Paul Ferraresi

The Deficit Reduction Act 2005 (DRA), signed into law February 8, 2006, brings new rules that make it far more difficult for seniors in need of long-term care to get assistance from Medicaid. Currently, only 10% of Americans over the age of 65 own some type of long-term care protection, and only 17% of baby boomers have planned for long-term care needs. People assume their health insurance will pay LTC bills, but it won’t. Even those who qualify for Medicare benefits will only be provided with a maximum of 100 days of nursing home care, and individuals are eligible only when going to a nursing home immediately after a three-consecutive-day stay in a hospital. Then the first 20 days are covered, but a co-pay ($141.50 per day for 2011) will be required for the remaining 80 days. All benefits end after 100 days.

Currently, 49% of LTC recipients are relying on Medicaid, but keep in mind, while some in this group come from our nation’s poor, many in this group start out paying out-of-pocket then go on Medicaid after their assets are exhausted. Only 7% of people are actually paying for long-term care with private insurance coverage they have purchased. The government took a step to reduce Medicaid roles with the passage of the DRA, making Medicaid eligibility more difficult. The three-year look back is gone. Under the new law, the look-back period is five years for all transfers, and the beginning date for the penalty period is now the later of the date the person enters a nursing home or the date the person applies for Medicaid.

What this boils down to is the penalty period will not begin until the nursing home resident is virtually destitute.

Gifts made by seniors in the most innocent manner could jeopardize their eligibility for Medicaid even if it is legitimately needed. For example, a grandparent making a monetary gift to a grandchild for a wedding or college graduation could end up delaying their Medicaid eligibility.

Also, watch out for filial responsibility. Filial responsibility laws derive from England’s Elizabethan Poor Relief Act of 1601. This law required grandparents, parents and children, to the extent they were able, to support family members who could not care for themselves. Currently, 28 states have filial responsibility laws. Pennsylvania has re-enacted its law making children liable for support of their indigent parents, and other states are likely to follow suit.

The DRA of 2005 also affects the exemption of a person’s home, the use of interest-only annuities and the forgiving of loans.
• A person’s home, formerly exempt from Medicaid eligibility limits, will be counted as an asset if the equity in that home exceeds $500,000. States are allowed the option to increase that amount to $750,000.
• Some advantages in using interest-only annuities have also been eliminated. These annuities provided a small income during life and left the original investment to heirs upon the senior’s death. Under the new rules, the state must be named beneficiary of any leftover funds in the annuity for at least the amount of the medical assistance paid on behalf of the annuitant.
• A senior can no longer loan money to their children to get it out of their estate, then, forgive the loan. In order not to be considered a transfer of assets, the repayment of a loan or mortgage must be actuarially sound and cannot be forgiven or cancelled upon the death of the lender.

Projected growth in the senior population has caused states to seriously review Medicaid programs.

For a reasonable cost, life insurance with a long-term care rider can be purchased. This plan will provide funds for the insured should they need long-term care, protecting the loss of other assets they have worked so hard to accumulate. However, in the event no long-term care is ever needed, the insured has a death benefit to leave to heirs, enhancing even further the legacy they will be able to leave their loved ones.

The credit card act of 2009 (CARD) mandates that lenders explain how long it will take and how much it will cost to pay off your balance if you make the minimum monthly payment. In addition, the law requires companies to show how much you will save if you pay off your card in three years (36 months). The problem is the three-year payoff date will always be 36 months away. It is a moving target. You see, when you pay this month’s amount for a 36-month payoff, assuming you do not make any more charges, then interest is added. So, in month #2, they calculate the payoff over the next 36 months on the new balances (that would be month 37), and so forth.

Here is an example that we use…assume someone has a $3900 balance at 15.32% APR. It would take 150 months to pay off the debt if you paid the 36-month amount listed on the statement each month.

How do you stay within a 36-month payoff? This month, determine the amount stated to pay off the balance in 36 months; for example, $121. Do not add any new charges and keep paying the exact $121 each month. It will be paid off in 36 months. This way, 36 months does not become 150.

With the markets in turmoil for the past 10-12 years, most people now feel that they are doomed financially to have a reasonable retirement. Not true.

In my 40-year career I have watched the herd mentality hit investors. Here is my point. Going back to 1871, the average rate of return for the stock market has been around 12-13%. Like a pendulum on a clock there are periods when the returns are greater than 13%, and, other periods with returns much less. (From a technical standpoint, the S&P 500 has a standard deviation of +/- 21%. So around 70% of the time you could expect returns of +34% to -8%. We could take these calculations out to three standard deviations but that is not necessary for this discussion.)

During the 1970s the S&P averaged a 5.9% return each year for those 10 years. In the 80s and 90s, it averaged around 21% each year (the low tax rates and high tech days). So you knew in advance that the years 2000-2010+ were going to be bad years…just to average things out. Well, it happened. Like all forces of nature, the market moves in cycles. Even though the public sees doom and gloom today, the markets will start the next trend line upward soon.

So how do you save and invest? Wade Pfau wrote a great paper, “Safe Savings Rates: A New Approach to Retirement Planning Over the Life Cycle.”

We all know about the safe withdrawal rate, namely, you should never take out more than 4% of your retirement account value annually in order to assure you will never outlive your income. Pfau assumed a 30-year accumulation period followed by a 30-year withdrawal period. Going back to 1871 he found using a 60/40 mix (60% stocks and 40% bonds) that one needed to save 16.67% of gross salary each year, adjusted for inflation. (So, if inflation went up 3% this year…next year would require 19.67% savings to make headway.) Now if your income went up every year by the exact amount of inflation, then, your rate would stay at 16.67%.

This formula plan would assure that you would have enough funding to live on 50% of your final year’s income level. Unfortunately, most Americans live on 91-95% of their final year’s salary in retirement…so, you will have to increase the rate of savings above 16.67% per year. I always suggest a person save at least 25% of gross income. That way, if you place your monies in a tin can in the back yard at a zero rate of return, you will have 10 years worth of money when you retire.

Read the article and insert the 25% under a 60/40 mix, and you will see the plan will amply fund your lifestyle.

Most people do not want to think about or discuss Estate Planning. The definition of Estate Planning is the process of getting resources to where you want them to go with the least cost and least problem.

This process includes risk management and a review of all your insurance coverage — life, disability, liability, long-term care. Also reviewed are tax planning, cash flow analysis, and much more.

You should not just look at your own life, but, you must consider the possible caring for elderly parents, multi-generational relationships, and other personal planning issues.

Most people think that simply drafting a Will solves all these problems. Far from it. Wills are not the best vehicle for carrying out one’s wishes.

In addition, one should do at least an annual estate review with their advisor to make sure that beneficiary designations are current and intended distributions match your current intentions.

With your advisor you should discuss how you want your finances handled if you cannot function or after you pass away.

To most people their estate is simple, but, I have seen fortunes wasted by people who do not understand what the laws are and how they can and will affect your loved ones. Let me give you an example…. If you are married with children, and, you do NOT have a Will…where do your assets go? Most people think all of it goes directly to the surviving spouse…. AH-OO-GA! Wrong Answer! See your advisor for the answer!

One of the greatest frustrations I experience is trying to get clients to accept that they will live a long time after retirement.

In the past 25 years, medical breakthroughs, such as stents, have extended people’s lives without debilitating surgery. Weekly, you see in the media celebrities or the “average person” living well into their 100’s. In fact, the fastest growing segment of Americans are those living past age 100.

So how do you plan financially for this event? You work from age 25 to age 65…a mere 40 years to accumulate enough money to live 35 or 40 years after retirement. Funny, if you save 10% of your gross income in your working years, and, assuming no rate of return (common today in bank accounts) for the 40 years of work…you will have, at 65, four years’ worth of monies after retirement. If you save 25% of your gross, with the same factors, you will have 10 years of living expenses available at retirement. Both scenarios assume no inflation.

The authors of a new study, The Problem With Living Too Long, from the Institutional Retirement Income Council, report half of all females who are aged 65 today will live to almost 88. Thus, if you, as a 65-year-old female, guess you will live to be 88, then, that gives you only a 50/50 chance of not outliving your income. Statistically, a quarter of those women will live five years past age 88 and 10% will live to age 98. So, if you want a 90% certainty of how long you will live…better use age 98.

You are playing with loaded dice if you say, well, I’ll be dead at 85 and so I only need to plan financially until then. How will you pay your bills when you live longer? Are you going to call on your kids to fund your lifestyle? (They probably will be retired themselves.)

The better choice is for people to work longer, save more, or live on less now. This funding requirement should not be a surprise to anyone. You have had your entire lifetime to plan for your retirement.

Sit down with a professional advisor…this week, and have them map out at least a “rough and dirty” template as to the path you are on. I have done scenarios over the years where people have only a projected 5-30% of what they will need in retirement. They are in shock since they never thought about it. (Must be because they are too concerned over who will win on Dancing With the Stars.)

Start now…a small change can produce tremendous results.

The chart below will give you an idea of what you can expect:

THE LIFE EXPECTANCY GAMBLE
10% of all 65-year-olds will live into their 90s

65-year-old males:

50% will live to 85.99 — 25% will live to 90.78 — 10% will live to 94.74

65-year-old females:

50% will live to 87.97 — 25% will live to 93.17 — 10% will live to 97.64

65-year-old joint life expectancy*:

50% will live to 91.07 — 25% will live to 95.07 — 10% will live to 98.80

Source: Actuarial Consultants Inc. Data is based on 2013 mortality rates for people who do not hold annuities using IRS projections based on July 2000 tables from the Society of Actuaries.
*At least one spouse will live to the age indicated.

You can deal with this issue like the “ant or the grasshopper.”

Ah yes…discipline or regret.