Medicare – Problem Solved: A NJ CPA Blog

Do you have a solid foundation upon which you can build wealth?

The other day, I received a call from a young 40-something client about retirement planning. “I have two little ones and my wife and I want to make sure that we are doing what we’re supposed to do in getting ready for retirement.” The client also expressed a desire to invest ~$6,000/yr towards college savings via 529 accounts ($250 per month, per child).

While this all sounded respectable and fair, I stopped him in his tracks and said “(Client), I am so happy that you’re being proactive in reaching out to me to discuss and address these issues, but I think we need to step back for a second. We need to look at the foundation upon which you’re looking to build.”

I could tell that my client was puzzled. He proceeded to ask me what I meant. I explained that as an advisor, I strive to develop plans with the strongest chance of succeeding. I am not interested in laying out colorful pages full of rosy assumptions, pretty graphs and a product push on the back-end. I am a professional that breaks down your goal as you communicated it to me, designs a plan to achieve that goal, identifies the risks that can throw a monkey-wrench in that plan, and finally presents solutions that eliminate or mitigate those aforementioned risks. “If we have a plan that ignores risk, we don’t have a plan. We have a pretty looking wish list.”

To develop this foundation of protection, I proceeded to describe to the client a foundation on a home. It has a simple, Pyramid-like shape with protection at the base. These are the four areas of your life that need protection – (1) health, (2) financial, (3) personal property and (4) wealth.

Health – To protect your health, you need health insurance and adequate reserves to handle extreme medical emergencies such as max out-of pocket deductibles and co-insurance. Having those funds in liquid cash, in a Health Savings Account are ways to manage this risk. Insurers like AFLAC also have special products to mitigate this risk for middle to low income earners that find it challenging to accumulate such funds.

Financial – Protecting your financial situation is a multi-faceted strategy. At the base of the plan, one should secure adequate Disability insurance. This coverage “protects the paycheck” and insures that you have the funds needed to meet financial obligations in the event that you can’t earn an income due to accident, illness or affliction. Next, would be adequate life insurance. Having a plan for your family is useless if you die and the resources needed to support surviving family is not there. Insurance is the best way to leverage relative lower dollars to generate a legacy for years to come. Building up an emergency fund and paring down debt are also methods of insuring that a savings/investment plan has a maximum chance of success.

Personal Property – Most of these items are required to be protected – auto insurance, homeowners’ insurance, apartment insurance, umbrella coverage, etc. it’s funny how the powers that be (banks, landlords, auto finance companies) make it required for you to protect their things, but we fail to require ourselves to protect our own valued assets.

Wealth – Strategies like proper asset allocations, utilization of protection-focused instruments like annuities and structured products are all ways to help minimize risks to retirement portfolios. In addition, forward-looking asset protecting vehicles like Long-Term Care help retires keep their assets from being decimated by custodial needs that may arise later in life.

While all of these issues may not be applicable to my client in the present sense, discussing these issues help clients see the big picture and plan accordingly. We identified (1) that his emergency fund only covered two months of expenses, (2) there were shortfalls in his life insurance and (3) that his long-term disability coverage didn’t cover his annual bonus (which made up nearly 40% of his annual compensation). So the plan right now was to secure the needed supplemental disability and life insurance immediately, cut back spending and build his emergency fund up to be a MINIMUM of three-month’s expenses (the 18-month goal is to build this up to 6 months of income), continue to responsibly manage debt, open two 529 with lower contributions (but reaching out to family and friends to contribute to help build up the account), and finally develop a risk- and time horizon-adjusted asset allocation analysis for the retirement portfolio. By engaging in actions to fortify his financial foundation, we are now both in a better position to work together to build wealth.

Into Fitness Meme

I have a confession. I am overweight.

Like many Americans, I indulge a little more than I should when it comes to eating and nice cocktails. I exercise regularly (which is why I look more like a bouncer than Fat Albert), but I know deep down that if I really want to change the way I look and feel, I need to address my diet and fitness with more attention and seriousness.

One of the skills that I credit from my mom is that I am a pretty good cook, so I am not a slave to fast food and casual dining establishments. Here are a couple of my creations:

Asian-Styled Short Ribs

Asian-Styled Short Ribs

“Rif-Daddy” Wings

Rif-Daddy Wings

Slow-Cooker Turkey Chili

Turkey Chili

Kale Salad with a Tomato medley and Thumbelina Carrots

Kale Salad

So, preparing meals is not an issue. Preparing the right ones in the right portions is the challenge. I have dabbled in going meatless (but not strict vegan or vegetarian), juicing and hitting the gym like a mad man. My typical results are a 20-pound drop here, a 30-pound drop there, and then I would shoot back up in weight when I stop the new routine.

My current journey has me incorporating a “lifestyle change”, where I look at everything that I do well (regarding living healthier) and find a way to do things that work in my everyday lifestyle. This includes (1) keeping eating out to a minimum (it was a remote occurrence when I was kid, so I am trying to get back to that paradigm), (2) increase water intake, (3) more FRESH fruits and vegetables incorporated into my daily diet, (4) keep processed foods to a minimum, (5) take a break on the bottle and (6) doing more cardiovascular exercise on a daily basis. The key is to try to find the combination of healthy behaviors that I can make into an overall healthier lifestyle, and do it before a doctor makes me do it. I’ll keep you posted on my progress, but if you have any ideas or success stories to add/share, please reach out to me and share the information. I would be eternally grateful.

Now on to the personal finance side to this post. What does weight and living a healthier lifestyle have to do with finances? Well, not be a buzzkill, while Americans today have better medical care and technologies, we are living more unhealthier lives (i.e., sedentary lifestyles and poor diets) vs. generations of the past. With current medical advances, people are living longer in the US, but not necessarily healthier. The costs associated with such unhealthy lives can be substantial, especially in retirement. When planning for retirement, one should take care to take stock of their health, their family’s hereditary history and factor this information into their planning to ensure that their assets can handle the potential impact of rising health care costs.

Health and Retirement … What’s the Connection?

Per a white paper produced by Fidelity Investments titled “America’s Lifetime Income Challenge”, many retirees who venture into retirement face the challenge of dealing with “rising health care costs”. These costs come to light for many, as they become solely responsible for their health care costs (vs. paying a fraction of the costs under an Employer Healthcare insurance plan or paying little to nothing under an Employer-provided Retirement Healthcare benefit). Therefore, many retirees who retire at Medicare-eligible ages find themselves paying for Medicare Part B (medical insurance), Medicare Part D (for prescriptions), and Medicare Part F (Supplemental Coverage) (or Medicare Part C/Advantage Plans, which A&B coverage and other benefits under a private insurance company) can find themselves facing health care costs in excess of $15,000 – 20,000/ year (medical care costs be as high as a third of a retiree’s household budget) . Per the report, “over a 30-year retirement, a couple may need $351,960 simply to cover maximum out-of pocket medical expenses not covered by Medicare”. And that’s for healthy retirees.

See the attached article on the topic here.

Poor health not only causes medical costs to be higher (from a prescription and out-of-pocket medical cost perspective), the chances other catastrophic expenditures such as Long-Term Care Costs become very real as the risk of stroke, diabetes, or dementia become magnified. Without Long-Term Care insurance, such an occurrence can decimate a family’s retirement nest egg and potentially place them at the mercy of state government programs such as Medicaid.

Helpful Hints

I am not a health professional, but I will do my best to provide some pointers to help you protect your retirement while making your life potentially more healthy in your golden years. Here it goes.

Take a DNA test – With take-home tests that can map out your hereditary makeup, you can now get insight into sicknesses or diseases that you may be susceptible to and prepare accordingly.
Change your lifestyle NOW – Start today. Seriously. Start walking to local destinations vs. driving. Crowd out your meals with fresh fruits and vegetables. Eat a healthy meal before going out for drinks with friends. Watch your alcohol intake (no more than 14 drinks a week spread out over the week) and keep fatty meats and seafood to a minimum. Moderation is the name of the game, so make small changes every day until you create the habits needed to change your life.
Do a Retirement Financial Plan – Work with a financial advisor or financial planning software to estimate your planned income and expenses in retirement. You may want to run different scenarios that show spikes in medical care costs and the potential mitigation of such costs with insurances such as Long-Term Care Insurance. In any event, you should plan out the numbers and have a plan in place to deal with the outcome of such scenarios.

Thanks so much for tuning in. I really appreciate it.

SAM

Tag: Medicare

Building Wealth on a “Foundation of Protection”

Your Expanding Waistline and Your Retirement. Not Perfect Together.