficient way to generate cash flow and to create a lot of certainty within a spending plan.
Actually, I think it helps people spend more money. Some of the research that’s coming out says that you actually can spend a higher percentage of your overall assets if you do annuitize some of the resources. Annuities are one of those tools, Bob, where you just got to be careful. You really have to work with somebody that you trust, that’s going to help you evaluate the contract. They’re going to help you understand the pros and the cons of the contracts. If somebody’s only telling you about the good things, you’re probably not working with the right person. A good adviser is going to say, “Here are the pros. Here are the cons. Here’s why I’m recommending it as part of your plan, and here’s where it fits in, and this is why it’s appropriate.” You just want somebody that’s going to give you the scoop.
On the same note, there are some guys out there, Bob, that say, “I hate annuities. I never recommend annuities, and nobody should ever use an annuity.” I think they’re really doing people a disservice, because basically if you say that, what you’re doing is you’re just basically throwing out an entire asset or entire planning tool for people, and you’re saying that all people’s money should be in stocks, bonds, mutual funds, ETFs or cash or bank accounts. To be that close-minded, I don’t think you’re really doing … You’re not serving in a fiduciary capacity where you’re saying, “I’m going to look and evaluate at all of the different things that are available and then recommend to people what’s truly in their best interest based on their risk tolerance and their goals and objectives.”
With annuities you want to understand fees. You want to understand surrender charges. You want to understand how the contract works, what are the guarantees. I always like to say, “If you’re going to buy an annuity, buy an annuity based on the guarantees, not the “What if’s,” because sometimes some of these “What if” illustrations, they look really good up front, but what’s the bottom line? What’s the guarantee? We’ve seen some annuities that are good. We’ve seen some annuities that are not so good. Again, I would just make sure, don’t just buy something for the sake of buying it. Buy it because it’s part of an overall comprehensive plan. An annuity can be a good tool for generating cash flow in retirement. That’s really what they’re designed for.
One of the reasons for that, Bob, is because they have mortality credits associated with them. The insurance companies are the only ones in the world that can actually, number one, use the term, “Guarantee” when they’re talking about income. You can’t guarantee income from a mutual fund or an ETF or a stock or a bond. They can use the term, “Guarantee,” but then they can also pool life expectancy. Insurance companies are pretty good at knowing some people are going to live a long time and some people are going to live a short time. As a result, they end up actually being able to pay out more money to people because of those mortality credits.
By the way, on another side-note there, mortality credits just got more expensive at the first part of January 2016. Every several years the insurance companies are required to reevaluate life expectancy. This most recent update showed that people were living about two years longer, and so as people live longer, insurance contracts become more expensive.
The other thing you’ve got to be careful of in this environment is we’re in a low-interest-rate environment. Insurance companies, when they take premium, and they’re generally buying fixed income, they’re buying bonds of some sort. In most cases that’s what their reserves are made up of primarily, and so in a low-interest-rate environment annuities, while they still can be attractive from a cash flow standpoint, especially when compared to something like money markets or CDs, compared to what they were ten years ago when interest rates were higher, they’re not as attractive just because there’s that correlation between interest rates and annuities.
That’s my two cents on annuities. What about you? You’ve been looking at these things just as long as I have. What are your thoughts about annuities and all the different types that exist?
Bob: There’s a distinction between annuities. There’s a deferred annuity where you put money in or continue to put money in. It defers and at some point you turn it into an income stream. Then there’s what’s called single premium immediate annuities, which is you take a lump sum and you purchase basically a pension. It could be for a period of time. It could be through two lives. It could be a lot of creativity that could have some guarantees. I met with an airline pilot, and his retirement from the airline was an annuity from an insurance company. You get regular paychecks every month, $6,000 a month for the rest of his life and through his wife’s life. They can really provide some stability and consistency to your income so that your basic needs are being met.
The other thing is if you have an annuity, don’t panic but get somebody who’s an expert at it to evaluate it, look at it, and explain what it is. There are some annuities that were written in 2006, 2007 that have wonderful benefits and you may not want to get rid of. Don’t listen to what your friend said they read on the internet, but talk to somebody who knows something and walk through the contract you have and have it explained to you. I’ve had clients come in and showed me something and said, “We don’t understand it. We don’t know if we did the right thing.” I said, “I wouldn’t get rid of this one, because it’s got some great income. You can’t do that anymore. They don’t make those kind anymore.” Be careful.
Jason: It all gets down to what’s the purpose of the money, what it is that we’re trying to accomplish. If an annuity is going to help people accomplish that and they’re comfortable with the fee structure, they’re comfortable with all the nuances within those contracts, then that’s what they should do. At the same time, though, Bob, if somebody comes in and they say, “Jason, I just don’t like annuities. I like stocks and bonds and mutual funds and ETFs and that’s all I want to use,” well, then let’s help people do it the way they want it done.
Jason: I’m product neutral. I don’t care what people use.
Bob: The issue is they need to be comfortable and like what’s presented to them and that meets their needs. That’s the key.
One question is, I’ve had several of these come in. People say, “I’ve heard that if you’re really good at managing investments you really don’t need a financial adviser in retirement.”
Jason: I would say that’s true for some people. Some people are number crunchers. They’re engineers. They love spreadsheets and they’re very confident. I would say that’s probably the minority of people, but there are plenty of people we’ve met with over the years that just come in, they just want to get a second opinion. Maybe they want to pay us a flat fee to create a plan for them, but they want to continue managing their investments, but it never hurts to get a second opinion.
For some people it’s their hobby, Bob. I know, I met this one guy, he likes going down to Mexico and sitting on the beach with his laptop day trading. I’m never going to be the right adviser for him, because that’s not the type of philosophy that we recommend to people. In fact, most people that we meet, they want a greater sense of freedom in their life. That’s like their worst nightmare is to be on vacation being on their computer all day long managing their investments, but for some people, that’s what they love. That’s their hobby. If that’s what makes them happy in retirement, then I don’t want to take that away from them.
I think there is some value in saying that because of the experience that we have, we’re working with people all day long every day that are asking similar questions, and so we’re researching the best answers to those questions. We just have that experience to draw from that most people in this real life experience … It’s not just an article on the internet or an article in a magazine. This is what are the real impacts to people’s lives.
Bob: The wisest piece of advice I ever got was when I started this business. My mentor early on said, “Bob, you don’t know what you don’t know.”
Jason: Bob, and just with that, we are out of time. Until next week, signing out.
Announcer: Information and opinions expressed here are believed to be accurate and complete for general information only and should not be construed as specific tax, legal or financial advice for any individual and does not constitute a solicitation for any securities or insurance products. Please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program. All insurance related discussions are subject to the claims paying ability of the company.
Investing involves risk. Jason Parker is the President of Parker Financial, an independent fee-based wealth management firm located at 9057 Washington Avenue NW, Silverdale, Washington. For additional information, call 1-800-514-5046 or visit us online at SoundRetirementPlanning.com.