The Money Class (32 page)

BOND INVESTMENTS

For the bond portion of your IRAs and any taxable accounts, I recommend you invest in individual Treasury bonds. Because the U.S. government backs these you do not have to worry about default risk. If you were to invest in corporate bonds you would need to build a diversified portfolio of 10 or more issues, and unless you have $100,000 or more to devote to bonds, the commission you would end up paying would be too expensive.

The discount brokerage where you keep your IRA should offer the ability to buy Treasury securities. Just remember to stick with shorter-term issues—maturities of five years or less.

• No Target Funds Allowed

At this stage of your life I am going to put my foot down and insist that you do not rely on target retirement funds. It’s for the very reason I mentioned earlier: I do not like bond funds in any way, shape, or form. And a target retirement fund when you are in your late 40s and 50s will in fact have plenty invested in bond funds. It varies by each different fund company but it might be 30% to 60% or more of the target fund’s assets. In the previous class I told younger adults that if they didn’t think they had the discipline to create their own portfolio of mutual funds among the offerings in their 401(k), I would allow them to opt for a target retirement fund because at a young age a target fund wouldn’t have much invested in bond funds. But as you age, a target fund’s glide path—that’s the term used to describe how its mix of different types of investments changes over time from higher risk to lower risk—will naturally shift into more bond funds.

You do not have my permission to stay in a target-date retirement fund once you are in your 50s. Nor do I want you using a target retirement fund for your rollover and taxable accounts. Time to stand in your truth. You are here in this class because you have a dream to retire. And to retire knowing you will be financially secure. That is your children’s dream as well. The more you can build true financial security for your later years, the less likely you will need your children to step in with financial support.

No matter how unfocused you may have been on making the smartest retirement investing choices in the past, you have reached a crossroads moment. You are standing at an important intersection: You can continue down the same road of not paying much attention; if you choose that path, there is no way to say whether you will in fact realize your retirement dreams. Or you can choose to become actively engaged in managing your retirement accounts and take control of steering your retirement to success. The choice is yours; which way will you go?

I understand that some of you may feel too overwhelmed to handle all the decisions on your own. There is nothing wrong with wanting to hire help. But I ask you to think of a financial advisor as a coach who is there to offer expert advice and help devise a strategic game plan. But you must be an active participant in the process as well. Hiring a financial advisor is not the end of your work. There is no end here. This is your retirement we are talking about, this is your money, not anyone else’s money. As I have said so many times: What happens to your money in the coming years affects you and you alone. So no matter how talented and smart an advisor is, if you blindly hand over your money and the decision making to someone else, that is a failure to stand in your truth. Hire a financial advisor to
help you
make the right choices for your future.

In previous books I have offered detailed advice on how to identify a solid financial advisor. At my website you can read the steps I recommend you take when interviewing possible fee-only advisors. But I do want to be very clear here: Fee-only advisors are in fact the only financial advisors you are to ever work with. Fee-only advisors charge a flat hourly fee, or if they oversee your investments, they will charge a small percentage of your total assets. But they do not make any money through sales commissions on the investments you buy, sell, and own.

An advisor who is reliant on commissions has an inherent conflict of interest. To get paid, an advisor who relies on commissions or trade-based fees needs you to buy certain investments to get paid. So that raises a question: Are you being advised to make an investment or trade because it is the right and smart move for your future, or because it generates a commission for the advisor? You should never put yourself in a situation where you have to ask yourself that. Working with a fee-based advisor is the way to go.

I hope what I am about to say will be ridiculously obvious to all of you, but history tells me this is an age-old problem: A referral from a friend or family member is not all you need to find a financial advisor. Bernie Madoff had great word of mouth for decades. Gather leads from people you admire and trust, and then do your own legwork to verify that the advisor is not only legit, but is someone you feel understands you and your financial situation. In the second class of this book I discussed my belief in trusting your gut—if something does not feel right to you, you must honor that. You are never to take a leap of faith, particularly when it comes to choosing someone who will be instrumental in the handling of your finances, simply on the basis of what someone else says. You have to get in there face-to-face and assess the situation for yourself.

LESSON 6.
PLAN FOR LONG-TERM CARE COSTS

One of the most important decisions to make in your 50s, one that can have a huge effect on your retirement years, is whether to purchase a long-term care (LTC) insurance policy. Long-term care insurance helps pay for your care if you can no longer take care of yourself without assistance. LTC insurance can pay for someone to help within your home and it can also be used to help with nursing home costs. I think buying an LTC policy now is a seriously smart move to make because the policy will be much more affordable. However, you will once again have to factor the cost into your annual expenses for years to come—possibly all the way to age 84. Why 84? That is the age when people typically need this type of care. It will do you no good to purchase a policy now, pay for it for ten years, and then have to give it up in retirement because you can’t afford it. No one wins in that situation except the insurance company. But if you can afford it, I would urge you to buy it. I remember suggesting to my mother that she buy a long-term care policy about twenty years ago. I even told her I would pay for the premiums, but she refused. She said she would never need such a thing. She even refused to sit for an exam. This year my mother, God bless her, turns 96. Her expenses in an assisted living facility are approximately $20,000 a month. If my mom did not have my help in covering these costs, I cannot imagine the life she would be living right now. So know that this is a subject I take very seriously—and so should you.

WHEN TO BUY

In the past I have recommended you wait until age 59 to purchase an LTC policy. Given recent changes to these policies, I now say that is the latest you should consider making a purchase. Your age at time of purchase and your health status determine your premium cost. If you purchase a policy before age 61 you will likely pay a premium of less than $2,500 a year. Furthermore, what you want to avoid is being turned down outright because of a health issue; the older you are when you apply, the more likely you are to have a preexisting condition that could impact whether you are able to buy a policy, or the cost of that policy. It’s just a fact of life that medical issues increase as we age. That is why I recommend you make your LTC decision no later than 59.

Go to The Classroom at
www.suzeorman.com
:

I have more information on how health issues can impact your ability to qualify for LTC insurance.

THE FINANCIAL CASE FOR BUYING LONG-TERM CARE INSURANCE

The fact that on average we are all living longer creates a bit of a good news/bad news situation for your retirement planning. A longer life span increases the likelihood that at some point you may no longer be able to take care of yourself.

Some of us may need nursing home care. The median daily rate for a private room in a skilled nursing home in 2010 was $206, according to Genworth Financial’s comprehensive survey of long-term care costs. A semiprivate room at a private nursing home carried a median daily rate of $185. And that’s just today’s cost. Like most of our healthcare system, long-term care costs have been rising more than the general inflation rate, about 5% a year. At that pace, the cost in 20 years could easily be $470 a day for a private room, or more than $170,000 a year.

What’s really eye-opening, though, is the cost of at-home care, something that many more of us will likely require. At some point we may well need to hire people to come into our homes to help us manage the daily rhythms of life as we age. And that can end up being even more expensive than nursing home care. The median hourly salary in 2010 for a home health-care aide, according to Genworth, was $19; that adds up to more than $450 a day for round-the-clock care. Moreover, assisted living facilities carry a median monthly rate of about $3,200. Even adult day care is around $60 a day. It’s all expensive and something you must plan for if you are going to live a long life without outliving your money.

HEALTH INSURANCE, MEDICARE, AND MEDICAID

Please know that your current health insurance policies and Medicare do not cover your long-term care needs. Medicare offers limited financial assistance for short-term recovery periods of less than three months. If you have been hospitalized (for at least three days) and then move to a Medicare-approved skilled nursing home facility, Medicare will only pick up the full tab for 20 days. For days 21–100 you must contribute to the cost of your care—called a copay. Beyond 100 days there is no coverage. Medicare coverage for at-home care is also limited. The bottom line is that Medicare will provide limited help in covering your long-term care needs. At Medicare.gov you can download a free booklet that explains Medicare coverage.

A Promising Development: A Partnership Between LTC Insurance and Medicaid

In the past, Medicaid (MediCal in California) has paid for long-term care only after people have spent down most of their own money. As I have said many times, if you think choices where you can receive care when you are on Medicaid are as good as when you are a private-pay patient, I am here to tell you that you are wrong.

But a promising program called the Partnership for Long-Term Care makes it possible to hold on to more of your assets if you were to ever need to apply for long-term care coverage that is provided within the Medicaid program. Under partnership plans, states allow consumers who purchase a state-approved LTC policy to be able to keep assets equal to the benefits paid out by your policy. The idea is that you buy as much private insurance as you can afford from an insurance company that participates in the Partnership program and if it isn’t enough, you can then use Medicaid as a safety net to help pay for your care for the rest of your life without spending most of your hard-earned money first.

You can learn more about these programs—including whether your state has a program in place—at the website of the Long-Term Care Partnership,
www.dehpg.net
, or in The Classroom at my website.

Clearly, planning for how you will be able to cover later-life care expenses is a big piece of your retirement puzzle. It is also of extreme importance for your children as well. In the Family Class I discuss how to stand in the truth while raising your kids—instilling good money values and helping them establish a firm financial foothold in their young adult years. Well, Mom and Dad, one of the most incredible gifts you can bestow on your grown children is to do your very best to plan ahead so you can cover your care costs later in life. That will help your kids reach their retirement dreams by reducing the likelihood—or the cost—of helping you out down the line. That is not just a financial gift; it carries tremendous emotional power as well. Releasing your adult children from the worry of how they might have to simultaneously care for you and their own family gives them more breathing space to live their lives to their fullest. That’s part of your legacy as well.

And that is why I think everyone who can truly afford a solid LTC insurance policy should have one. Please read that carefully; the point I am going to stress here again is affordability. I am not just talking about the cost of a policy you buy today. The biggest challenge is to make sure that you will be able to afford paying an LTC premium year after year. You should anticipate an increase of 50% in that premium cost, too, over time. The LTC insurance industry is still in its early growth stages and insurers have yet to figure out how to properly price the policies to cover their claims. What has been happening is that many LTC insurers have raised their rates on existing policies by double digits. And some insurers have recently decided to stop selling new policies, period (don’t worry; they are still honoring existing policies). I do not think that is a reason to avoid LTC insurance. But it does make it very important to shop wisely and make sure the policy you buy today is a policy you will still be able to afford if it incurs a price hike.