You can't cheat life insurance, you can't cheat health insurance, and you can't cheat long term care. It costs money. Welcome to the Retire On Time Q and A podcast. I'm Michael Decker here with David Franson from Kedric Wealth. As always, text your questions, (913) 363-1234, and we will feature them on the show.

Just remember this isn't a show. It's not financial advice. David, what do we got today?

Hey, Mike. What's the best way to plan for rising health care costs?

Rising health care costs is one of those things you can't control. And we've talked about this before. There's plenty of things in life you can't control, and if you focus on those things, you're probably in a difficult emotional state. Mhmm. Right?

But there's a lot of things that you can control. And so when we understand that, let's first just talk about what we can control. We can control what's in our portfolio. We can control the insurance products that we buy. We can control our health.

We can control our projections. And so when you start to look at what you can control, just assume health care costs are going to increase. Just assume that inflation's gonna be an issue. Just assume markets are gonna go up and down. But overall, if you have a long enough period of time, like fifteen to twenty years

Mhmm.

Overall, they should be relatively up. Are you with me so far?

Okay. Yeah. What's relatively up? All the markets?

The stock market Yeah. To put it simply

Yes.

In that situation. But real estate markets typically trend upwards as well. The bond market is like the little engine that could. It just keeps chugging along.

Okay.

Right? So but generally speaking, any market, which is a place to make money, should increase. Some may increase better to offset inflation, and others maybe they just barely keep up with inflation, kinda like the bond market.

Okay. So with that as the backdrop, you've got a couple of different options for health care. And this might sound strange, I am licensed to sell long term care insurance. Uh-huh. Ten years of working in the retirement space, I've never actually sold a policy.

Uh-huh. So either I'm really, really bad at selling it or I really understand the economics of it. And you take your pick which one it's gonna be. Uh-huh. But here's my whole thing on this, okay?

So the expression I say is if you need it, you probably can't afford it, and if you can afford it, you probably don't need it. In that, if you buy an asset based long term care policy, which is kind of like what they are today, what happens is the dollars that you put in will be multiplied and then paid out for a certain period of time.

So it's not like you're gonna put an X amount of money and everything's covered. That's not how it works. You might put like some sort of inflationary rider on it, which costs money, but that would increase your benefit over a certain period of time by like 3% typically. But it doesn't just solve everything. Okay?

You have to think about it from an insurance standpoint. You're transferring a risk to an insurance company for a potential payout, but the odds, the financial odds are in the insurance company's favor.

Which is usually the case. Right? And should we have peace with that? Do you want insurance companies to stay around? Yeah.

Or do you wanna be the the sucker that bought an insurance policy, they went broke and you got nothing? Mhmm. I mean, are state trusts and backs and things like that.

But Okay.

The point being is they have to stay solvent. So the odds have to be in their favor. So the way I like to look at long term care is if if you want a long term care policy and let's say you buy it, you're really transferring long term care risk dollar for dollar for the next ten, maybe fifteen years. Because if you needed long term care within that time period, that might have been a better option financially speaking. You would have gotten more dollar for dollar.

But if there's any red flags on your health care exams, they're not going to give you

the policy. They're going see you as a risk and like

It's unnecessary risk for the insurance company.

And so if you look at dollar for dollar, how much would you put into a long term care policy versus the dollar for dollar to put it in the market, let's say a fifty fifty split stocks and bonds, and you just grow it for a ten, fifteen, twenty plus year period of time, you have to ask yourself, which version is going to get you more money? And what we're looking at is the internal rate of return here.

Yeah. Define that.

So the money that moves in or out, and then the annual actual growth of those funds.

If you're healthy, it might be better to put it in something like the market. Now the market doesn't promise returns. Those aren't guaranteed returns. Putting a bunch of things in, like, a CD or a treasury ladder

for

your health care, that might not keep up with inflation. Like, there there is an element you're taking with risk in self insuring. But I I just wanna highlight, like, the the long term care bit of it, though it has some rigidity, it's probably not going to get you rich. And if you never used it, the death benefit's so minimal anyway. It's an insurance product.

And so when I look at this, I think, okay, if someone genuinely is concerned about health, they have poor family history, and they're like, I'm healthy today, but that could change any moment, and I'm concerned about the beginning of retirement and my spouse, the surviving spouse, and that my potential illness based on my family history might bankrupt the

spouse. Okay.

You might be willing to pay the premiums knowing the odds could be against you to transfer that risk to an insurance company.

Alright. That's a good explanation.

Do you see a very clear bit here? This isn't, Oh, everyone needs it because what if? Everyone's different. And there's different risks you're willing to take on, and there's different risks you want to transfer to an insurance company. And you can only transfer risk to an insurance company.

That's the definition of insurance. You're not transferring risks to the stock market. The stock market is risk. Yeah. You're not transferring risk to your real estate portfolio.

Your real estate portfolio has its own risks. So just so we're clearly defined there. Now now there are other options here to help hedge against it. One is indexed universal life insurance is becoming a more popular way to hedge against it. And and the the idea here is if you're in need of long term care insurance Yeah.

You're probably on your way out.

What people do when do they typically start? When when does someone get an LTC policy?

Years before they need it. I mean, you're not gonna go in and say, hey. I need this now. I'm I'm going into hospice. That's

when they get denied.

Right? You get it early. Right? You have to be healthy. You have to be young enough.

So sixties? Fifties.

Oh, okay.

60, 65.

Okay.

I mean, I I know they approve other people. It's just the older you get, the more expensive life insurance is gonna be. And this is life insurance. Yeah. And so with indexed universal life insurance, the first ten years, for what it's worth, ain't going to grow that much.

The fees are typically front loaded. And then after ten years, then it starts to compound or has the ability to grow the cash value a little bit better.

But if you needed long term care, they're like, Hey, you're kind of dying. We have a death benefit. We'll let you tap into the death benefit early. So what you've done is you've said, You know, I want to transfer some risk here. There's the death benefit which is a little bit higher than maybe the traditional long term care based on how you structure the policy.

Maybe you got a little bit more wiggle room, but you're using the cash value to try and kind of be a bond fund alternative. In that you're just looking for over a ten to fifteen, maybe twenty year period of time Mhmm. A slightly better internal rate of return than the bond funds would what they would offer.

So you're just you're swapping one thing for another. It's not a guarantee. There's no promise on any of this here on the cash growth, right? You can't promise growth. But that's the way you can hedge against it.

And if you didn't use it, you still have the death benefit, which the asset based long term care insurance didn't have. They're priced differently, so you're going to put more money into an IUL than you would asset based long term care insurance. And so it's all just a simple calculation of what do you want to transfer as far as risk to an insurance company, what flexibilities do you want in the future, Do you want assets in the future? Do you not want assets in the future? It's just a conversation because none of these are perfect.

For everything you get, you're giving up something. And that's okay. That's how all finance works. So that's that's kind of the middle hybrid ground. Now there are annuities out there that pay a lifetime income.

And if you were to, you know, qualify for long term care and by the way, to qualify, you just can't do two of the five or so daily activities. So you can't dress yourself, you can't feed yourself, for example.

Then you qualify.

Yeah. Get the doctor's note, then you're pretty much good to go.

But

where I was going with that is with annuities, people say, well, whenever I need it, the income's just gonna double. What a great deal that is. And they and that is a great deal. I mean, if you if you buy an annuity Mhmm. Two years later, you turn on this long term care rider.

And there's there's usually, like, a little bit of a break there. You have to, like, have it on for one or two years. And then you get five years, and you miraculously recover from long term care insurance. Or not long term care

You recover from the insurance.

Yeah. You you healed. You healed. Then the income goes down, and it's still lifetime income.

So that's kind of a good deal.

So you recover from whatever injury you had or you were in rehab or whatever it was, and you're you're out, you're back home.

Yeah. And then You know, you you typed into chat GPT and created your own vaccine and you just cured cancer.

Don't Okay.

Yeah. Hear about that? No. Allegedly, some guy, his dog was dying. So he uses chat GPT to bake a homemade vaccine Oh.

Sticks it in the dog. And as the as the news story said Uh-huh. The dog recovered from cancer or something, and he used a chat GPT to make a vaccine. Wow. A homemade vaccine.

I'm assuming he's like a chemist or something at the very least. This is not your typical pursuit. But Yeah. You know, maybe you end up in in long term care for a little bit or in hospice. There's a medical breakthrough or a medication just takes off and you recover.

Things happen. Yeah. So you still have the lifetime income, which is kinda But the part that people miss, and this really gets my goat. You ready for it? Mhmm.

There are lines in these insurance contracts. They're not sketchy. It's just to get insurance, now it's priced in. That your lifetime income is associated with a cash value, and that cash value is going down every year you spend it. Uh-huh.

Because you're getting lifetime income. So the cash value will probably hit zero maybe in year ten, twelve, fourteen or so. Right? Within the first ten to fifteen years, it'll probably zero out.

Once it zeros out, that income doubler is gone. You can't get it anymore. Because they doubled your income saying, well, you're gonna die or you might die, so we'll give you your money back based on the cash value just a little bit faster.

Because if you died and there was cash value left anyway, they'd have to pay it out anyway.

Oh, right.

So and that's not true with all products. This is a generalization. But do you see how in asset based long term care, the traditional side of things, you put a little bit amount of money in for a large multiplier, but long term, it's kind of worthless. It's not really worthless. It's just it may not have kept up with inflation.

It may not be as much as you need. It may it's just it's for a pocket of time. The index universal life insurance is gonna require you to put lot more in there to get that death benefit, but you've got a nicer benefit later on for income or flexibility. There's a death benefit and so on. Then you've got your lifetime income, but that only works for the ten first ten to fifteen years, kind of like the traditional anyway.

So the point is, and I can't tell you how many times I've gotten this question, you can't cheat life insurance, you can't cheat health insurance, and you can't cheat long term care. It costs money. And so when you put the options out there, you're picking the path you're most comfortable with. And some of them, which is the last path that we're talking about today, just putting your money into an investment that you feel comfortable with that should grow and help offset inflation for the rising cost of healthcare so that in your eighties or nineties, if you need it, the money hopefully was able to compound in such a fashion that it was able to pay for it in the amount that you needed in the way that you needed, and it wasn't a taxable situation that erupted something.

Is that what we call self insuring?

That's the self insure. You're just gonna pay out of pocket, which isn't bad. Yeah. You're paying out of pocket when you think about it in each situation. Yeah.

Because you're paying money for something. Right. Either you're paying an insurance company and you're transferring the risk typically for a certain period of time. The benefits still might be their life for the lifetime, but it's maybe not as financially prudent. Or you just put it in the market and say, yeah, I'll pay for it later.

Yeah. I'll put this in, compounding does its thing, and then it'll be there if I need it.

We're just we're just we we create these stories in our mind of saying, I don't want to deal with it, so someone you're the professional. Tell me how I get out of this risk. That's like saying, hey, I want to experience life with no problems, with no risks, with no heartache. It ain't gonna happen. No.

And anyone that suggests otherwise is selling you something pretty hard. Yeah. Because it's just not gonna happen. And anytime you hedge a risk, whether it's inflation risk, market risk, long term care insurance, right, which is or long term care risk, health care risk Yeah. Medical risk.

Take your pick. Anytime you hedge a risk, you're increasing your risk somewhere else.

Yeah.

That's the puzzle. That's why retirement planning, in my opinion, should be plan first, strategy second, portfolio third. That's when you then talk about, do you really need these products? Do you really need these investments in this form? What's the time associated with all of it and so on?

And we didn't talk about Medicare. How does Medicare like, find its way into all this? Like, everybody gets it at 65.

Yeah. But it's not long term

care

insurance. It's not gonna cover your long term care, or it's not gonna cover all of your health care needs. Medicare is great. It's I mean, when you look at the cost of healthcare before Medicare and after Medicare, it's like, sign me up. That's a good deal.

Right. That's a good deal for the 65. Yeah. But it's not going to cover everything. And so you need to understand the differences between traditional Medicare, the Medigap plans, and then the Advantage plans.

And just for what it's worth, anyone that says everyone should do one or the other is hallucinating. They each have their own path. They each have their benefits and detriments. Sure. And when someone says, oh, love her.

Stop it.

Yeah. A little throwback there. Yeah.

Just just stop it.

Yeah.

It's like, well, hold on. Yeah. We're all living different lives here. We all have different amounts of health. We all have different expectations.

I mean, in point of fact, some people see the doctor often and religiously. Yeah. Not just for their annual checkups. Like, they're seeing the doctor often. Mhmm.

Other people won't see a doctor more than one in five years. Yeah. So we all should pay for the same thing? You just context is king with health care. I I I think it's going to evolve rapidly over the next couple of years.

Mhmm. Stay tuned for that.

Yeah. Pay close attention to who you vote for and what they say they're gonna try and do. Yeah. Because that's gonna shape our health care in the future.

Do do HSAs have a role in this too? I'm trying to I'm bringing in more for you too.

Yeah. This is great. So HSAs, they can pay for health care costs Yeah. And so on. So if if you have an HSA, don't spend it at the beginning of your plan.

Let that be a great place to grow tax free and pay out tax free for your health care needs. Just grow it, grow it, grow it. Maybe that's the riskier side of your portfolio because you don't plan to use it for ten, fifteen years.

And side note, once you're on Medicare, you can no longer contribute to an HSA. Correct. So you're sort of stopped. Hopefully, you've funded enough up to your sixty fifth.

Oh, You shove funds into your Roth and into your HSA as best you can.

Oh, yes.

And you can do interesting things. Like, if you're like, right now, I don't spend any of my HSA. I'll keep health care receipts, so if I just want some money, I can just redeem it through the receipts.

That's right.

But as far as I'm aware, there's no statutory limit on when you spent it and when you're pulling the funds out Yeah. As long as it's only counted once. So just make sure you're really good at your accounting if you do that. But you know, HSAs are really nice in that maybe that's your long term care plan. But that's one of those 50 years old to 65 or whenever you end up retiring, put funds in there.

Grow. Grow. Grow.

Alright. What else do we miss?

Gosh. Did did we I mean, we we're so good. We covered everything. Right?

Yeah.

We left no stone unturned. We we solved it. We're just solving things left and right here. Yeah. I I think at least for Let me do

one one caveat. Just this isn't health care. This is taxes.

Oh, yeah.

Yeah. If you have a health care cost that's extensive and all of your money is in an IRA, you're getting hit twice. Because if there's like a $100,000 medical bill on top of your already existing expenses Right. You're paying income tax on that.

So if if you have to pay for some huge medical expense and you take it out of your IRA, ordinary That

could I mean, long term care costs, health care costs, if all of your money's in an IRA, could be pretty expensive because it could push you into higher tax brackets. You don't get everything dollar for dollar.

Right.

There are things to be aware of. Tax code can change. And wouldn't that be nice if they say, hey, your IRA, there's a health care cost, it's tax free. Oh. That'd be nice.

That's bipartisan. Like, who couldn't get behind that? Everything's partisan today.

You could say you could say broccoli's good for you and someone's gonna disagree. No, the pesticides. I don't know, whatever. Right. Sure.

No, I mean, tax laws are gonna change. Be wary of that. But just know that you need to know where your money is, and if there's a health care cost, where do you pull it from, and are there other consequences that would follow? Because if you had a high ordinary income that year, that also might increase your modified adjusted gross income, which might then affect your Medicare premiums. Right.

And then you've got Irma to deal with. And so not only you're just paying for all these horrible expenses, but then your other costs are increasing as well. So that's why when we say, like, you know, health care planning is important, health care planning has to be done with tax planning, and tax planning has to be done with health care planning. And those two need to be done with income planning and portfolio construction, and it all just one big happy family of

It's like this web and there's domino effects and it's all related. Multidimensional chess. We get deep here.

Yeah. Anyway, that's all the time we've got for this show. If you enjoyed it, tell a friend, leave a rating, subscribe to us wherever you get a podcast or on YouTube. As always, go to retireontime.com for resources to buy the book and so much more, or join me live for one of my workshops where I actually build a plan live and take your questions along the way. Thank you so much.

We'll see you in the next episode.