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Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Welcome to how to retire on time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today on Amazon, or you can grab a free copy by going to www.howtoretireontime.com. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax professional. When it comes to finance, we can pretty much cover it all.
Mike:Now that said, please remember this is just a show, as in not financial advice. So if you want financial advice, you can always request analysis from our team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thank you for being here.
David:Yeah. Happy to be here as always.
Mike:Yeah. David's gonna read your questions, and I am going to do my best to answer them. You can always submit your questions by texting them to (913) 363-1234. Again, that number, (913) 363-1234, or you can email them to heyMike@howtoretireontime.com. Let's begin.
David:Hey, Mike. What are the types of insurance policies that are applicable in retirement?
Mike:I appreciate the word applicable
Mike:Yeah. Because many times we think insurance is a way to cheat the system. It's not. Uh-huh. Insurance is not an investment.
Mike:Let me say that again. Insurance is not an investment. Okay. We're clarified. Here's the deal.
Mike:I'll use this as an example before we go down the list. Some people will say, well, wanna buy permanent life insurance, so that I get more into my estate, pass more onto my kids. Well, if you just take the same amount of money that you would put in that life insurance policy, and I'll just oversimplify it, the S and P 500
David:Okay.
Mike:And you look at the average of the S and P five hundred's growth, and then what your death benefit will grow. Yeah, if you died sooner than expected, you'd come out on top. Yeah. But the odds are not in your favor. Yeah.
Mike:And if you live until the insurance can be believes you're gonna live, then they would have made fees along the way, and there's somewhat less of a death benefit that you're gonna get overall in most situations. Again, the insurance company does not have a secret market that they're making more money in.
David:Right.
Mike:You can't cheat economics. And so when people are buying life insurance, it's like, well, hold on. The numbers are being manipulated in some sort of marketing scheme. You gotta just pump the brakes and understand what's really going on.
David:Okay.
Mike:Anything that's done with an insurance company is transferring risk, whatever the risk is, to the insurance company, and there's always an associated cost. Mhmm. So let's just cover the basics real quick. Home, auto, the basic stuff. Yeah.
Mike:You don't want to get an accident and have the liability disrupt your retirement. Make sure you get an umbrella policy. You want the umbrella policy to cover enough that if, let's say you were to bump someone in the parking lot, and maybe it's not a huge deal, right? They're fine, but they're calling their lawyer, saying, hey, I I got hit in the parking lot, and the lawyer says, and I don't know if this actually happens. I'm being a little bit facetious here.
Mike:But the lawyer says, alright, fall over and start crying in agony and record it on a video.
David:Yeah, right.
Mike:I don't think lawyers would actually say that.
David:Hopefully not.
Mike:But I've seen videos on YouTube of people that will jump out in front of a car, the car stops, and then what does the kid do? The kid then jumps on the car, smashes his head into the windshield.
David:Oh, boy.
Mike:And then his friend comes out and says, I got it all on camera, and then extorts the person. This crap happens, and when markets go down, when people get desperate, you wanna have these kinds of things insured, because even if you don't win in court, like, hopefully you'd win in that situation, that's ridiculous, but it happens. Yeah. Dash cams on cars might be a good version of insurance. And by the way, if you've never heard of this, go on YouTube.
Mike:Yeah. Just look up kids running into cars for insurance or something. I I'm sure you'd find something on YouTube.
David:Is it usually a younger person that's doing this?
Mike:Yeah. It's kids trying to cheat the system. It's so dishonest.
David:Oh, boy.
Mike:Do you remember the show Parks and Recreation?
David:Yeah. Love that show.
Mike:If you haven't heard it, it's just a funny satire, but there's a character on the name, Jean Ralfio. Uh-huh. And he's telling me, I love this. It's so funny. But he goes, I made my money the old fashioned way.
Mike:I got hit by Alexis. And then he turns to his buddy and says, I know a guy. You wanna get hit by Alexis too? Yeah. And it's a joke because people try to pull this crap off.
David:Yeah. Yeah. They do.
Mike:So yeah. Cover your basics, home, auto, house insurance, fire insurance, tornado insurance, whatever. Get those basics covered because one of the 60 risks retirees may not know exist, natural disasters, and then these other things that could happen. So Mhmm. So that's the first one.
Mike:The next one's term life insurance. You might not think about life insurance in the term, but maybe you can extend your term life insurance into the mid sixties. So if you're delaying Social Security, and let's say you happen to pass at 64 Mhmm. Towards the end of the term, that might be a nice bump for the surviving spouse just to make the difference for what you would have lost in Social Security.
David:Okay.
Mike:Okay? Term life insurance is really expensive though, once you get past 65, roughly. So if you have a term policy, and you want to pay the premium to transfer that risk, it might make sense. Maybe you've already saved up enough money that you don't need to be paying this. It's like, I hate to see when people pay gym memberships, when they never go to the gym.
Mike:Sure. That's just unnecessary tax on something you're not using. If you don't need the death benefit, then why would you pay the tax for it? Maybe you want to, and that's okay if you want to, just know that going in, okay? The next one's the permanent life insurance policies.
Mike:These are gaining cash value, you've got whole life, which is more of
David:a steady Eddie situation, and then you've
Mike:got indexed universal life, or universal life I should say is the category. Universal life has more cash flexibility, but there's more variability within the universal life policy. They each have different benefits and detriments associated with them. Okay? But that's again, having a cash value tied to a death benefit like a term life insurance policy that maintains there.
Mike:If you're kind of on the fence of how much money you need, and you're concerned that a spouse might pass sooner than later, so you're again, you're missing income opportunities, maybe you took 50% on your pension survivability, maybe you're just concerned about your taxes increasing when the surviving spouse goes to single, and you just want an extra kicker just in case. These are things that you would hedge against. You're not gonna get rich off of life insurance. Yeah. But it lowers the risk because you're paying to transfer some risk to an insurance company.
Mike:Gosh, what a long term care, that's another one. Yeah, it is. Here's the truth of long term care. So the old policies don't exist anymore. I mean, they kind of do, but they're they're so expensive, people don't typically buy them.
Mike:People are buying long term care policies called asset based long term care, and asset based long term care is basically you're gonna put money into something that really has very little cash growth.
David:Okay.
Mike:If you were to qualify for long term care, then there's gonna be a significant multiplier of those funds. Let's say like 10x or 7x of the funds. Immediately, a seven times multiple. That's pretty good, right? Mhmm.
Mike:If you are healthy, and then within ten years or so, and you qualify for long term care, your health just goes awry, whatever happens. Yeah. It might be a good situation. But if you put the same amount of money into that policy, or let's say put in the market, and the markets grow as they typically do, all things being equal, you might have more cash value to pay for those expenses after a certain period of time. So at the end of the day, what's the question?
Mike:How do you pay for medical expenses? How do you pay for long term care expenses? You can pay for a policy that transfers healthcare risk or long term care risk to an insurance company. So if the situation that's not probable happens, it's a better situation for you. But if the expected situation happens, as in you don't need it for a certain amount of time, the insurance company wins.
Mike:That's how insurance works. Yeah. It's not criminal, it's not a scam, it's just you pull a bunch of people together, the odds are in the insurance company's favor, a couple of people have those unpredictable events. Yeah. They can afford to pay it all out because the collective was in the insurance company's favor.
Mike:It has to work that way. That's how you hedge against us. That's how in like the literal definition of insurance, that's how it's supposed to be. So long term care, it's not an investment. If you're concerned that you might need long term care needs, and you're concerned about maybe something happens in the first ten years and you're healthy right now, maybe that's a risk you're willing to pay for, but you're paying a premium to hedge against that risk.
Mike:Maybe you've saved up enough money that you don't need to hedge against that risk. Because the reality is if you need long term care insurance, you probably can't afford it. Mhmm. And if you can afford it, you probably don't need it. Again, let's define things by numbers and break evens, and get rid
David:of
Mike:these fictitious fear based stories of long term care. Most people end up in there, 300,000. Yeah. Look, in ten years of being in this industry, I've never been a part of actually selling a policy.
David:Uh-huh. A long term care policy.
Mike:I'm really good at selling long term care policies. I'm licensed to sell it. Yeah. I've had a couple of people attempt, they all were denied because their health was bad. They just wanted to see if they could squeak through.
Mike:Uh-huh. And the insurance company said no. Why? Because it's not an investment. Yeah.
Mike:You have to be healthy and it has to not be expected to happen. So am I missing out of the What about annuities? So annuities are an insurance policy where you're transferring longevity risk to an insurance company. So if you're taking income out, you're basically telling the insurance company, hey, look, I don't want market risk. I don't wanna worry about outliving my money, blah, blah, blah.
Mike:Yeah. You'd handle it. So if you live roughly to your life expectancy or die sooner, the insurance company will win. Yeah. If you're one of the few people that live a longer time, you might win.
Mike:But you lose control. Most times I've seen people buy annuities and take flat income, so over time your income becomes less valuable because inflation erodes the policy, or erodes the I mean, just think about what your cash flow needs were in the eighties and nineties. Think about what your expenses were in 02/2005. What was the cost of eggs in 02/2005 or 02/2006? And now what is it today?
Mike:Okay. So your retirement will probably be twenty to thirty years long, inflation's going to keep going. Yeah. So you've got a huge inflation risk if not built correctly. And you might say, oh, well, you know, I bought a couple of annuities, and I'm just gonna turn them on every time I need a little bit more money.
Mike:Again, you're oversimplifying this because you're putting money into something that has less growth potential than the market would, to turn it on a little bit later on. Why wouldn't you just put it in the market, and then when you needed more money, you then bought another annuity. Now again, that's also a little bit oversimplified, because you've got reinvestment risk, you've got renewal rate risk, you've got all these other risks. It's a complicated situation. A lot of people hit the annuity button, because they want to say, Hey, I don't have to worry about it.
Mike:I bought a pension from an insurance company. Yeah. Well, it's not really that simple. But it's transferring longevity risk to an insurance company. Now my book, How to Retire on Time was written as an argument against the guaranteed income for life, because really what you need is just a source of principal protected accounts that you can draw from when markets go down, that's how you solve sequence of returns risk.
Mike:That's how you basically replicate what the annuity companies are trying to do with your money, but on your own, so you've got more flexibility, you've got more control over your assets, and there's more potentially for the estate. I think control is a good thing, I think flexibility is a good thing, I think growth is a good thing.
David:But
Mike:some people just wanna have that guaranteed income for life, and that's fine. Just understand that you may risk being the elderly person that has to make a fixed income work. Right. And that's the risk that you're taking. Yes.
Mike:And just since we're talking about annuities, when they say, Oh, well it's guaranteed to grow by 16%. No, it's not. If you think you've got a good annuity that has fixed the system, that's gained the system, that's beating Wall Street, call the insurance company, not the agent that sold it to you, call the insurance company and say, Can you tell me how much the cash value has grown since I bought this annuity?
David:Uh-huh.
Mike:You'll probably be pissed, because most annuities are not built for cash growth, they're built for income. It's deliberate. It's by design. We don't have time to really dive into that detail. Maybe you'll text a question and say, Mike, can you break down why most annuity companies are not built for cash growth?
Mike:I can explain that another time, but it's transferring longevity risk to an insurance company. That's it. Yeah. It's the hit the easy button, because you either got overwhelmed, or you couldn't find someone that you trusted and respected to work on a holistic and comprehensive way to manage your retirement. Sure.
Mike:Any others that I missed?
David:So the last one we have here is Medicare. Various flavors of Medicare we have out there.
Mike:A lot of polarizing opinions on Medicare. Here's the reality. You've got traditional Medicare. You've got the supplemental Medicare or gap Medicare plans, and then you've also got your advantage plans. They all offer different benefits and detriments, and they can change over time.
Mike:So you've got plan adjustment risk. You've got to understand what you're getting. Insurance is not an investment. You're gonna pick something that's gonna offer you certain benefits, but not offer you other benefits. Yeah.
Mike:You've gotta know what you have, and you've gotta review that every single year in retirement. Yeah. And then before that, you have affordable care act insurance for health insurance as well. Insurance is a very complicated conversation, and unfortunately, I don't think it's talked about enough, because once you're sold something, the commission's paid for, and they don't need to talk to you anymore. And you need the ongoing conversation about your insurance policies to make sure that it's happening.
Mike:But how many people are getting proactive calls of saying, hey, we sold you this policy, we're not going to make any more money on it, but let's have another conversation and review it and make adjustments.
David:Yeah, it's probably rare.
Mike:They're only calling it when they know that the renewal rates are crap, that you're not making any more money. They want to sell you another They just want to basically refinance your annuity. No, they're just reselling you the same thing. And if the first annuity didn't have good due diligence, the second one probably won't have good due diligence. With Medicare, they might sell you the products that have a better commission.
Mike:It's just work with someone that's holistic, and you have an ongoing relationship that's proactive. If you're working with a financial professional that's not proactively calling you, consider going out there and talking with other financial advisors to have the right and appropriate relationship. Yeah. If you're not proactive, then whatever happens, happens. If you're proactive, you might be able to find some additional efficiencies, You might be able to get more out of your hard earned money.
Mike:You might be able to enhance your overall quality of life. You might be able to enhance your lifestyle and legacy expectations. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcasts. Just search for how to retire on time.
Mike:Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date, go to www.yourwealthanalysis.com today to learn more and get started.