A buddy of mine – I’ll call him Mike – recently told me a story about bankruptcy that’s haunted me. Mike’s about my age, with a mom who lives a couple of hours away in the same house and the same the town where he and his two sisters grew up. She’s been there for 50 years. Mike’s mother is in her mid-70s now, having retired almost a decade ago. Her husband, Mike’s father, passed away a few years back.
Ten years ago, as Mike’s parents were nearing their planned retirement, something terrible happened: The economy took a nose dive. Mike’s parents saw their retirement savings take a beating. It’s a beating from which their portfolio never fully recovered.
Mike’s parents got by, but barely. Extraordinary health care costs hit them during the final year of Mike’s father’s life when they were expected to shoulder exorbitant bills that Medicare wouldn’t cover. In order to manage those expenses, they accrued significant debt. Mike’s father passed away, but his mother was left with that mountain of debt. She was hounded relentlessly by debt collectors until she ultimately declared bankruptcy to attain relief…at 74 years old.
It’s a heartbreaking story, and it’s one that’s increasingly common. Older Americans are filing for bankruptcy in more significant numbers than ever before, a new study reveals. Research published by four college professors using data provided by the Consumer Bankruptcy Project shows that the number of senior Americans filing for bankruptcy jumped from 1.2 per 1,000 in February 2013 to 3.6 per 1,000 by November 2016.
Hmmm…that is a 300% increase in 3 years!
There’s certainly been a “graying” of the population as the huge Baby Boomer population has aged and gone on to retirement. But that alone does not explain the increase in bankruptcy filings, say the researchers. Multiple forces are at work. The researchers conclude that more seniors than ever face increased financial risk because of unmanageable health care costs, inadequate income both in retirement and before it, and reductions in their social safety networks.
In other words, precisely what happened to Mike’s mother.
Folks, let’s keep the same thing from happening to you. No matter where you are in your life – still accumulating wealth on your way to retirement, or in the distribution phase – there are practical strategies you can employ to keep yourself solvent and to make sure that you are protected when you face financial adversity.
Let’s start at the beginning. Mike’s parents suffered a big setback during the economic downturn of 2008-2009. Like many self-directed retail investors, they had adopted a “buy and hold” investment approach with a portfolio heavy skewed into equities. When the stock market tumbled badly, so did their investments. Its drawdown – the measurement of their portfolio’s decline from high to low – was almost 50%. They lost nearly half their retirement savings, and a huge chunk of their net worth, during the recession. Mike’s father exacerbated problems by making another classic mistake – he sold some of those equities at their lowest point then bought them back after they started coming back, suffering further losses over time.
You see, an investment strategy that emphasizes downside risk management could have really helped to minimize their losses. And diversification can be an essential component of that strategy. By diversifying their investments across different asset classes, such as domestic and international stocks, bonds, short-term investments, and others, they could have reduced the volatility in their portfolio.
An investment strategy that incorporates tactical risk triggers can also help to preserve capital. A defined risk strategy helps educated investors to eliminate decisions based on “gut instinct” -emotions and opinions; rather than facts, data and an analysis of historical market trends.
Mike’s parents didn’t help their situation by critically underestimating their own health care needs in retirement. As a result, they very quickly accumulated debt they could not pay back. The cost of health care in retirement is rising, and Americans are living longer than ever in retirement. Fidelity Investments says that a couple retiring at age 65 in 2018 will need $280,000 saved after tax just to cover their health care costs. Having a sound financial plan in place to pay for premiums and expenses not covered by Medicare is critical to economic well-being during retirement years.
As Mike’s family has discovered, paying for long-term care is one of the most daunting challenges affecting many folks planning their retirement, especially since Medicare does not pay for long-term care.
In some cases, retirees will pay for such care out of pocket, using liquid assets or home equity. Unfortunately, this can often leave those retirees with little to nothing to pass on to their loved ones.
Medicaid planning with an experienced attorney can sometimes help retirees to reposition their assets to help become eligible for Medicaid assistance. But please understand, there are many factors to consider before doing this, including whether or not it makes sense to lose control over any such assets.
Retirees ineligible for Medicaid who don’t want to spend down their assets have another option as well: long-term care insurance. Traditional long-term care insurance requires the payment of a monthly premium and pays out benefits only if the policyholder requires it; premiums are not refunded, and if long-term care isn’t needed, the money is gone.
Asset-based long-term care insurance is another option that’s growing in popularity. An example would be a combination insurance/long-term care policy. The advantage of such a policy is the payout of a death benefit that the policy holder’s family will receive if long-term care is not needed.
The long-term care insurance market has changed dramatically in recent years as the insurance industry has recognized American’s needs to pay for more health care in retirement. The industry has sought to make such insurance more palatable for more consumers with new options.
If you are considering long-term care insurance, it is crucial for you to understand what you are buying, what your coverage limits are, any exclusions, benefit triggers, and what type of care is covered. There are practical considerations to consider regarding potential rate increases over time, and any tax benefits associated with such a policy as well. These are all issues to discuss with your financial planner and attorney, preferably long before such services are necessary.
What happened to Mike’s family could happen to anyone. Preparation and planning can make all the difference when it comes to your long-term care needs in retirement.
As I say every week, be vigilant and stay alert, because you deserve more.
Have a great week!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices is Falmouth, Duxbury, and Mansfield. Jeff can be reached at firstname.lastname@example.org.
Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.
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