Check out my latest interview above with Jennifer Hammond, Radio Show Host of Jennifer Hammond Real Estate Show on Sirius XM.
Check out my latest interview above with Jennifer Hammond, Radio Show Host of Jennifer Hammond Real Estate Show on Sirius XM.
When the modern definition of retirement planning came of age in the United States there were two main accounts that were used to give Americans the opportunity to retire with income. These accounts were Social Security which was signed into law during Franklin Roosevelt’s administration in 1935 and a pension which has its roots as far back as 1776 and was originally designed for soldiers of the Military (http://www.ssa.gov/history/briefhistory3.html)
Since their inception, these plans have had many changes on the way to their modern-day forms. Both of these programs provide income to people who get older and/or become sick or disabled and lose the ability to create their own income via their own labor. A pool of money is created from contribution or taxation of many people to form a large amount of money that in theory will grow over time and then as the contributors begin to stop working full-time “retire” or become disabled, they can start to draw a monthly income to pay their bills and maintain a decent lifestyle.
There will come a time for almost all people where they will exit the full-time workforce and enter the non-working class or the part-time workforce. When this happens their income will usually dramatically decrease. So during their working lifetime, they will contribute (mandatory) to social security (most professions contribute but not all are required to contribute to social security) and many will contribute to a pension or now the much more popular 401k or IRA and other similar qualified accounts. There are other types of qualified accounts and the qualifications are governed by Uncle Sam. Many times the name of the account references the section of the IRS code that covers the rules and qualifications for these types of plans ex: 401k and the 403b.
Most of these accounts give the contributor the ability to set aside a certain amount of money annually into these qualified plans and offer tax-advantaged status. With traditional qualified plans, you put money inside of the account and can defer your tax on that contribution and any growth that account may or may not have until the money is withdrawn voluntarily or at mandatory ages. The newer Roth accounts don’t qualify for the tax deferral on the contribution but all growth of the account is tax-free for life and withdrawals are tax-free as well.
These qualified accounts have taken over as the main retirement vehicles for American workers and replaced a traditional pension. Companies have embraced these accounts and run away from traditional pensions. In doing so, they have shifted the risk of retirement from the company over to the employee. The Old Style Traditional PensionWhen I speak to people about retirement planning, many of them long for the old days of the pension plan. This type of plan is called a defined benefit program which simply means the pension fund and the employer guarantee the retiree a certain amount of income every month regardless of the pension.
The Old Style Traditional Pension
When I speak to people about retirement planning, many of them long for the old days of the pension plan. This type of plan is called a defined benefit program which simply means the pension fund and the employer guarantee the retiree a certain amount of income every month regardless of the pension funds performance over time. So it might look like this: Joe works for ABC Company, ABC union, or ABC municipality for 25 years and contributes from every check along with his employer into the pension fund. He is promised that when he retires he will be paid $3,000 per month every month for the rest of his life (and usually his spouse’s life but not always it will depend on options the plan administrator offer and what options you take) from the pension fund.
If the pension fund does not perform well in the market or other investments during those 25 years it does not affect Joe’s income because his benefit is guaranteed. This guarantee is only solid if the overall pension fund remains viable. One of the big financial stories a couple years ago was the municipal bankruptcy of Detroit where a portion of those pension payments are in jeopardy. (http://www.latimes.com/nation/la-na-detroit-bankruptcy-20140222,0,3941443.story#axzz2w34XwofH) If the funds don’t perform as projected then it is up to the plan sponsor to put in more of their money into the plan to keep it funded properly. When you hear the term underfunded pensions it usually does not mean that the proper money was not put in the account but rather the contributions did not grow as planned thus creating a shortfall in total pension funds to be able to pay retirees. Sounds good for the worker but they have some serious flaws such as:
1) Workers are usually not qualified to receive income until after many years of working for the same company, union or municipality. If they leave and go elsewhere that pension and the amount they contributed are generally not portable and transferable. A real downside for the modern “free agent economy”.
2) The worker’s ability to get the actual cash before retirement is very limited and impossible for some accounts. This will depend on the plan administrator and how the account was set up at inception. 3) The employee does not control the cash generating the income but rather the pension fund has all the control. So if you and your spouse pass away relatively early then the pension income stops and your estate receives no cash from the pension fund In 1981 the 401k and other qualified plans were born and even the man who is widely credited with their invention says they are failing most Americans. (http://www.marketplace.org/topics/sustainability/consumed/father-modern-401k-says-it-fails-many-americans) These plans are referred to defined contribution plans. In these
3) The employee does not control the cash generating the income but rather the pension fund has all the control. So if you and your spouse pass away relatively early then the pension income stops and your estate receives no cash from the pension fund.
In 1981 the 401k and other qualified plans were born and even the man who is widely credited with their invention says they are failing most Americans. (http://www.marketplace.org/topics/sustainability/consumed/father-modern-401k-says-it-fails-many-americans) These plans are referred to defined contribution plans. In these plans, the worker contributes to these accounts on a voluntary basis as does the employer also on a voluntary basis. The growth of these accounts are not guaranteed. The eventual incomes from those accounts are not guaranteed as they are with the traditional pension. So retirement income is totally in the hands of the account owner and how they allocate those funds. The income is very much dependant on how the stock market performs for most workers because the stock market is where the lion’s share of all the money in those funds is invested. So if you withdraw money as income and pay your required taxes (in the case of traditional accounts) the balance is left for you to spend to live your life. If your money remains in the market during retirement and the market goes bear then you must sell more shares of your investment to achieve your desired income.
Many people are familiar with dollar cost averaging during their working years but almost nobody is familiar with the dirty little secret of reverse dollar cost averaging. Reverse dollar cost averaging will cannibalize your retirement (click here for more information on both dollar cost averaging and reverse dollar cost averaging) and must be handled to have a successful retirement. One of the best ways to combat dollar cost averaging and set up your own stable income stream for life is to set up your own “private pension” by utilizing your old 401K or existing IRA.
This can be done by the proper rolling over of those accounts from risky market accounts to a properly designed annuity contract. As with any financial product, there are always upsides and downsides. Purchasing an annuity is no different. We will cover the benefits and pitfalls of annuities next week in part two of this article. For now, understand that there are 3 basic structures of annuities:
1) Fixed Annuities
2) Variable Annuities
3) Fixed Indexed Annuities
These 3 types of annuities have the same basic name but have wide variations of how they work. Then once you know how each work there are many different varieties and terms offered and by a wide range of providers. The fees will also vary based on product and provider.
One of the biggest benefits of many annuities is the ability to structure the contract for guaranteed lifelong income once purchased. Also, you can use qualified funds such as IRA’s and 401k’s to purchase the annuity and accomplish this via a tax-free rollover in most cases.
One of the biggest downsides of annuities is the non liquidity of the money beyond a certain percentage of the total account. Most annuity contracts come with steep penalties for early withdrawals beyond a certain amount (usually around 10%) of money withdrawn out of the account during a certain period of time.
Please read my next article when we will discuss in more depth how to successfully turn your IRA and 401k into a paycheck machine for life while at the same time avoiding the costly pitfalls.
As I write this article the stock market has had a fantastic rebound from its last serious downturn and most investors seem to have a little more bounce in their step than several years ago. It seems that the market is hitting new all-time highs every other day. I am happy that people’s investments and retirement accounts are doing better and I hope they continue to do so in the future. However, as we all know the stock market goes up and goes down and the timing of your entrance and exit on certain investments can have a huge effect on your actual gains and losses. (never forget 1999,2001, 2008 just in recent history)
The stock market and all the emphasis put on it by almost everybody can act like a giant Magic show where you are paying attention to what the market is doing in the left hand but totally oblivious to what your overall financial picture is doing in all other parts of your life. The traditional media’s focus on stock market investing almost to the exclusion of everything else has made most Americans singularly focused on that one part of their financial life while not paying attention to where most of their wealth is being eaten up systematically month after month and year after year. This cannibalization of wealth happens no matter if the stock market is up or in the tank. I call these massive wealth drains and there are 4 huge ones (along with several other smaller ones) we will cover briefly in this article.
The first and biggest expense people have over their lifetime are income and other taxes. Even with that fact most people really have no clue how the tax system operates and that is by design by our old Uncle Sam. Books have been written on how to reduce taxes but since our time is limited take a couple of points away from this article. Since taxes are such a huge expense maybe you should spend some time studying one of those many books by a credible tested source and figure out how to reduce your taxes. The only thing I have time for today is to give you this huge general idea. The tax system is set up to penalize hourly and salaried workers while rewarding entrepreneurs and business owners. Salaried workers pay taxes based on that they gross while business owners pay taxes based on what they net for income. When that statement is made most people think of the fortune 400 companies getting something over on the little guys. Keep in mind you don’t have to be a massive business to get great tax advantages. Even the little businesses and start-up businesses get huge tax benefits. So since that is the case, rather than complain about it and say “oh well I guess I am out of luck because I have a normal job” dig a little deeper and realize that everyone should have a small business even if you run it from your home office or kitchen table. To qualify for tax deductions in that business The IRS says that you have to have the intent to make a profit and work in that business for a reasonable amount of time (he never defines reasonable). When that standard is met you automatically qualify for dozens of tax deductions that you don’t get to take as an individual. If you have losses and start-up expenses much of them can be written off against your other income from your job (limits apply so get a good business CPA to work with you) Realize that nobody (even your CPA or tax preparer) cares how much you are paying in taxes and if you don’t take time to know how it works and use it effectively you will cost yourself tens and hundreds of thousands of dollars in lost income over your lifetime plus the compounded growth that lost money would have given you over time.
Another huge wealth drain is market losses on any investment capital that you control. So when the stock market or a piece of real estate drops significantly in value it could take years for your money just to get back to even and of course, there are certainly no guarantees that it will come back during your investment lifetime. Compound interest is an amazing beast that even Einstein had trouble grasping so I will keep it brief. If the compounding curve of your money is broken by market losses or premature withdrawals it has a massive effect on your final pool of wealth. Just for fun, if you were offered a job that only lasted 36 days and you had two choices on the pay plan which one would you take? First, you could be paid $5,000 per day at the end of every day for 36 days for a total of $180,000 of income. Not bad for just over a month’s work! The second option is you would be paid one cent starting on day one but that one cent would be compounded by 100% daily and payable at the end of those 36 days. Well if you jumped at the $180,000 you missed the power of true compounding of money. If your coworker doing the same job chose the compounding penny they would not be a millionaire…………….they would be a stinking filthy rich multi-millionaire with a check of $343,597,384! Do the math and then tell me when you want to break your compounding curve with big losses or withdrawals. (did you know you can have money invested tracking the market without it being subject to any market losses?)
Next massive wealth drain is interest and fees paid to banks or finance companies over your lifetime. Loaning of money (financing) has been around in some form for thousands of years. Since the time you could pull your ox into the temple you could get a loan on it if you paid more back than you borrowed and left the ox as collateral. Any business model that has been around that long is a winner! However, when you’re on the borrower side of the transaction it is a wealth drain especially if most of your borrowed money is on depreciating assets such as cars, boats, equipment and any other item that goes down in value. Now people will tell you that if you can borrow money cheap and invest in something that makes more money than you pay in interest back to the bank then you are using leverage properly. That theory can be true but it comes with many caveats and other lessons we cannot cover here this week. Do a simple exercise and add up all the money you have paid out over your lifetime in monthly payments on everything. Then compare that number to the amount of money you have saved for retirement and tell me which one is bigger. Leave your results in the comment section. Then decide you should know more about how to be the lender and not the borrower.
Last massive wealth loss is depreciation (money lost) on items such as cars, boats, equipment, appliances and almost any other large asset we buy over our lifetimes. Almost nobody discusses this (except me of course) and yet did you know that most people will lose more money on just their cars during their lifetime than they can ever save for retirement let alone all the other depreciation? Do your own math on your life and find out the truth.
Think of your financial life as a big pie and as such it has many pieces to the entire pie. Don’t fall for the magic trick of only paying attention to what is happening to your one slice of pie, which are your investment gains or losses. Pay attention to the entire pie and start to slow down and stop your 4 massive wealth drains.
John Jamieson is the #1 Bestselling author of two books “The Perpetual Wealth System” and “Wealth Without Stocks or Mutual Funds” as well as a nationwide wealth strategist with clients in dozens of states. Contact him at firstname.lastname@example.org or visit his site at www.wealthwithoutstocks.com
Part two of three part series.
Last week I wrote an article talking about how to save boat loads of money by purchasing the car of your dreams but only after it is two to three years old. For that article go here http://wealthwithoutstocksblog.com/2017/09/how-to-win-the-financial-battle-vs-your-automobile-2/ This week I want to talk about how leasing a car really works and some tips to save you more money on that next car purchase or lease.
What is a lease? A lease is an agreement you enter into to rent your car for a predetermined length of time (usually 24 to 36 months) for a predetermined monthly payment, and for a set number of miles. These payments are always less than the payment would be if you purchased the same car on the same day. The lower payment means that the car looks more affordable on the surface but inside of that lease agreement are all kinds of terms that can cost you far more than just the lease payments.
To begin with, why is the payment less expensive with a lease than with a loan for the same car? When you lease you are only paying for the estimated depreciation during the length of that lease rather than the entire loan balance you would pay back during that same time frame. As an example, you borrow $25,000 and sign a 36 month loan agreement at 5% giving you a payment of $749.00 which is a very hefty car payment by today’s standards and for many people that payment is not an option based on their income and budget. However, if you could swing that payment for those 36 months you now have a free and clear car with a lot of life left in it and if you were smart and disciplined you would continue to make that big payment but now into a tax-free account. (More on this in next week’s part 3)
In contrast, when you sign a lease on that same car for 36 months your payment might only be $300.00 for a 36 month lease which is much easier on your pocketbook. However, after the 36 month lease, you still have a balance to pay off if you want to own the car. This balance is called the residual value and must be paid off either by cash or with a new loan. Most people will not have the cash to pay off the car and so if they decide to own the car they now take on another loan for several more years to actually get the car paid off. Most people do neither of the above but turn the car in and get the next newest model and take another lease payment and so on and so on until they are old and gray.
In essence, a lease allows you to extend your payments on a car for 6 to 8 years paying far more in payments and interest (yes there is a hidden interest rate with a lease) for the same car. You have less of a monthly payment, but way more of them totaling more money out of your bank account. So how about we actually have a strategy for our next car purchase instead of just winging it? If you can’t afford the 3-year payment then how about committing to no more than a 5-year note on your car? Can’t afford that payment either? Then the truth is you really can’t afford that car. Shop for something less expensive and possibly a model year or two older http://wealthwithoutstocksblog.com/2017/09/how-to-win-the-financial-battle-vs-your-automobile-2/ Now make a commitment and plan that after you pay off the car you will not buy another one for just two more years but you will continue to make a car payment to yourself into a tax-free account. According to www.polk.com the average length of time people hang on to a car is almost 6 years so you will go one extra year for good reason.
It will look like this in real numbers. You borrow $25,000 at 5% for 5 years on your next car creating a $470.00 payment which you pay for 5 years. Now you own the car free and clear but what will you do with the payment you were making? Blow it on junk if you’re like most people but you are not like most people. You have a plan that you are working. So now you still write that payment from your checking account every month but now the money goes to a bank (or pool of money) that you control. You will do this for the next 24 months accumulating $11,322 plus the growth on that money (guaranteed and tax-free if we do it right) which would put you at a total of about $13,000 you have saved for yourself and your family. That $13,000 in a tax-free account that just gets 5% compound interest will be over $35,000 for you in 20 years. Could you do that on every car you and your spouse ever own? If you will do it you will have a couple hundred thousand dollars more for your family! According to The Employee Benefit Research Institute www.ebri.org the average American only has $56,000 in savings by the time they are 65 years old. So by mastering this car strategy, you could have 4 or 5 times that amount over your lifetime depending on when you start.
Yes, John but why do I need to make a payment back to myself instead of just letting the unused money sit in m checking account? Simple, human nature will not allow you to truly “save” your car payments unless you get the money out of your day to day cash flow and super easy access. Money is only saved if it is focused and not frittered away on other things we really don’t want or need.
Focused cash flow is the key to wealth and the disposition and growth of that cash flow are critical if you want to get ahead and have more options later in life. Did you ever “save” money on a big item? Where are those savings now? Precisely! Get in the habit of taking “savings” and truly making them savings by taking them out of your cash flow account and into a separate tax-free account.
Automobile ownership is a luxurious necessity in this fast paced world (in most places) and is a source of pride in owning a nice automobile. However, the dollars at stake here are massive over time and you need a strategy on how to stop the wealth drains of depreciation and interest on these purchases.
Next week we will show you a proven system on how to actually make money on every car you ever own which is a game changing piece of information. You can also get a jump on next week by watching a video on this very topic. Make sure you sign up for my Youtube page when you’re there watching this video! https://www.youtube.com/watch?v=JjERU7KY16c&t=74s
This time of year many people’s fancy turn to owning a new shiny car during the upcoming New Year. Dealers will need to liquidate their current year inventories to clear space for the new models. They will be pulling out all the stops including colorful free brochures, demonstrations, and pitches by beautiful ladies telling you all about the New Year models. Be careful not to get sucked into these sweet offers. A new automobile is one of the biggest wealth drains for you and your family. However, that being said a car is very close to mandatory to survive and thrive in most areas of the country. Let’s talk about some tips on how to save a fortune on every car you ever own over your lifetime. Many families own at least two cars which means you are getting robbed twice as fast. Use these simple yet powerful tips to take control of this expensive item.
It is important to keep in mind that the depreciation is usually calculated off of the base price and does not take into account all the extras you pay for when the car is new. This could be the sport package that raises the price $10,000 but only gives you $2,000 back after the first year or two. So it is very possible to find beautiful cars with manufacturer warranties still in place and pay 35 to 50% less than the first owner did when purchased new. Since the biggest percentage of depreciation occurs in the first three years, let someone else eat the depreciation and buy it used (or pre-owned as the car dealers like to say) after the second or third year.
I was able to drive a gorgeous car with a warranty for far less than it would have cost me new and I drove that car for 4 years and still sold it for $3,500 and had very little repairs during my ownership that came out of my pocket. This strategy works with exotic cars as well. When I was a young man one of the dream cars then was a Ferrari Testarossa and its price tag was around $200,000. You can buy one now for right around $50,000 and most don’t have that many miles on them because they are babied by the owners.
If you pay over 6 years you will pay out $28,989 vs. $26,974 for a difference of $2,015 more out of your pocket to own the car. In addition, by financing it for the 6 years your loan pay down is going at a much slower pace than the depreciation on the vehicle creating an “underwater situation” on the car almost from the initial purchase date. (Assuming you buy the car with a small down payment) During the 3 year program you are paying down the car faster than it is depreciating giving you options if you should have to sell the vehicle. If you truly can’t afford that 3 year payment take out the 5 year option and try to send a little extra every month toward the principle to pay it off sooner.
There are several other ways to save loads of money when purchasing an automobile that we will discuss in part two of this article next week.
Since November of 2016 the stock market has hit record high after record high which has created an estimated 3 trillion of additional wealth for stock holders. If you own stocks or mutual funds your money should have done well and had nice gains.
The next question is how much longer will it last? Will it come back down to where it was? If it comes back down might it even go down more? The answer to all of those is NOBODY KNOWS! People have been trying to time the stock market for generations and very few have been successful.
Do you want to give your stock market gains back during the next downturn? Do you want to lose money when it goes back south of where it started its upward trend? Would you like to keep your gains but not give up the possibility of future upturns?
You can reallocate some of your stocks and mutual funds into programs that protect your new found gains while allowing you to participate in future gains should they continue. This can be done with the use of a solid fixed indexed annuity.
When you purchase a fixed indexed annuity your money will track one of various indexes (actual index depends on the product and company chosen by you and your adviser) with the protection against any market downturns that may occur. If you purchase an annuity and the index you track goes up over the next year or two your money will grow along with that index (actual growth rates vary greatly based on the product chosen) but if that index goes down during the same period your cash won’t go down because of that market and index loss.
You’ll need to know some terms and ask some questions about your potential investment. Here are some to consider but not an exhaustive list:
These annuities qualify for a tax and penalty free roll over from IRA’s old 401k’s or any other qualified account you may own. If you have an active 401k, 403b and like accounts, there might be some restrictions on moving the money placed on the account by your current plan administrator. Your IRA’s could be rolled over (either all or In part) to a solid fixed indexed annuity with no issues.
Remember this is one of the 3 major types of annuities. In addition to the Fixed indexed annuity there are also variable annuities and fixed annuities. The fixed annuity gives a guaranteed rate of return with no risk of loss but the upside is usually on the low side. Could be a great fit for people who like CD’s and very safe products with a guaranteed rate of growth that happens no matter what happens in any market.
A variable annuity can basically give you high rates of return but are also subject to some loss (some have floors on the loss and many do not) and are usually subject to more fees than the other types of annuities due to their active trading and money movement.
In closing, a solid Fixed indexed annuity offer strong growth with the protections of no downside risk. If you would like more training on this particular program, feel free to visit www.perpetualpensions.com and watch the video halfway down the page. No charge and its only 20 minutes long.
John Jamieson is a national wealth strategist and 2 time #1 Bestselling author. He is a frequent guest on national radio shows and a contributor to some of the biggest online financial websites and magazines in the country. He operates a national firm that focuses on showing people how to create Wealth Without Stocks or Mutual Funds. You may contact him through his site at www.wealthwithoutstocks.com
Big Tax Deductions and a Secure Retirement for Business Owners using a Restricted Property Trust
How successful business owners are putting more money away for Retirement than they ever could with a Traditional Retirement Account
Trusts as a wealth building and wealth preservation tool have been around for centuries. Every specific trust has a specific purpose for why it is set up and how it is utilized. There is one that is designed for high income business owners to be able to put away more money for retirement than they possibly could with a traditional retirement plan. This trust will also allow the business owner to do this on a tax deductible basis.
This also allows the business owner to legally “discriminate” against their current employees or co owners so if they choose; the owner can be the only one who participates in the plan. This is very different from traditional retirement accounts where most full time employees must be given the opportunity to participate in the retirement plan.
The name of this trust is a “Restricted Property Trust” and is a very powerful tool for the right business owner. It basically works like this:
There are some taxes to be paid out of the cash value at the end but the balance of the cash value is all tax free and can be an entirely new tax free income stream for the business owner.
This is not simply a deferred comp plan or is it a traditional retirement account. It is much more high level than either one of those programs. Now let’s answer some of the most common questions we receive about this program.
Q: I already have other retirement accounts I am funding, can I still fund this trust in addition to my other accounts?
A: Yes you can.
Q: Can I be a partial owner of my business with partners? If yes, do my partners have to participate in the program as well?
A: Yes you can be a partial owner of the business and no your partners don’t have to agree to the plan (but don’t be surprised if they want to set this up for themselves as well) and your employees do not share in this benefit at all
Q: How much money do I have to make to be able to qualify for this trust?
A: There is not a specific income level but the minimum contribution to the trust is $50,000 annually for 5 year increments.
Q: if I have the resources can I put in $300,000 or even more a year into the program?
A: Yes, but that contribution amount will be dictated by how much your business is worth and how much of a death benefit the business owner can qualify for based on that business value.
Q: What happens if I can’t make the contribution during that 5 year term?
A: You contributions will be forfeited to a qualified charity
Q: Why is life insurance a part of this plan?
A: For various tax and trust reasons a properly structured whole life policy is a must for this program to be implemented
Q: If I should die during one of the 5 year trust periods, who gets the death benefit from the life insurance policy?
A: Your estate collects the death benefit during the trust periods and after the trust periods when you take control of the policy after the trust is dissolved
Q: Can I have access to the cash value in the life policy during the trust period?
A: No there is no access to the cash value during the trust period.
Q: I am a salaried employee who makes big income but am issued just a W2 at the end of the year. Do I qualify to participate in this program?
A: Unfortunately this type of trust is just for business owners or partial business owners. It is possible to receive a W2 as a salary and own the business as well. You must own a part of the business to be eligible to participate in this plan.
Q: Because life insurance is included in this plan do I have to qualify physically as well as financially for this program?
A: Yes there will be a physical required to qualify for the underlying life insurance policy. Most people who use this program are in their 50’s or 60’s and the vast majority get approved physically for the policy.
In closing, a restricted property trust can be a great benefit for the right established business owner with disposable income and/or other assets they can draw upon to fund the trust. It is not meant for spotty incomes or low asset business owners. If the business owner is stable and confident in their ability to fund the trust during the trust periods it can be a great tool.
If you would like more information on this program, please visit www.perpetualinsurance.com for a brief presentation and the information on how you can set up a personal consultation to see if this is a fit for your business.
This is not an easy topic to think about or discuss but with tens of millions of people who will find themselves in that position in the upcoming years it is mandatory to get over the uncomfortable nature of the topic and discuss options. You basically have 3 options at your disposal:
The first option is what most people choose and it’s hard to blame them because it’s without a doubt the easiest (currently) decision to make. Most people decide by not deciding or being properly educated about the other two options that are available. Surely, you and your spouse will fall into the minority group of 30% or into the “Not too expensive or long” group of people in the 70% majority that will need some type of care; right?
If you are correct with your hope and wish, and both you and your spouse don’t need long term care help in your later years, than you have dodged the proverbial bullet. If, however, your bet is a loser then you run the real possibility of not receiving the care you need or receiving the care you need but at cost of draining all the assets you have worked so hard to accumulate during your lifetime. You run the risk of leaving behind little to no estate for your family or cherished causes.
Many people who find themselves needing long term care, but haven’t planned for the possibility, end up attempting to transfer assets out of their names into family member’s names or trusts to appear poor so they can have their care paid for by the government. This strategy is wrong on many levels. First there are very specific time tables when those transfers will have had to occur BEFORE you knew you needed long term care (usually years before) and most people fall well short of meeting these time tables. This will mean you will have to exhaust almost all your assets before any help from Uncle Sam kicks in to help.
If the government is involved and paying for your care, do you think you will get the best care available allowing you to extend your life; in time and in terms of quality of life? Just look at the VA health system and realize you will likely be getting the same sub-standard care.
Also, I have always wondered why the government should have to pay for someone’s long term care? I am not talking about the truly poor and needy as I think we have enough wealth to provide needed safety nets to that group of people. I am talking about people who have worked their entire lives and built up assets. Those assets are meant to be used to make your life better and if you leave money behind to your family that is an added bonus. We are not supposed to fleece the system because we refused to plan accordingly when we had the means and ability to do so just so we can leave our family behind a chunk of money. If you want to pay for your care and leave money behind to your family then this will require knowledge and planning.
The second option is to take out long term care insurance policies for you and your spouse. This can be a great way to plan ahead for the possibility of needing long term care in the future. These premiums will not be inexpensive but neither is long term care or eventual poverty. There are many variables to these plans based on the kind of coverage you’re looking to obtain. The upside is you will have an insurance policy that will pay out monthly to help you and your spouse pay for long term care expenses (make sure you can use the policy for home health care as well as actual long term care facilities) should they occur. Terms and amounts will vary widely so if this is the way you decide to plan for these expenses find an agent who has much experience and knowledge about these kinds of policies and has access to several of the top carriers in this arena.
The downside of this option is that many people can’t afford the premiums and even if they can afford them, if they never use the policy they don’t get the money back (in almost all cases) just like your car insurance. If you don’t file a claim on a car they don’t send you back all your premiums because if they did the entire system would become insolvent. It is very possible that you could pay tens and even hundreds of thousands in premiums and yet never need the coverage. This is a thought that drives many crazy and causes some not to decide to use this option.
(If you would like more information on this topic visit www.perpetualltc.com for a short video presentation.)
The third option is called “Asset based long term care” and it has several variations. Let’s talk about the most common use of this strategy. A person might opt to take a sum of money and open up a specifically designed life insurance policy. Most of these policies are opened up with a very specific goal of generating a death benefit but that “death benefit” can be accessed during the applicant’s lifetime to pay for long term care expenses. The applicant put in a certain amount of money (could range from $50,000 to $200,000 per applicant) and buys a life insurance policy on themselves. Let’s use $50,000 one time single premium into the policy that buys a $200,000 death benefit and that death benefit is guaranteed not to go away after that single premium.
This is not done to have the $50,000 premium actually perform and do anything except generate the bigger death benefit. However, there will also be cash value generated that can be accessed should the policy owner choose to in the future. Any loans taken from the policy will reduce the eventual long term care payout. There is a rider built into this type of policy that allows you to access your death benefit early should you need long term care. (Make sure the policy will allow you to use the benefit for home health care as well as going to a facility) So in this case you could draw up to $200,000 to pay for long term care expenses. If you went into a facility this would be enough to pay for about 3 years of care (depending upon where you live and what kind of facility you enter) and if you can stay at home your money would typically last longer assuming it is part time nursing or family members coming in to help you live.
What happens if I live longer than the benefit? You will then start using other assets or consider putting in more money up front to generate a bigger death benefit. Maybe $100,000 would generate $350,000 worth of death benefit that could be drawn on later for long term care. There are also certain policies that might have a “lifetime long term care benefit” after that initial period of coverage is spent you might be able to pay some nominal annual premium on top of the upfront premium already paid years beforehand. There are many options depending on the company and product chosen.
What happens if I die and never need the long term care benefit? Simple, this is a life insurance policy so the $200,000 death benefit is paid out tax free to your heirs. So with that up front premium you either get a higher multiple to use for your eventual long term care or you leave that amount behind for your family.
We hope this article helps shine some light and makes you aware of the options for you and your family. If you would like more information on asset based long term care please visit www.perpetualltc.com for a short video presentation.