Wednesday, November 28, 2007

Retirement Planning and Bernard Baruch

I will admit that when I chose a quote for the book by Bernard M. Baruch, I did so with numerous possibilities in mind. The American financier, economist, advisor to US presidents had a treasure trove of quips and notable quotes that would apply to just about any situation.


I could have used “A speculator is a man who observes the future, and acts before it occurs.” Or perhaps “During my eighty-seven years I have witnessed a whole succession of technological revolutions. But none of them has done away with the need for character in the individual or the ability to think.” Might have served its purpose, allowing me to twist towards the ultimate goal of explaining how important what you do today is on how you will live tomorrow.

Mr. Baruch was a speculator who also said: “I made my money by selling too soon” and “I never lost money by turning a profit.” His thinking on how this was done is best explained in his wry observation of himself.

“If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.”

Aside from the speculative nature of investing in the stock market – I do not pursue this as a method to good retirement planning except when the investment used is the mutual fund, he did believe that a good understanding of who you are and why you do things helps in your decision making process.

Asking yourself why could be at the center of how you approach your plan. Mr. Baruch suggested, “Millions saw the apple fall, but Newton was the one who asked why.” Do you ask why you continue to put off beginning your plan or do you ask yourself why you have under funded it? Chances are, you haven’t.

For this he observed, “In the last analysis, our only freedom is the freedom to discipline ourselves.” This will take some doing. At the key to all of our successes has been the ability to push ourselves forward, possibly even testing our boundaries.

“Only as you do know yourself can your brain serve you as a sharp and efficient tool. Know your own failings, passions, and prejudices so you can separate them from what you see.” That said, how do we do that? Nothing presents itself in stark contrast to what we perceive and what reality is than the task of creating a budget.

A budget outlines our failings, our passions and our prejudices in sharp detail. And in doing so, it allows us to see what our financial life looks like as compared to our financial futures.

Change is difficult. No one would ever argue that point. But it is important to make the change while you still can. Because there is always this prospect: “We grow neither better or worse as we get old, but more like ourselves.”

Tuesday, November 27, 2007

Retirement Planning and Divorce

“After a divorce”, writes E. Mavis Hetherington, author of “For Better or Worse: Divorce Reconsidered” at the beginning of chapter two, “people often imagine that if only they could go back and make a tiny adjustment here of there in the past – not answering a particular phone call, say, or displaying an ounce more resolve in a weak moment – life would have turned out differently for them.”

The reason Ms. Hetherington gets a mention in the book is because of the way she categorizes people into six groups.

The enhancers are who we would all like to be: upbeat, learning from each mistake and turning it to our benefit. In a divorce this would be someone who feels release without regret. In retirement planning, this is someone who understands that things may not be exactly how they envision it but they are nonetheless excited about the prospects of entering a new and mysterious time. This person or couple would gladly downsize and do so without so much as a re-consideration. Free from the confines of work, this person(s) will explore art and gardening with a new or renewed passion. They will volunteer and become vibrant and active members of their community.

And yes, they will have managed this because they saved as much as possible, stuck to a plan and practiced retirement often while they were working. They did not live large even when they had the cash to do so. They did not take unnecessary financial or health risks and pretty much had that single goal in mind for quite a long time.

An enhancer could also be a competent loner. This person was never meant to be confined by marriage and probably will not allow retirement to hold them as well. They forge on without the help or encouragement of others. As the name implies, they do this with some skill.

The good enoughs are like most of us. We take a beating and step right back in, often making the same mistakes as we did previously. In a retirement plan, you will be the one who will be haunted by the missed or mishandled opportunities that may have come your way.

Regret is a mighty potent weight especially as you approach retirement age. Yet, while there is time, and it could take as little as ten years, any retirement plan can be turned around. To become an enhancer, you will need to embrace a sort of lifestyle change.

How little can you live on and not be completely miserable? Not an easy question to ask but look around the dinner table one night and picture yourself asking those kids of yours for a small loan to get by. You may love them but can you rely on them to do well enough to fund their own lives while helping you out as well?

The other direction for the good enoughs is less appealing. Perhaps you would become a seeker. This person stumbles along for most of their working lives and finds that when they no longer want to work, they can not stop. They may have gathered a small pension or tapped their Social Security benefit, but they are finding that life after work may be too expensive. These unprepared souls quickly become depressed.

The libertines actually make a brief appearance in the book as the couple that sold everything for the RV life only to be waylaid by a medical condition that forced them to return to their hometown. Without house and lacking the right kind of coverage (insurance) for the wife’s problem, they were forced to live a wholly different existence than they did when they were working.

In fact, looking back, the libertine might even find work a more desirable place to be. In Ms. Hetherington’s book – and I failed to give credit to her co-author John Kelly and do so here – the libertine rejoices at the idea of finally being free of the confines of a marriage only to find that the experience is fleeting.

And finally, the defeated. These are the hapless workers who labored at the bottom of the wrung and can expect a life of hardship for the foreseeable future. These are not just the hardscrabble people you might expect who end up among the ranks, but those who have had a simple turn of luck, a misfortune, and an I-didn’t-see-that-coming moment.

Can we learn something from divorce? Absolutely. It, all by its lonesome can derail a perfectly good retirement plan. For the woman, statistics prove that you will take the longest time to financially recover. For the man, the cost of recovering can be just as difficult on your health as your wallet. Avoiding a divorce would be the best method of retirement survival.

But the separation events described above apply nicely to the state of retirement. Will you blossom or wither? Will you become regretful or will your ability to survive be enhanced by your newfound lifestyle? You are making the choice right now.

Tuesday, November 13, 2007

Retirement Planning and Louis Pasteur

I use a well-known quote from Louis Pasteur in the book: “Chance favors only the prepared mind.” Essentially, the man who debunked spontaneous regeneration, a belief in the notion that some things could automatically be created from inanimate objects, understood the importance of the experimental process. It is what he brought to that process that separated him from his fellow experimenters.

(For those of you who may not be aware of what spontaneous regeneration is, you can try this simple experiment at home: Take one large jar. Place one pair of sweaty underwear and some husks of wheat and if you did everything correctly, you will have a mouse in twenty-one days. Even when Italian physician Francesco Redi, using the first controlled experiment to debunk the myth in 1668, the general populous was not swayed.)

Pasteur (1822 – 1895), a chemist who was born in Dole, in the region of Jura, France said, "Imagination should give wings to our thoughts but we always need decisive experimental proof, and when the moment comes to draw conclusions and to interpret the gathered observations, imagination must be checked and documented by the factual results of the experiment."

Philosopher Ernest Renan described Pasteur's method of research as a “marvelous experimental method eliminates certain facts, brings forth others, interrogates nature, compels it to reply and stops only when the mind is fully satisfied. The charm of our studies, the enchantment of science, is that, everywhere and always, we can give the justification of our principles and the proof of our discoveries."

Should our approach to retirement planning be any different? I don’t believe it should. Although I do lay some specific guidelines for how you should question your retirement plans, each individual query will be different for each of us. We have different experiences and obstacles, many of which are not of our making. While you can control some of the roadblocks that life places squarely in your path – such as debt, your own health – many are unforeseen.

Each event requires us to interrogate the nature of the obstacle. Can it be overcome? How long will it take? Is there a way to absorb the change into my retirement plan with out jeopardizing the goal? And if the setback is major, how will I adjust my plan to compensate?

Monday, November 5, 2007

Questions: 11-18: Retirement Planning and Long Term Care: Eighteen Questions

Many policies have their own set of requirements. It is important to know when and how these criteria will be enforced. I’m skeptical of many of these qualifications. Policies issued now may have a wholly new set of hoops to jump through when the actual time you make a claim comes around. But asking the question now and including your agents (signed answers) can be helpful when you do make a claim twenty years from now.

11. Ask your agent if this policy requires the following questions to be asked if you put a claim in for nursing home care:
* An assessment of activities of daily living?
* An assessment of cognitive impairment?
* Physician certification of need?
* A prior hospital stay?
How will your potential policy cover the need for home health care:
* An assessment of activities of daily living?
* An assessment of cognitive impairment?
* Physician certification of need?
* A prior hospital stay?
* Other?

12. Surprisingly, or maybe not, insurance companies may have a small loophole built into the policy that you may not be aware of when doing your comparisons. For instance, does this policy require a prior nursing home stay for home health care coverage?
* Yes
* No

13. Once the policy is written and signed, it cannot be changed. The language is set in stone so to speak. This also should apply to the cancellation policy. If you are on good terms with the insurer, your policy should be guaranteed renewable. It may be, but ask anyway. Is the policy guaranteed renewable?
* Yes
* No

14. We have discussed some of the optimum years for getting these policies. Do it before your birthday and if possible, do it during your fifties or earlier. Here is an example of several policy quotes I received from the Federal Long term Insurance Program.

Because I am not eligible (I am not, as the site says, a Federal family), I used their calculator to determine several options. All of the policy quotes I received were based on three years of coverage, a ninety day waiting period, a daily benefit of $100, $200, and $300, comprehensive coverage (which includes both nursing and home care) and inflation protection. Here is what I found out based on my age (49 at the time of this writing), one year later, and if I had applied ten years later.

On the $100 benefit at age 49, I would pay $60.01 a month and receive a lifetime benefit of $109,500, at a daily benefit of $200, my premium and my maximum benefit would increase by twice; at a $300 daily benefit, I would pay $180.

Waiting a year until after my fiftieth birthday, I would be making slightly higher premium payments of about $4 – 8 a month. But if I waited until I was 59 to purchase the policy, the policy premium on a $100 daily benefit would increase to $89.47, at $200, it would double and if I wanted a $300 day benefit coverage, my monthly outlay would be over $265.

Ask your insurer for their insurable age ranges. It is important to understand what kind of insurance pool you are jumping into. If there is a cut-off date, this might be prove to be beneficial in terms of what kind of people are participating. If they offer a lengthy cut-off date, they may be filling the coffers with policies, many of which they will paying out on soon.
What is the age range for enrollment?

15. It is possible that your policy will no longer require you to pay the premium once the policy is activated. Find out if there is there a waiver-of-premium provision and how long must you be confined before the waiver begins?
For nursing home care
For home health care

16. The inflation portion of the policy is important and may cost you extra. Does the policy offer an inflation adjustment feature as a regular part of the policy or as a rider? And if they do:
What is the rate of increase? $ _________
How often is it applied? $ _________
For how long?
Is there an additional cost? $ _________

17. Policies can offer discounts depending on how you pay your premiums. Often, there is as much as nine percent discount if you pay the premium in full on an annual basis. Be sure to ask if you can receive any additional discounts if the money is electronically transferred. Once all of these things are asked of the insurance company, don’t expect a clear-cut view of all of the costs. But you will be able to get a general idea of what the policy will cost you and whether you can afford it.

What does the policy cost?
Per year $ _________
With inflation feature: $ _________
Without inflation feature: $ _________
(get it regardless of the cost savings that might be shown)

Per month $ _________
With inflation feature: $ _________
Without inflation feature: $ _________

18. Most policies come with a period of cancellation. You may have second thoughts. You may find, if you read further in the book, that there may be another option available for those who are diligent enough to pursue the alternative. Ask your agent if there is there a 30-day free look?
* Yes
* No

Questions: 4-10: Retirement Planning and Long Term Care: Eighteen Questions

As we continue our discussion about LTC coverage and what it covers, comparisons become more difficult. The next six questions will help you compare the types of coverage available

Compare how long your policy will cover the following:

A stay in a nursing home
If you need care at home

4. To determine what you maximum lifetime benefit is, simply multiply your daily benefit times the number of days you are covered. For instance, in the chart below, a policy with a daily benefit of $100 payable for three years will pay out $109,500 in benefits ($100 x 3years=$109,500 – this lifetime benefit is not reflective of inflation increases). Once again, the length of time you choose for your policy and the waiting period have an effect on your maximum lifetime benefit.

What does your policy offer?
For nursing home care $ _________
For home health care $ _________

5. Does the policy have a maximum length of coverage for each period
of confinement?
For nursing home care
For home health care

6. Like many policies that have a wide swath of unknown territory to deal with, such as LTC policies, there is generally a waiting period before the policy kicks in. Because Medicare covers the first one hundred days, many LTC policies do not begin before 90 days. You can request a shorter waiting period but the monthly premium is often prohibitively higher. Ask your agent how long you must wait before a preexisting condition is covered?

7. How long must I wait before benefits begin?
For nursing home care
For home health care

8. In almost all standard policies, Alzheimer's disease and other organic mental and nervous disorders are not covered. That’s not to say you cannot get these coverages added. One of the most difficult aspects of comparing any type of insurance is gathering all of the information about what you require and allowing each policy to stand side-by-side.

Some policies have ingredients that met most but not all of your requirements while some are basic shells that can be added to based on your needs. The later types of policy type additions are called riders. Riders, in insurance parlance, add benefits at an additional cost. Among the most important aspect in an LTC policy is coverage for home health care.

When comparing policies, this should be a standard item unless of course, you live in an area where home health care may not be readily available. In such instances, a home health care option would be the standard by which to judge policies. It can be added later if your circumstances change.

Some policies will offer non-forfeiture benefits – decline them. This type of benefit is costly and unnecessary. It is offered as a rider and will be sold as something that should have been included in the policy. The non-forfeiture rider usually pays some or all of your benefits even if you no longer make premium payments. A certain amount of time must have elapsed first.

Another type of non-forfeiture rider is disguised as a return of premium. This allows you to cancel your policy and receive some of your premium payments back. Disregard such a rider or offers to add it after you have had the policy for a number of years. Often this seems enticing when estate planning is taken into consideration. You may reason that your heirs would get a return on your policy if you never used it or canceled it after a certain amount of time. The unfortunate aspect of this rider is the temptation to cancel the policy at exactly the time in your life when you are most likely to use it.

The last and probably the best rider accounts for inflation. Because the value of today’s dollars will be vastly different than dollars calculated in the future, getting some sort of inflation protection is always a good option. Try to choose an option where this protection is imbedded in the policy. If not, add it.

The question here should be, does your policy cover things like Alzheimer’s or other organic mental diseases?
* Yes
* No

9. Does your policy include inflation protection?
* Yes
* No

10. When you do your side-by-side comparison, have you included all of the possible riders and their cost to the policy?
* Yes
* No

Retirement Planning and Long Term Care: Eighteen Questions

As we continue to look at the possibility that retirement may not be what we envision, the conversation takes a turn to caring for that unforeseen need. Over the next three posted offerings, we will look at some important question to ask your potential insurer before you sign yourself or a loved one up for a long-term care policy of LTC.

Please note that I do discuss, at length in the book, what Medicare and Medicaid will and will not pay for and what kind of assets (or lack thereof) those programs will allow. That said, Short-term care as spelled out by Medicare requires that the following conditions must be met:

    You must have been in a hospital for at least three days immediately prior to entering the nursing facility. Because the onset of most Alzheimer's and Parkinson's cases takes time to manifest themselves and generally are done without the involvement of a hospital stay, they are excluded from Medicare coverage.

    You must go into the facility for the same condition for which you were previously hospitalized, and it must be within thirty days of discharge.
    You must be getting better each day. Once you level off, Medicare stops paying.

The search for LTC policies can be long and confusing. I’ve put together a small checklist of things to ask your potential agent or the one you already have. LTC policies should be compared against each other with a minimum of three side-by-side evaluations.

Here are the first of eighteen questions on the subject of Long-Term care Insurance. Additional information can be found in the book and at

1. Does your policy cover the following:
* Nursing home care
* Home health care
* Adult day care
* Alternate care
* Respite care
* Other

2. Each policy differs on a pay per day basis that can make it difficult to choose. Primarily we are concerning ourselves with nursing home care. There may be other opportunities to finance some aspects of in-home care that we have yet to discuss or have only briefly touched upon (HSAs).

The policy should clearly state how much each item is paid for and whether these numbers are indexed for inflation. For the inflation number, a modest percentage of inflationary risk would be 3% year-over-year. That is however not guaranteed so, in a worst-case scenario, expect inflation to be higher, not lower twenty-years or more from now.

How much does you potential insurer pay for the following services:
For nursing home care? $ _________
For home health care? $ _________
For adult day care? $ _________
For alternate care? $ _________
For respite care? $ _________
Other? $ _________

3. How long the benefits last is an important question indeed. Medicare, as we discussed earlier, does not pay for long-term care expenses. It does cover some limited convalescent skilled nursing care and some limited home health care under restrictive, short-term conditions (see the previous chapter). One hundred days is considered the limit for this social insurance program.

The Long Term Care Insurance industry breaks down the level of care into three distinct categories. So in fact, does Medicare.

It covers only skilled nursing care. This leaves those in need of coverage for intermediate or custodial care at risk to pay out-of-pocket. This is also the most financially draining aspect of recovery for the family members, many of whom must take time off from work to take care of the recuperative patient who may not be able to complete many daily activities or ADLs.

Although there is no limit to the amount of one hundred day stays you may have at a skilled nursing facility, you must meet the criteria set forth by the Health Care and Financial Administration or HCFA, now known by its fuzzier name, The Centers for Medicare and Medicaid Services or CMS. In the fine print, you will find the exclusion of Alzheimer's or Parkinson's and the fact that Medicare, HMO's, Major Medical and Medigap insurance policies do not pay for long-term nursing home care stays.

Generally, these LTC policies last for three years. Keep in mind the “look back” period and see if your policy offering jived with the new rules of five years.