{"id":485,"date":"2019-05-06T22:50:00","date_gmt":"2019-05-06T22:50:00","guid":{"rendered":"http:\/\/retirementhangout.com\/?p=485"},"modified":"2019-05-06T22:50:07","modified_gmt":"2019-05-06T22:50:07","slug":"what-could-go-wrong-part-ii","status":"publish","type":"post","link":"https:\/\/retirementhangout.com\/index.php\/2019\/05\/06\/what-could-go-wrong-part-ii\/","title":{"rendered":"What Could Go Wrong \u2013 Part II"},"content":{"rendered":"\n
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Odysseus Escapes the Cyclops <\/em>by Arnold Bocklin, 1896<\/figcaption><\/figure><\/div>\n\n\n\n

Welcome back!  In this post, we continue talking about the financial shocks that could derail your retirement \u2013 and what you can do to protect yourself.  Read the first post <\/a>here<\/a><\/em>.<\/p>\n\n\n\n

Long-term care<\/strong><\/p>\n\n\n\n

We left off the last post with a discussion of the importance of good health insurance \u2013 fortunately largely covered by Medicare for most people over 65 (and by Obamacare for those under).\u00a0 \u00a0\u00a0But what about long-term care?\u00a0 If you\u2019re 65, there\u2019s a 50\/50 chance you\u2019ll need it someday.\u00a0 It\u2019s not cheap; the median cost is $85,800 per year for care in a nursing home, although there\u2019s significant variation by state (average cost in Texas is $54,800, Connecticut is $150,200).\u00a0 Assisted living costs average $46,000 per year.\u00a0 Home health care can be less \u2013 or more.\u00a0 Health insurance, including Medicare, does not <\/em>cover the cost of long-term care.\u00a0 (It covers nursing<\/em> care<\/em>, if medically necessary for recovery from an injury or illness, but not custodial care<\/em> that you need because you could use some assistance in daily life.) \u00a0 <\/p>\n\n\n\n

To insure against the need for long-term care and its potentially devastating effect on your finances, you can buy long-term care (LTC) insurance.  <\/em><\/strong>LTC insurance is not cheap \u2013 it costs thousands of dollars per year \u2013 which is probably why only about 7 million Americans currently have it.  Premium costs depend on your age when you first get the insurance, how much coverage you buy (dollars per day and number of years), inflation adjustments to benefits, and other factors.   You can control costs by buying it when you\u2019re younger and insuring for something less than full expected assisted living costs (you can pay some from other sources).  Couples can sometimes purchase policies that allow \u201csharing\u201d of benefits between spouses, which might make you feel more comfortable purchasing shorter coverage periods.<\/p>\n\n\n\n

Other strategies for covering potential LTC costs include (1) \u201cself insuring,\u201d (i.e., not insuring!), planning on paying any costs out of your income and assets (this strategy obviously works best if you\u2019re wealthy);  (2) counting on family members for care; or (3) relying on Medicaid.  Most of us would rather not be a burden to our children, who have their own lives and families to take care of.  Medicaid does cover a large portion of LTC costs today (43% of all LTC costs, 62% of nursing facility costs).  But remember, it is a program for the indigent.  To qualify, you will need to spend your assets down to practically nothing.  This is not the end-of-life situation many of us would choose, and could leave a surviving spouse in an untenable position.  <\/p>\n\n\n\n

Another increasingly popular option is \u201chybrid life insurance,\u201d which combines life insurance with LTC benefits.  However, this costs two to three times as much as standard LTC insurance for equivalent benefits.   (It does, however, provide a death benefit to your heirs, which regular LTC insurance does not.)<\/p>\n\n\n\n

For most of us in the middle \u2013 neither very wealthy nor poor \u2013 LTC insurance is probably the best strategy.  Limit the daily coverage amount and number of years of coverage, and if possible start it in your 50s, to keep the premiums affordable.  <\/p>\n\n\n\n

For younger folks, there is hope for plugging this big hole in our social safety net.  Hawaii and Washington<\/a> have recently passed laws creating limited long-term care insurance sponsored by the state.  Washington’s program is funded through a modest payroll tax. We can hope that within five or ten years a Federal program might come to be that would provide long-term care for all.  <\/p>\n\n\n\n

Insurance you may not<\/em> need as a retiree<\/strong><\/p>\n\n\n\n

The observant reader will have noticed that I have said nothing about some fairly common types of insurance. This is because your insurance needs as a retiree and (ahem!) senior are not the same as when you were younger.  Life insurance<\/em><\/strong> is vitally important when people are in their working years, especially if children (or other dependents) are involved.  A substantial life insurance policy can help to keep a bereaved family from having to sell their house, and the surviving spouse from having to take on three jobs to make ends meet.  But if your working years are behind you and your kids are grown, you may not need it any more.  Your spouse will continue to receive pension and social security benefits when you\u2019re gone (although income will likely be reduced), while the grown children are no longer dependent on you.  When your term is up, just let that life insurance policy go!<\/p>\n\n\n\n

Disability insurance<\/em><\/strong> is another type of insurance that\u2019s\nvaluable to younger adults who have people depending on them.  An accident or illness can disrupt your\nability to work, perhaps permanently.   Yet you still have living expenses, perhaps\nincluding significant medical costs.  Disability\ninsurance, often available as a benefit option through an employer, can greatly\ncushion this impact.  Like life\ninsurance, disability insurance insures your future earning capacity.  It is especially important for young families\n\u2013 but pointless for a retired person.<\/p>\n\n\n\n

Vision<\/em><\/strong> and dental insurance <\/em><\/strong>are common supplements to health insurance.\u00a0 You need these, too, right?\u00a0 Not necessarily.\u00a0 Vision and dental insurance don\u2019t really function as a means to pool risks to protect you against low-probability catastrophes.\u00a0 Root canals, while a bummer, usually don\u2019t rise to the level of a serious threat to your financial well-being.\u00a0 Typical dental insurance might involve a premium of $500 or so per year, and in return pays a percentage of your dental costs up to some cap \u2013 say $1,500.\u00a0 At the extreme, you could come out ahead $1,000, or end up down $500 \u2013 not enough to knock most people off course financially.\u00a0 These types of insurance are more of a means of evening out expenses that are fairly predictable, and usually manageable. Evaluate what you think their costs and benefits are likely to be for you and make a decision \u2013 but don\u2019t think of them as important risk management tools.<\/p>\n\n\n\n

Have a Plan B for the\n\u2018Unknown unknowns\u2019<\/strong><\/p>\n\n\n\n

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To the End of the Earth<\/em> by Lisa Bagherpour<\/figcaption><\/figure><\/div>\n\n\n\n

So, if you take out insurance against all the possible disasters described above and in the prior post, you can relax and rest easy, right?  Well, not exactly.  Life can throw us curveballs that are (perhaps fortunately!) beyond our poor imagination to anticipate.  The stock market could crash, a child could become disabled and move back in, or your house could suffer serious damage from an earthquake — after you concluded that earthquake insurance was simply too expensive.  While I don\u2019t recommend that you lie awake at night dreaming up disaster scenarios, it is helpful to have a backup strategy or two in case something unexpected goes wrong.<\/p>\n\n\n\n

First, conduct a brief thought experiment.  Suppose the stock market goes down 50%.  (This is not some unrealistic scenario; the S&P index lost 50% as recently as the bear market of 2007-2009.)  You hear pundits saying stocks may stay down because this is really their true value\/China is eating our lunch\/there are too few workers and too many old people\/trade wars will prevent recovery\/the financial system is broken beyond repair (take your pick).   What effect would this bear market have on your retirement portfolio?  (If you had a 50\/50 stock\/bond allocation, your portfolio would drop by about 25%.)  How would you react \u2013 stay the course, confident that eventually the market will recover; or cash in and buy CDs to protect your (remaining) hard-earned savings?  If you think you might be tempted to cash in, consider adjusting your portfolio now to a level that feels safer.  Remember, the 4% rule holds for allocations between 30% and 75% stocks \u2013 so choose a level you can live with.  <\/p>\n\n\n\n

\u201cFirst, conduct a brief thought experiment.  Suppose the market goes down 50%\u201d<\/em><\/p><\/blockquote>\n\n\n\n

Let\u2019s suppose you suffer the loss described above, perhaps permanently.  (Maybe it\u2019s earthquake damage, and your uninsured home repair costs are $250,000.)  Would you be able to make adjustments?  There are several ways you might adapt:<\/p>\n\n\n\n