Paul Ferraresi

[Danger: This article may cause heart problems]

The above question continues to surface as baby boomer approach retirement. For most boomers their answer is the Las Vegas Approach. Under this approach “you’re basically asking people to roll the dice and hope for the best”.

The first step is to determine “The number”. “The number” is the withdrawal rate from a retirement portfolio that creates the highest probability of sustainability until assumed mortality. Bill Bengen’s mid-1990 research gave rise to the 4% rule. Basically, Bengen postulated that retirees can withdraw about 4% annually from their liquid asset base with a high probably that savings will last 30 years. Take out more than 4% and the odds of sustaining financial independence began to decrease. Remember the 4% rate is only one ingredient of the required seven-layer cake.

So, one approach to success it to limit yearly portfolio withdrawal rates to 3 to 4%. That equates to $3,000 to $4,000 for every $100,000 saved. I am asked if this is $3,000 per month? NO! It is $3,000 per YEAR for each $100,000.

What is a safe withdrawal approach? Well, 2% is bulletproof, 3% is probably safe, 4% is pushing it and at 5% you’re eating Alpo in your old age. If you take out 5% and you live into your 90’s, there is a 50% chance you will run out of money.

Here is where the rubber meets the road. Suppose you need $100,000 per year in after tax cash flow. This amounts to $8,333 per month, in today’s dollars, net of Social Security or pension payments. Here is what amount is needed in capital at various withdrawal rates.

Those are the facts regarding what people need. Now the sad part. A 2005 Retirement Confidence survey showed total savings and investments by age group, not including the value of the primary residence to be low. The grim results for those age 55 and older as they plan for retirement: 39% have saved less than $25,000; 12% have from $25,000-49,999; 7% have from $50,000 to $99,999; 23% from $100,000 to $249,999, and, only 19% have $250,000 or more.

Look again at the eye popping numbers chart. Even if you cut monthly income in half to $4,167 per month ($50,000 per year) not including Social Security, and a withdrawal rate of 2% to 5%, a person still needs a capital base of $2,500,000 down to $1,000,000. Hmmm, yet only 19% of those in the survey have $250,000 or above, which is only 10% of the required level.

If you have been working with a professional advisor, then, the above numbers are not a shock. If you have been reading this blog, then, past articles have informed you generally. So, what is a “body” to do?

First off, you can use some of the principles of “Missed Fortune” that we have shared with you in the past. Make sure you work with a certified TEAM member so your program is done correctly.

Next, determine the amount of monies you need for these 5 categories:

1. Survival Income: The money one has to have to make ends meet. (That is “need” not “want”)
2. Safety Income: The money needed to meet life’s unexpected turns.
3. Freedom (Fun) Income: The money needed to do things that bring enjoyment and fulfillment to life.
4. Gift Income: The money needed for people and causes that one deeply cares about.
5. Dream Income: The money needed for the things one has always dreamed of being, doing or having.

Finally, you can determine the shortage and draft out a plan for success. Please do not wait until 5 years before your planned retirement date to start. Get assistance now!!!

Here is another reality check. Assume you are in the 25% marginal tax bracket, and, in retirement spending 4% of your base net of taxes, with a 3% inflation (low estimate). This scenario will require a gross average annualized return of 9.33%. Using all past studies a mix of 60% equities and 40% bonds at a withdrawal rate of 4%, sustained virtually every 30 year period back to 1926.

Caveat; If you retired in 1987, 1991, or 2001 you took a massive hit to your portfolio, so, it may not work out if you retire when the markets plummet.
Set up a 3 year liquid fund upon retirement so you do not have to draw on your retirement assets if the markets go into a 2-3 year dive.

Need assistance- contact us-

We will force to you have discipline, so, there is no regret.

I have often written, hinted, cajoled and begged in this blog for you to get on track with Long Term Care Insurance (LTCi). No, I will not share personal experiences or client experiences in this write up. Rather, here is a compilation of statistics on the subject. When you have convinced yourself of the need, please contact us …

The bulk of the country’s 76 million baby boomers will soon reach age 65. The Federal government estimates that 60% of them will eventually need some type of long-term care. Unfortunately, only 7 million (about 10%) actually have a policy to cover those costs.

One reason the public has not purchased a policy is because they are complicated. The typical policy has dozens of options and add-ons that can make for hundreds of permutations. The insurance industry has started a massive simplification of basic policies.

Another reason for not moving ahead with a policy is the good ol’ human trait of … procrastination. Many people wait until the horse has left the barn before closing the door. That is, they wait until later in life to buy the policy when they may not be in good health. Recent statistics show 20% of the applications from clients aged 60-69 and 42% of those aged 70-79 are declined. What is the solution …? Buy a policy when you are young and healthy, say at age 40-45.

The average nursing home (or at home care) costs $8,000/month or $100,000 per year. Assume a basic policy, at age 40, costs $500 per year and you pay it until age 90 (50 years). Then, your total cost over your lifetime would be $25,000 ($500 x 50). Do you realize at today’s cost of $8,000 per month that in 3 months you would spend the same amount as you paid for your lifetime premiums. ($8,000 x 3 = $24,000) The decision to buy a policy is a layup with a ladder, or, a stolen base on a wild pitch.

Why even consider a long term care policy? Everyone needs to be concerned about the quality of Medicaid-funded long term care. With the Medicaid system in sever financial strain and no solution on the horizon it is obvious that care will diminish. The system is underfunded.

Some people tell me that they will self fund their long term care needs. Costs today are running $100,000 per year and rising 14% annually. Some people need long term care coverage for 10 years. Do you have “loose change” of 1.5-$2 million to handle these long term care costs for one person?
As I have written many times in this blog the new Federal rules for transferring your assets to obtain Medicaid are super tight. Thus, this can be an option only if done 6-10 years in advance of the need.

Are there alternative ways to fund long term care coverage? Yes. See your financial advisor TODAY to develop some strategies.

In general, here are a few ideas and tips for buying long term care insurance (LTCI):

• Buy young, when premiums are less expensive
• Women are more likely to need LTCi as 72% of nursing home patients are women
• Avoid lifetime coverage to save on your premiums
• Buy joint spousal coverage
• Set up a side business and have your business pay the premiums. The premiums are a tax deductible expense
• Buy inflation protection. (Compound inflation rather than simple inflation)
• Avoid future purchase option riders
• Examine new lifetime benefits life insurance that pays for your needs when you are alive, not, after you die

I implore you to examine this area. I have seen emotional strain and financial strain of long term care costs demolish a family.