That OTHER insurance you should worry about

Posted on October 1, 2013October 1, 2013 by Danielle

I just got a lovely letter yesterday from Blue Cross informing me that my current health insurance would soon be defunct and I better get online today and pick out a new one. And, what a surprise, replicating my existing coverage is going to cost more. I’m not going to get too worked up about this one, because we all knew something had to change with health insurance, right? But what everyone in the country seems to be trying to ignore is the other big health care crisis—long term care.

Thinking about this is hard, painful even to try to imagine yourself feeble and incapacitated. But, with modern medicine, it’s probably going to happen. As a dog trainer once said to me—if your pet doesn’t get killed in a freak accident, you’re probably going to be faced with some day putting them down. Been true with 2 dogs and 9 cats. The few accidents were the worst. Difficult circumstances are easier to handle with some sort of rational plan. You need one for the point when you’re no longer able to roar around on your motorcycle. It appears, given the fight over basic health insurance, that it’s going to be a long, long time before we get any kind of national consensus about taking care of the very elderly.

Think Medicare will take care of you? Ha-ha. Theoretically, Medicare can cover 100 days of service. Getting that service in actuality is pretty difficult—you have to be making progress on rehab, and you have to have spent 3 nights in a hospital. An awful lot of hospitals will park you in the lobby if you’re not out in two, and extreme old age and frailty is not something you can be rehabilitated out of. And even if you (or your loved one) can work the system, what’s your plan after 100 days?

Wowie-zowie it’s expensive. Think $250-$300 per day at the joints around here, and I’m not talking luxury apartment. Assisted living can be less, but real full-blown nursing care is usually a small room that you may be sharing with at least one other person. The more you can pay, the less you share, but some places don’t even have space for single rooms. Can you pay $100K a year in today’s dollars? Will you have a spouse that still needs to live on your savings and your Social Security? And really, when you need it you really need it. Unless your retirement portfolio plus Social Security generates at least $100K per person in today’s dollars (or you’re willing to liquidate it all and don’t outlive it), you need long term care insurance. Okay, there are some more factors, but your personal set of facts should be discussed with a financial planner—I’m just giving you the pep talk here.

I’ve seen quotes for LTCI that range from $1,500/year (probably inadequate) to more than $8,000 per year, so I’m going to list the key factors that seem to influence cost. These are the basics you will need to think through:

When to get it. The younger you are, the cheaper it will be, the longer you will pay, and the more likely you can still qualify. People in their 40s may be too young (depends on family history, whether your workplace offers it as a group benefit) and after 60 an awful lot of people develop health problems that make it difficult to qualify at a decent rate.
How long you’ll wait before it kicks in. 90 days? 180 days? How long can you afford to cover 100% of the costs before you cry uncle? Lately, 180 days doesn’t seem a whole lot cheaper than 90.
How much per day it will cover. Establishing your personal minimum and maximum requires some work with a calculator—taking into account other sources of income, and who else (your spouse) might need that income while you’re being cared for. Here’s where the cost of insurance starts to really break out—choosing a higher benefit preserves future assets but eats up current ones.
Whether the benefit goes up with inflation. Nursing home costs have gone up much faster than the Consumer Price Index. What seems like a generous benefit today may be chump change in 30 years. I mean, my tuition at the University of Chicago in 1977 was $3,600/year. No, I don’t believe it either. Plans offer 3% inflation, 4%, 5%, and you also need to choose whether compound or simple.
How long it lasts. Tell the agent when you’re going to croak and you can get the perfect term. Statistics say that most people kick off a little less than 3 years after entering a nursing home. If you’ve ever eaten their food or heard some of the entertainment, well…but, 3 years does give your family time to sell the house and re-arrange other investments if necessary. On the other hand, my daughter volunteered at the Mather for 5 years, and there were plenty of residents who had been around 5-7 years. My unscientific observation from her experience was that people who were single with no family to care for them tended to move into residential care earlier, at a point when they were relatively more healthy and lasted longer. People who had an involved spouse or children tended to be able to put off the move until they were much frailer. So weigh your support network as you select a term.

Do take a look at your own health and family history. But keep in mind that your personal habits and modern medicine might keep you alive much longer. For example, my mother’s siblings and parents all died in their 70s. My mother, who gave up smoking in 1963, kept her weight down, was happily married, and ate pretty well (none of which was true for the rest of the clan) made it to 90. Dad, with a very long-lived family, lived on his own until 8 months before he passed away at 96. I think it’s a pretty good bet I’ll collect on that long-term care insurance. Like most of us, I hope I’ll clutch and keel at an advanced age. But I won’t bet my money on it. Which is why I think LTCI is a pretty worthwhile investment.

Why stuff is ruining your finances

Posted on September 9, 2013September 9, 2013 by Danielle

I spent Sunday sewing on a blue suede jacket. Now, you may ask, what on earth does this have to do with financial planning? Well, sewing gives you lots of time to think and obsess about other things, and this particular jacket was a perfect launch pad. Mainly, because I realized that I purchased this fabric when my daughter was an infant, and she’s in college now. I’ve been a) hoarding it because it was expensive; b) never found the perfect use for it; and c) kinda forgot about it. And therein lay three principals for wasting a lot of money.

Hoarding

If you’re not using what you have, have no clear use for what you’ve acquired, or think something is “too good to use” (ask me about those indigo fabrics I bought in in Japan in 1998), you’ve invested a lot of money in something that has no returns. Do you own wedding china? How many sets of bed linens do you use? Any clothes with tags still on hanging in your closet?

Not only does this stuff represent tons of money invested with no return, but in many cases it costs you money—in depreciation, at least, but sometimes in storage costs (I have a fortune in plastic tubs) and maybe even in insurance. If your possessions have outgrown your house, caused you to buy a bigger house to store it all, or (the ultimate) you are paying a monthly fee for a storage locker somewhere, it’s time to de-acquisition (errrr, sounds better than de-junk).

Sell it on E-bay and put the money in your Roth where it will actually do some good. People who start down this path find that they can raise a lot of cash from stuff that will soon junk up someone else’s house. Go ahead, walk through one room and estimate the amount of money you actually spent on stuff you don’t use. Any musical instruments nobody plays? Okay, go take a pepto.

“Perfect use”

Not everything can be quantified in dollars. If you still want to keep a lot of stuff that’s precious to you, then promise me you’ll at least use it. My aunt, too, was a fabriholic and when she died, I inherited enough fabric to clothe my daughter for the first two years of her life. But that was a small fraction of what she had. A lot of it was polyester double knit (yes, it was once popular), and there was a significant amount of avocado green and harvest gold. Even once-wonderful things go out of fashion. Unless you keep them long enough to become vintage. And beat the moths and silverfish.

And if you do love it, why aren’t you using it? In a month, that blue suede will be on my back, the Japanese fabric is next up, and I’m selling the teddy bear fur from a long-ago (and misguided) business attempt as soon as dear daughter comes home for fall break and puts it up on her eBay account.

Forgot about it

Here’s a secret: don’t buy anything unless you really have time for it on the schedule. If everyone followed this principle, there would be virtually no boats sold and no one would have more than one car per person. People with hobbies (whether carpentry or knitting or computers) are particularly guilty here. I know more than one friend with a computer boxed under their desk that has never been opened. Can you work all the electronics in your home? How many tools do you have whose manual is still in the plastic baggie?

Don’t buy stuff ahead of need just in case it might come in handy one day (you’ll never be able to find it at that point), because it’s a great deal (I have perhaps 100 metal zippers my aunt bought for $1) or because you may never see it again (c’mon, this is the era of web shopping, where you can buy all the stuff someone else has stored for you all these years).

Ask yourself:

when am I going to get time to use this,
am I afraid to use it,
where am I going to put it, and
what else can I give up to make room for this?

No good answer? You’ve just saved yourself a lot of investable cash.

Does Your 401(k) Stink? Do You Know?

Posted on August 2, 2013August 2, 2013 by Danielle

Really, I’m not always angry. I’m pretty calm when I’m petting my dog. But reviewing peoples’ finances does tend to show you a million ways someone has figured out how to cheat people out of their money. Recently, I’ve started to wonder whether corporate 401(k) sponsors are better at it than Bernie Madoff. Or Fabrice Torre. Or whoever is the crook of the day.

One of the ways financial crooks operate is that they count on no one paying attention, or people not understanding investments well enough to question anything. So take a moment—do you know what you invested in in that 401(k)? (I could also ask, do you have any old ones laying around from previous jobs that you’ve forgotten about, or, are you even contributing, but those are subjects for another post.) Typically, people pick investments that are labeled “growth”—who doesn’t want growth?—and to those I say, remember the adage, “Give a dog a good name”. Or maybe it’s a Target Date Fund—often I see several different target dates, because who knows when you’ll actually retire. Ugh.

But even setting aside our own individual dumbness, if you work with any number of companies (even the Fortune 100, who should know better), you’re still stuck, even if you know what you’d like to invest in. The choices are limited, the funds offered are often load, actively managed, and with high management fees. Even if the plan has negotiated a lower rate, it’s still the same lousy fund. Yes, you’re supposed to be given more information nowadays on what those fees actually are, but there’s no requirement to offer you a wider selection of funds.

So, pull out that plan document or go to your employee benefits website. Look for the following:

Are there index funds available in large (S&P 500), mid-cap, and small-cap funds; corporate, government, and international bonds; international developed and emerging markets; and some alternatives (such as real estate, commodities, or, if you must, gold)? It’s pretty hard to build diversification if you don’t have many choices. And if all the choices are stocks, it’s going to be impossible for you to make truly tax-savvy choices as your account builds.
Is it sponsored by an entity with “private banking” in the name? You’re probably being screwed. Law firms and medical practices are particularly vulnerable to pitches that sound elite. The only thing elite about this is the much higher fees and much poorer investment choices—elite for the “private bankers”.
Does Morningstar list the funds? If the funds aren’t publicly traded, good luck trying to get a prospectus or even any statement about what investments are actually in the fund. And forget any ability to actually get an independent opinion, rating, or comparison of them. Oh wait, maybe that’s what they wanted. Some of the descriptions I’ve seen of these private investments can only be described as wishful thinking, er, pipe dreams, er, misrepresentation, er…
Do you recognize any of the funds? Vanguard, Fidelity, American Century, TIAA-CREF—not all have my favorite investments, but at least you’re working with well-observed entitites. You probably haven’t heard of the “Maximize Growth Special-situations Fund”–guess why?

Here’s an issue where well-paid executives are just about as vulnerable as the average receptionist–perhaps more so because their account balances are likely to be larger investments in crummy funds. And even if you’re smart about investments, you still may be trapped without choices.

So, what to do? If you get an employer match, it’s still usually worth contributing. But contributing up to the full legal limit to get the tax benefits? Well, it depends—and for that one, you do need a financial advisor to take a personal look. And, radical thought though it is, you could actually save money outside of your 401(k), where you control the investment choices.

For a really excellent article on what you can do about a lousy 401(k), run out to the newsstand (or subscribe online) to the latest issue of Consumer Reports. They sound pretty angry, too.