Asset based long-term care insurance as an alternative to traditional long-term care policies

Asset based long-term care insurance as an alternative to traditional long-term care policies

One thing I hear a select group of senior retirees lament is that they feel they have put “so much money” into their long-term care insurance policies and, as yet, have received little or no benefit.

Some wonder, as they continue to pay premiums, whether they will ever see a return for the dollars they have contributed. Others speculate that they may have done better had they invested their premiums rather than handing them over to an insurance company.

A few thoughts about such concerns.

So far, these particular folks are fortunate in that they have not had major expenses for extended care. It seems fair to say that, at least for this, they should be thankful.

Another point is that anyone’s circumstances can change quickly. The unhappy premium payer of today may face the spectre of extended care costs tomorrow. One would expect such an individual to become a reformed believer in the value of his or her policy as a key form of protection.

Regardless, there seems to be a disconnect with how some people perceive the ongoing value of their long term care policies. By contrast, most of these same individuals have never filed a major claim under their homeowner’s insurance.  Yet, I seldom hear similar complaints about having “paid all that money” over the decades with so little to show for it.

What if there were a way to solve this problem?

What if the “bottomless pit effect” which leaves insureds feeling like they keep paying and paying, yet receiving little or no benefit in return could be eliminated? 

In my humble opinion, there is an answer.

It is called “hybrid” or “asset based” long-term care insurance.

Asset Based Long-Term Care Insurance

When the first long-term care insurance policies were introduced decades ago, they were new to everyone, including insurers. Companies tested many different plan options and actuarial assumptions to price policies affordably and effectively.

In some cases, insurers underestimated their future costs and ended up having to raise premiums. Over time, the shape and form of long-term care insurance has continued to evolve.

On August 17, 2006 the Pension Protection Act (PPA) went into effect and changed the long-term care insurance landscape even further.

Importantly, the PPA opened the door for insurance companies to offer riders on qualifying life and annuity policies to provide tax free withdrawals for the purpose of funding certain long-term care expenses.* This set the stage for the introduction of new “hybrid” or asset based long-term care policies.

Under the right circumstances, such policies can serve as an alternative to traditional long-term care insurance policies.

Here are a few characteristics of asset based long-term care insurance,

  • Asset based long-term care insurance is a life insurance policy or annuity that includes a rider (or riders) which expand coverage to include qualifying long term care expenses.
  • In general, if you don’t end up using the policy for long-term care expenses, you won’t “lose” the money you put into it. This is the case because the underlying policy can still carry out its base function as either an annuity or a life insurance policy.
  • If benefits are never needed, either the death benefit of a life insurance policy, or accumulated funds of an annuity can be left to heirs.
  • Insureds can live a long life with the certainty of having coverage and without the anxiety of constantly shelling out premiums.
  • Most policies require a fixed, upfront premium to be paid, though some contracts may allow for annual contributions.
  • Internal funds grow on a tax-deferred basis and qualifying long-term care expenses can be paid on a tax advantaged basis.
  • At least one insurer offers a policy that can be purchased jointly. This allows both individuals in a couple to benefit from coverage under a single policy.
  • Depending on the contract, additional riders may be available to provide protection for inflation as well as other extended benefits.
  • Asset based policies are medically underwritten, but some individuals may find it easier to qualify for certain types of these polices.

Moving dollars from one pocket to another

Where appropriate and as part of a comprehensive plan, asset based long-term care policies can provide an opportunity to leverage low-risk nest-egg funds to safeguard against the cost of extended care.

  • Conceptually, funds shift from “one pocket to another”
  • A portion of dollars allocated to safe, low-risk positions – such as cash, intermediate and/or long-term bonds – are reallocated into asset based long-term care insurance.
  • If long term care benefits are not needed, these repositioned funds serve as added support for legacy planning.

Long-term care insurance is not right for everyone and there is no one-size fits all solution when it comes to choosing a policy. If you live in the Cincinnati, OH area you are welcome to contact me through my agency to discuss the suitability of such coverage for your situation.

For readers in other areas, an excellent resource is the American Association for Long Term Care Insurance. Their website has a trove of great articles as well as links for finding an advisor, if you need more help.

Think a long-term care event will never happen to you?

Do you believe you are invincible?  If somehow it turns out you’re not, can you guess who will have the most to lose if you fail to make a plan for long-term care? This article explores the answer: If you were sick or disabled, who would chew through a wall to take care of you?

*Note: Neither I nor my agency provide investment, legal, or tax advice. If you need help with such issues, be sure to consult with a qualified advisor. 

The 60 Second Retirement Plan

While no one plan fits every situation – and you should certainly spend more than a minute formulating an actual plan – the hardest part about anything is getting started.

If this motivates you to take your first step, its worth it.

1) Lower your expenses. Don’t let your upkeep be your downfall. Get rid of debt. If you plan to downsize, do it sooner than later. Don’t bum out about downsizing. Even if you’re rich, “simpler” is better and you’ll likely be happier anyway.

2) Use “guaranteed” income to cover BASIC living expenses. This will keep you from blowing your nest-egg on groceries. There are basically three types of guaranteed income: social security, pensions, and annuities. Figure out your basic bills, and pay as many of them as possible using guaranteed income.

3) Protect against healthcare costs. Attend a Medicare “educational event” and learn how Medicare actually works. Medicare educational events are free and presenters aren’t permitted to try and sell you anything.

4) Plan for “extended” or “long-term” care expenses. Who really loves you and would drop everything they were doing to take care of you? Without a plan this is the person who ends up getting hurt the most! Learn about “asset based” long-term care policies. Underwriting is easier and heirs can get your money back if you don’t use the coverage.

5) Protect against inflation. If you follow STEP 2 and cover your BASIC expenses with guaranteed income, you can leave more of your nest-egg in growth mode. This affords you a critical hedge to protect against inflation over time.

6) Study and focus on fulfillment. It’s not only how long you live, but how well you live. Stay productive. Keep learning. Keep experiencing. Be grateful. Make the most of each day and don’t become a curmudgeon. Set an example and age with grace.

Questions, thoughts, comments? You can reach me directly here or by posting a comment below.

Here’s wishing you a secure and happy retirement!

My biggest reason for loving the Paleo Diet

I recently came across a book in a dollar store that may end up making my all time top ten best list. The book is, Your Personal Paleo Code, by Chris Kresser. I had not heard of Chris before, but flipping through the pages, my first impression was, “Wow! Whoever this guy is, he worked his tail off on this book!” So, I thought, for a dollar, I’d give it a whirl.

It is funny how some of the most valuable things we find in life are stumbled upon. More than once I have, by accident or luck, found something that later became life changing. I suppose the lesson here is to always remain curious and on the lookout for hidden value.

I brought the book home and started reading it.

Long story short…it blew my mind!

I had heard of Paleo dieting before, but mainly as a ‘socio-political’ issue. This was the first I had heard of it as a force-multiplier for improving diet and general health. Chris is the expert and you should hear the scientific side of the story from him (visit his website here), but below – so far – is my biggest takeaway from reading the book.

The magic of nutrient dense food.

We hear endlessly about “junk food” and “empty calories,” but I never stopped to think what those words really mean.  In the current era of low sugar dieting and “counting carbs,” it seemed all that mattered about most food was the gross calorie count. “Junk food” meant high sugar and/or high fat which in turn meant high calories. Conventional wisdom said, for a better diet, avoid such foods or consume them in moderation.

It turns out there is more to the story.

It begins with the fact that our bodies and digestive systems are monumentally complex. The digestive system consists of a vast universe of ‘microbiota’ with an almost immeasurable number of these agents working in concert to sustain our lives. Humans evolved these systems over millions of years living as hunter gatherers and eating a diverse array of naturally occurring foods.

With the onset of the agricultural revolution, an unintended consequence was diets became substantially less diverse. This was due to the fact that only a relatively small number of plants and animals proved to be domesticable and cultivation friendly. Some of these foods worked out well for our diets, while others were not always the best in terms of nutrient quality or digestibility.

In the end, we arrive today dependent on diets with comparatively fewer food choices and with the widespread adoption of many foods that often conflict with our millions year old digestive systems.

So, what does it all mean?

Why nutrient dense food matters.

Feel hungry? This is your amazing, millions year old evolved body telling you it needs something. The question is what? I know people who get very focused cravings for particular food items. Maybe it’s just me, but I have never experienced hunger with this degree of focus. Instead, I seem to just get generally hungry without much tilt toward specific foods.

But, being “hungry” is, in essence, a generalized condition.

Your body could be looking for some specific nutrient or fuel that you may not even be aware of (i.e. like sailors suffering from scurvy and having no clue what’s going on). One way to think of it is to imagine the body as having a limited vocabulary. It may need calcium, vitamin B12, citric acid, or some other nutrient, but, because it can’t specifically ask for it, it just says, “I’m hungry!”

In the modern world, the cycle goes something like this,

Step 1. Needing some combination of calories and nutrients the body says, “I’m hungry!”

Step 2. In response, I feed it high-calorie, low-octane junk food.

Step 3. My stomach, now filled with calories but limited nutrients, provides me temporary relief. But, it is a false summit.

Step 4. Soon, my body still lacking the nutrients it wanted in the first place and in spite of the fact it recently got a load of extra calories, repeats, “I’m hungry!”

Step 5. Return to Step 2 and repeat.

In such a cycle, I end up with an excess of calories and a deficiency in nutrients (i.e. overweight and less healthy). In reality, the body’s vocabulary is much more expansive. Yearning for what it wants, it may “speak” by saying things like; headaches, body aches, depression, sleeplessness, digestive issues, cramping, pain, gas, various types of inflammation, and more.

Selecting a diet with more diverse and nutrient dense foods (i.e. like the Paleo diet) can alter the steps above to look more like this,

Step 1. Needing some combination of calories and nutrients the body says, “I’m hungry!”

Step 2. Instead of giving it junk, I feed it more nutrient dense foods (Visit Chris Kresser’s website to learn more about foods that qualify.)

Step 3. I get the calories I need and more of the nutrients my body wants. This gives me multiple benefits including improved nourishment, more energy, and relief from feeling hungry as often.

Step 4. In time, I “average” toward better nutrition, a more stable diet, more optimal body weight, and improved overall health.

Again, the body and digestive system are exceedingly complex. Depending on the conditions, knowing what micronutrient the body may or may not want can be extremely difficult to discern. However, by selecting in favor of more diverse and nutrient dense foods – as our ancient ancestors did – I increase the odds of giving my body the fuel it actually needs.

There is much to be learned about this topic and focused study is required to improve one’s knowledge. For my part, I am glad to be on the path. As with any diet, there is no one size fits all. Be sure to consult with your physician before beginning any new diet or exercise regime.

To learn more about Paleo dieting, tasty Paleo menus, research, special reports, and more, visit: chriskresser.com

If you were sick or disabled, who would drop everything they were doing to take care of you?

I recently wrote a sales letter for the agency about the need to plan for “extended” or long term care insurance.  When it comes to the issue of planning for extended care, many people experience a disconnect.  In sum, they believe they have nothing to fear because they think subconsciously, “It will never happen to me.”

The biggest risk from the dismissal of such planning is not so much about what happens to the sick or impaired individual. Rather, it is the fallout that occurs to those who are forced to step up to help the sick or impaired individual. And, who usually steps up? Those closest to us such as a spouse, a partner, a child, a lifelong friend. 

Below is the text from the marketing letter I wrote. I would love to hear your feedback. You can reach me through the comment section below or contact me directly, through this site’s contact page.

Here is the copy of the letter,

If you were sick or disabled, who would drop everything they were doing to take care of you?

If you could no longer care for yourself, who would be the first to make sure you received the care you need? Would it be your spouse? A partner? A sibling? A child? A lifelong friend?

Whoever it would be, it is someone who cares deeply about you. But, without a plan for the possibility of extended or “long term” care,  it is this person who may have the most to lose.

By starting a family, we invite people into our lives. Along with this invitation, comes a promise to provide for and keep our loved ones safe. Such promises last a lifetime, even into our elderly years.

The commitment to protect loved ones is human nature. It stems from a core belief that we can rise to meet life’s challenges with confidence. However, if we dismiss the need to plan by thinking “It will never happen to me”, we leave our promises to chance. Those we once said would take care of, may face the burden of taking care of us.

If we ever really needed help, certain of our loved ones would likely do whatever it takes to get us the care we need. Some would overcome any obstacle, make any sacrifice, and even put their lives on hold.

But, at what cost?

As a long-term illness or impairment progresses, higher and higher levels of care are required. If you have a surviving spouse, the burden for care will generally first fall on his or her shoulders.

-Spouses faced with the increasing demands of providing care for a partner often suffer irreversible physical, emotional, and financial consequences.

-In families with multiple children – especially as the healthy spouse begins to waver under the weight of providing unending care – frequently one child ends up taking on most of the burden to assist the healthy parent.Over time, this imbalance can cause friction among siblings. This often leads to future resentment and division in families.

-Due to the 24/7 demand for care, the child of a parent in need may be left with no choice but to set aside his or her life. Thereby, impacting his or her career, relationship with spouse, relationships with children, involvement in the community, personal pursuits, and more.

-The enormous cost of providing extended care frequently demands a reallocation of retirement income and may force an intrusion into underlying retirement assets. Such intrusions can undermine the future financial stability of a surviving spouse, special needs child, legacy planning, or charitable giving.

-Advances in medicine now allow people with chronic conditions to live longer than ever. While generally good news, for those who have no option but to put aside their lives to provide care, this can prove a source of increasing stress.

It doesn’t have to be this way.

You can help protect the people you love by putting together a plan before care is needed. The goal of the plan should be threefold.

1) For as long as possible, allow you to gain access to the care you need at home with minimal physical, emotional, and financial impact on the people who care about you.

2) Instead of having family members provide care directly, empower family members to hire and coordinate professionals to provide your care.

3) Where suitable, seek to mitigate the cost of providing care through the leverage of long term care insurance. Plans may be available which provide essentially a ‘return of premium’ to heirs should you end up not needing care.

Every person’s situation is different and there is no one-sized plan that fits all. At McCarthy Stevenot Agency, Inc. we have been guiding businesses and individuals with insurance needs for over 25 years.

To learn more about how to create and fund a plan to protect the people you love from the risks associated with extended care, contact our agency at this link.

Here is wishing you the strength to stay the course and deliver fully on the promise to protect those who are the most important in your life!

Best,

 

Ted Stevenot
Partner
McCarthy Stevenot Agency, Inc.

209 Main St., Milford, OH 45150 | Phone: 513-891-9888 | Fax: 513-891-3088
ted@mccarthystevenot.com | www.mccarthystevenot.com

45.9% spend more after they retire

A key factor in determining whether you can afford to retire is estimating how much you will spend in retirement. Experts say most will likely spend less because they have fewer overall expenses as a result of not working.

But, not everyone spends less.

In a recent study from the Employee Benefit Research Institute, nearly half of those studied ended up spending more. Those who did increase spending weren’t just the well off, but were represented across all income levels.

A few highlights from the study,

  • Median household spending dropped in the first few years after retirement. The reduction was 5.5% from pre-retirement levels for the first two years and 12.5% in the third and fourth years. After the fourth year, reductions in spending leveled out.
  • While the average amount of spending fell, a large percentage of households experienced increases in spending after retirement. 45.9% of those studied spent more in the first two years after retiring.
  • Those that spent more were not exclusively affluent households, but were distributed similarly across all levels. Of those who spent more, 28% spent 120% more than their pre-retirement level. After six years, 23.4% of households were still spending more.
  • In the first two years after retirement, transportation spending slowed the most. Median spending on transportation reduced by 25.1%.
  • Median of households in the study had mortgage payments before retirement, but no mortgage after retirement.

View the original study at here.

I have a theory that, unfortunately, a large number of people, once they gain access to their 401(k) savings in retirement, will not have sufficient experience with disciplining and budgeting their spending habits. As such, many will blow through their retirement nest eggs before they realize what they have done.

It is important to give serious thought to how much you will spend in retirement and how you plan to derive reliable and lasting income from your nest egg funds. Given increasing lengths of retirement, rising healthcare costs, volatility in the markets, and the general tendency of people to overspend, running out of money in retirement is probably easier than you think.

I wrote a report to help people solve these problems that includes: an easy method for estimating how much retirement income you may need, a list of ways to reduce expenses in retirement, and information on how to secure guaranteed income so that, regardless of what the future may hold, you will never run of money in retirement.

Download a free copy of the report at this link.

What are your thoughts?

  • Are you surprised to learn that so many people actually increase their spending during retirement?
  • Are you surprised that those who do aren’t just the well-to-do?
  • What do you think of my theory that many people will unwittingly exhaust their savings because they spend too much?
  • Did you know you could secure guaranteed income so that you will always have a “paycheck” during retirement?

Get more income for the same money

I have been doing some writing recently about “pooled income” – an idea that has existed in various forms for over 2,000 years – and how this resource may prove to be one of the biggest salvations for the Baby Boomer generation.

I looked up some numbers today to run a quick comparison between various alternatives for generating income at current rates – money market deposits, long term treasuries, and an immediate life annuity.

For this comparison, I assumed a male age 65 with $500,000 to allocate.

Here is how the numbers came out,

  • Money Market. Money market rates today (4-25-16 / www.bankrate.com) were paying between 0.85% and 1.00%. Assuming a 1% return on a $500,000 allocation, yields an income of $5,000/year.
  • 30 Year Treasury Bonds. The  yield on 30 Year U.S. Treasuries today (4-25-16 / data.cnbc.com) was hovering around 2.72%. Assuming a 2.72% return on a $500,000 allocation, yields an income of $13,610/year.
  • Immediate Life Annuity. I visited the CNN Money Retirement Calculator and ran a $500,000 lump sum for a 65 year old male for an immediate life annuity in my area. The result came back an estimated $2,744 per month for an income of $32,928/year.

Yearly income $500,000 allocation

These numbers change practically by the minute, but the general conclusion is clear. The annuity far exceeds the income generating capacity of the other alternatives for the same allocated amount.

Why does the annuity yield so much more income?

Because it is a pooled income product.

Pooled income is the primary engine behind entities as commonplace as Social Security and defined benefit pension plans.  People with 401(k) plans only and no company pension to fall back on can benefit tremendously from learning more about the benefits of pooled income products.

To learn more about how pooled income products work, click here.

Get back what’s missing from your 401(k)

People often speak nostalgically of the prosperous retirement era that our parents once had and how those days are long gone. But, what made our parents so lucky compared to today?

The major difference between then and now was that many of our parents had employer-sponsored “defined benefit” pension plans.

  • Defined benefit pensions offer employees a “defined” or specified benefit in the form of lifetime income upon retirement, say 70% of a worker’s final salary payable for life.
  • 401(k) plans, by contrast, are merely deferred savings accounts. They guarantee no future income and there is no second party promising any future benefits.
  • Defined benefit plans function using “pooled income.” Pooled income is a centuries old concept and one the most cost-effective ways to provide lifetime income to retired populations (learn more).
  • 401(k) plans make no use of pooled income. Instead, they presume people will amass enough wealth, generally through stock market investing, to live indefinitely off the earnings and appreciated value of their savings.

In comparison to what our parents had, the new retirement reality is a much more complicated and risky proposition – with more dependence on volatile markets, higher costs for management, greater personal uncertainty, and fewer guarantees.

But, it doesn’t have to be this way.

Get back what’s missing from your 401(k)

People can improve the outlook for their retirements by replacing what’s missing from the 401(k) retirement model. The key is gaining more access to pooled income.

There are many types of pooled income products available today that allow individuals to essentially create their own “private pensions.” In general, these products provide,

  • More retirement income per dollar allocated than other comparable options.
  • Guaranteed income for life and options for survivor benefits.
  • Protection against the risk of living too long and outliving retirement funds.
  • Insulation from the ups and downs in the market.
  • Simplified means of translating retirement savings into steady, reliable income.

Though the times have changed from the era of our parents, with greater access to pooled income options, the promise of a secure and enjoyable retirement remains within reach.

Click here to learn more about currently available pooled income options and see a simple way to calculate how much income you will need in retirement.

What do you think?

  • Did you ever wonder what happened to employer pension plans and why?
  • Does it surprise you to learn that pooled income can actually be less costly and more secure as a means of generating retirement income?
  • Did your parents or grandparents have pension plans that they benefitted from?

If you would like to discuss the suitability of income alternatives for your situation, you are welcome to contact me by email or through my Cincinnati, OH insurance agency, McCarthy Stevenot Agency, Inc.

Are you nervous about relying on the stock market?

Many people who lived through the 2008/2009 stock market bubble are still very nervous about the future of the stock market. Many are especially nervous about relying on the market as a means of reliable support during their retirement years.

As well they should be.

Most people aren’t aware that there are alternatives to Wall Street when it comes to achieving income security during retirement.

I have been doing some writing recently about “pooled income” – an idea that has existed in various forms for over 2,000 years – and how this resource may prove to be one of the biggest salvations for the Baby Boomer generation.

I looked up some numbers today to run a quick comparison between various alternatives for generating income at current rates – money market deposits, long term treasuries, and an immediate life annuity.

For this comparison, I assumed a male age 65 with $500,000 to allocate.

Here is how the numbers came out,

  • Money Market. Money market rates today (4-25-16 / www.bankrate.com) were paying between 0.85% and 1.00%. Assuming a 1% return on a $500,000 allocation, yields an income of $5,000/year.
  • 30 Year Treasury Bonds. The  yield on 30 Year U.S. Treasuries today (4-25-16 / data.cnbc.com) was hovering around 2.72%. Assuming a 2.72% return on a $500,000 allocation, yields an income of $13,610/year.
  • Immediate Life Annuity. I visited the CNN Money Retirement Calculator and ran a $500,000 lump sum for a 65 year old male for an immediate life annuity in my area. The result came back an estimated $2,744 per month for an income of $32,928/year.

Yearly income $500,000 allocation

These numbers change practically by the minute, but the general conclusion is clear. The annuity far exceeds the income generating capacity of the other alternatives for the same allocated amount.

Why does the annuity yield so much more income?

Because it is a pooled income product. Pooled income is the primary engine behind entities as commonplace as Social Security and defined benefit pension plans.

To learn more about how pooled income products work, click here.

Baby Boomers throughout their lifetimes have been barraged by the financial industry and the media that the stock market as the be-all and end-all for achieving retirement security, but there are other alternatives.

Click here for an easy way to calculate the income amount you may need in retirement and to learn more about how to generate that income.

To learn more about or discuss the suitability of various income alternatives for your situation, you are welcome to contact me by email or through my Cincinnati, OH insurance agency, McCarthy Stevenot Agency, Inc.

So, what do you think?

  • Are you worried about the markets and how they may affect your financial security in retirement?
  • Have the past few bubbles and bursts impacted your faith in the market?
  • Do you think the market is likely to become more or less reliable in the coming years?
  • Are you surprised at the difference in income amounts in the comparison above?

Pooled Income: The secret to getting more out of your retirement savings

One of the hardest things for people to do in retirement is translate nest-egg savings into reliable income that lasts. A way to do so – and generally get back more income per dollar compared to other alternatives – is through “pooled income.”

Though entities as commonplace Social Security and defined-benefit pension plans utilize pooled income approaches, few are aware of how such arrangements actually function.

Baby Boomers – especially those with 401(k)s and no traditional pension to fall back on – can benefit tremendously from a better understanding of the benefits of pooled income.

Below, from the writings of economist Moshe Milevsky, PhD., is one of the best – and most entertaining – descriptions I have ever read on how pooled income works.

The 95 Year Old Bridge Club

“My 95-year old grandmother loves playing bridge with her four best friends on Sunday every few months. Coincidentally, the five of them are exactly 95-years old, are quite healthy and have actually been retired – and playing bridge – for 30 years. Recently this game has gotten somewhat tiresome and my grandmother has decided to juice-up their activities. Last time they met, she proposed that they each take $100 out of their purse wallets and place the money on the kitchen table. “Whoever survives to the end of the year, gets to split the $500…” she said. “And, if you don’t make it, you forfeit the money…Oh yeah, don’t tell the kids.”

Yes, this is an odd gamble, but you will see my point in a moment. In fact, they all thought it was an interesting idea and agreed, but felt it was risky to keep $500 on the kitchen table for a whole year. So, the five of them decided to put the money in a local bank’s one-year certificate of deposit paying 5% interest for the year.

So what will happen next year? According to statistics compiled by actuaries at the U.S. Social Security administration, there is a 20% chance that any given member of my grandmother’s bridge club will pass-on to the next world during the next year. This, in turn, implies an 80% chance of survival. And, while virtually anything can happen during the next 12 months of waiting – actually, there are 120 combinations, believe it or not — the odds imply that an average four 96-year olds will survive to split the $525 pot at year-end. (I sure hope
grandma is one of them.)

Note that each survivor will get $131.25 as their total return on the original investment of $100. The 31.25% investment return contains 5% of the bank’s money and a healthy 26.25% of “mortality credits”. These credits represent the capital and interest “lost” by the deceased and “gained” by the survivors.

The catch, of course, is that the average non-survivor forfeited their claim to the funds. And, while the beneficiary’s of the non-survivor might be frustrated with the outcome, the survivors get a superior investment return. More importantly, they ALL get to manage their lifetime income risk in advance, without having to worry about what the future will bring.”

Click to view the original paper, “Grandma’s Longevity Insurance,” from Moshe Milevsky, PhD.

Important notes on the story:

In a real pooled income arrangement, the people don’t get to keep the money at the end. Instead, funds are allocated to assure that income for the remaining participants persists.

Those who live the longest do reap the greatest rewards. But, that’s really the point. People have the choice to cling to the funds they have and risk running out of money at later ages, or, let go, “jump in the pool,” and rest assured they will always have a guaranteed income no matter how long they end up living.

Few argue that individuals should put all of their funds into pooled income products. The key is to cover basic living expenses – food, shelter, utilities, everyday expenditures. Therein lies security. Once basic expenses are covered, more traditional investment alternatives would be preferred due to their liquidity, growth potential, and suitability for inheritance planning.

Relative to the issue of inheritance, it is useful to recall the warning flight attendants give to airline travelers, “Put the oxygen mask on yourself, before putting it on your child.” Similar logic applies to retirement funding, “Make sure to cover your basic income security, before worrying about leaving money to your kids.” (One idea is to leave kids your “stuff” instead – house, physical assets, etc.)

Mentioned in the story above is the concept of “mortality credits.” Mortality credits are what create the magic and give pooled income arrangements – including Social Security, pension plans, and individual annuities – the ability promise more long-term income to participants than other comparable mechanisms.

Assuming proper funding, mortality credits allow for the assets of pooled funds to be invested in highly safe instruments, such as intermediate and long-term bonds, and still deliver superior results.

Arguably, mortality credits may afford pooled funds the ability to take on a bit more risk to achieve their objectives. In grandma’s story above, if the group had put the $500 into a hot growth stock and lost 20%, the survivors would have still each gotten their money back.

Finally, securing basic living expenses with pooled income can give individuals more freedom to pursue higher investment returns with their remaining funds. This happens because a person’s “base” income is safely separated from his or her overall investment risk.

In summary, here are several major benefits provided by pooled income mechanisms,

  • They serve as a form of insurance to cover basic expenses in retirement.
  • They generally provide more retirement income per dollar allocated.
  • They protect against the risk of living too long and outliving retirement funds.
  • They insulate retirees from the ups and downs in the market.
  • They allow greater freedom to pursue higher returns with remaining retirement funds.
  • They provide a simplified means of translating retirement savings into steady, reliable income.

If you would like to learn more about the suitability of pooled income products for your situation, you are welcome to contact me by email or through my Cincinnati, OH based insurance agency, McCarthy Stevenot Agency, Inc.

Bonus content: Use this simple method to calculate how much basic income you may need in retirement.

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How to generate income in retirement

Most people spend their careers saving and accumulating funds so that one day they can retire. But when retirement finally arrives, a whole new process begins.

Economists call it, “the decumulation phase.”

This is the process of turning saved or invested assets into regular income.

Decumulation is an entirely different animal than accumulation. Paying regular bills by slowly liquidating investment shares can be an extremely complicated task to undertake.

  • Which stock (or fund shares) should you sell first?
  • Should you sell shares of a stock that is up or a stock that is down?
  • Should you sell an average of all the stocks you own?
  • Should you be selling shares of some other investment such as a bond fund?

I often think of the challenges of decumulation when I am at the grocery store and see very senior people doing their shopping.

(OK…if that makes me some kind of economics/financial nerd, so be it. There is a serious human side to this story.)

I think to myself,

“Does this person now have to go home, log in to his or her online brokerage account, and sell shares to pay for those groceries?”

I also often wonder,

“What if this person is alone and has lost his or her spouse?”

What if the spouse who is now gone was the one who “took care” of the money?

What’s left is someone at a very delicate and vulnerable senior age – who is likely intimidated or even downright afraid – forced by necessity to manage an extremely complicated and difficult task, just to pay for basic things like groceries.

Yikes…

There is a better way.

There are products designed to generate and distribute income more smoothly. These products generally “pool” funds in order to distribute income steadily and predictably over time.

  • Funds of this general type date back to the Roman Empire when individuals were paid an annual stipend called an “annua.”
  • Roman soldiers received such stipends in exchange for military service.
  • Participants would make a single payment to the fund and receive payments each year until they died.
  • Other funds of this type – called tontines – were used during the middle ages by kings and lords to finance the cost of frequent military campaigns.
  • The first annuity used in America was established in Pennsylvania as a retirement fund for pastors in 1759.
  • Lotteries today use similar mechanisms to distribute prize money to winners. After an initial lump sum is contributed, funds are paid out evenly over a number of years.

Converting savings into income can be a very complicated process, but it doesn’t have to be.

After a certain age, for mercy’s sake, it really shouldn’t be.

Don’t leave your spouse trying to manage a “do-it-yourself” decumulation plan.

Learn how annuities can help convert savings into guaranteed, worry-free income and make the decumulation process a whole lot easier.

Try this simple method to calculate how much income you may need in retirement.

If you would like to contact me to discuss whether annuities may be suitable in your situation, I can be reached by email or through my Cincinnati, OH insurance agency, McCarthy Stevenot Agency, Inc., at 513-891-9888.