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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.
Hey. Thanks for joining. Here's a question I was recently asked on my show, how to retire on time. Take a look. Alright.
Mike:Add any questions you want to the chat. We're gonna go to your questions for the rest of the show here. Here's the first one. You've been demi dismissive of long term care lately, but I'm genuinely concerned because my of my family history. Fair point?
Mike:Mhmm. And I am a bit critical of long term care. Alright. So question continues. Can you give a fair breakdown of different ways to prepare for future health care expenses?
Mike:So, first off, let's divide health care into two categories. Because I think that's a fair assessment. First off is health care, doctor's visits, knee replacements, kind of just the wear and tear, the maintenance health care,
David:let's call it.
Mike:Yeah. And with that, you wanna enter into Medicare at 65 with the right assumptions. So traditional Medicare is right for some people. Traditional Medicare with your supplemental plans is right for others. And advantage is right for a third group.
Mike:Mhmm. And anyone that tells you everyone should do one of them is biased. Mhmm.
David:Right.
Mike:So you wanna understand which one are you? Are you gonna travel a lot? Are you not gonna travel a lot? Do you have kids that you're gonna see a lot in other states? Are all of your family kind of around you?
Mike:Like, these are different restrictions and variability or variables that are gonna determine which plan might be right for you. How's your family history? Because if you enter at 65, the right plan, you can't get denied. Yeah. So It's true.
Mike:If you're like I don't know. I I don't know much about the stages of cancer other than stage four is really bad. Mhmm. So let's assume stage three is bad, but you're probably gonna make it. I don't know if that's true or not.
Mike:I just making this up for for sake of argument. Let's say you're stage three cancer and you turn 65. Get that insurance.
David:Yeah.
Mike:They can't deny you. It's guaranteed as you. Get it in there. Yeah. And then eat well, recover, and live a long and healthy life.
Mike:But know you've got that. That that's that's the idea is you wanna go into maintenance health care planning.
David:Okay?
Mike:And then if you're going to Affordable Care Act as well, they can't deny you with Affordable Care Act. Right. So, knowing what you have, get the right plan, line those things up a little bit so you get the right maintenance with the right treatments. Because, at least I've found in Affordable Care Act insurance, they just take a lump of money and then they give you certain benefits, but don't give you others. It's just different combinations of kind of the same thing.
Mike:Yeah. Insurance is not an investment. It's understanding which risks are you paying to transfer to the insurance company.
David:Right.
Mike:That's it. It's not magic. So when people get upset with health care companies, it's like, well hold on. Did you get a generic plan or did you understand the different variabilities and then sign for the right one. So now let's talk about long term care.
Mike:I'll tell you this story and then we'll talk about it in greater detail. So I've been doing this for over decade. I've had people ask for long term care insurance before. And every time someone's asked for a traditional or asset based long term care, like actual long term care insurance, they've all been denied. Mhmm.
Mike:Why? Because the insurance company knew the odds were not in their favour, and that you would probably use it, and they don't wanna pay out.
David:Yeah.
Mike:Insurance only works when the odds are in the insurance company's favor, so that the accidents that happen can be afforded or absorbed by the general probability being in the house's favor, or the insurance company's favor.
David:Right.
Mike:That's the only way insurance survives. So I think oftentimes we're overly critical of how insurance works. Now yes, I know like the profitability and all that and greed and I I know all that. But look, if we look at pure definitions, that's what we have to start with. So knowing that, if you want long term care for maybe family history reasons or just other parts of it, its job is really to do one thing.
Mike:Now, asset based long term care is really the typical one that you'll see today. Traditional long term care has kind of gone by the wayside because insurance companies priced it wrong and they don't like it. Because the odds are against them. Asset based long term care, you put in like 50 ks or 100 ks, whatever you want, into a policy. And if you need long term care assistance, you're gonna get a massive multiplier immediately on whatever you put in there.
Mike:So 50 k, it's a great payout that supports you for 5 years. 100 k, you got twice the amount. It's just how much you put in, so much you're gonna get Now, its intention is to protect the portfolio for the surviving spouse. It's to help pay for your health care costs if you needed them, let's say, in the near future. But at some point, if you do the math, ten, twelve, or fifteen years, it's not like it goes away.
Mike:It's just if you compare the benefit value to maybe doing some IRA to Roth conversions and growing your Roth account, the cash value at some point has a break even. Now there's a lot of assumptions there. We don't know how well the markets are gonna do. Right. But all things being equal, there is a break even.
Mike:Because it doesn't grow at a steady rate, it kind of plateaus a little bit. And you can buy or pay for the long term care cost of living adjustment rider, which helps with inflationary costs. But a common misconception is, it's not gonna cover all of your health care costs. It's gonna be a multiplier of whatever you put in there. And if you don't need it, the death benefit sucks.
Mike:It's basically like nothing. It's whatever you put in there. Because there's oftentimes like no inflationary or growth factor to it.
David:Okay.
Mike:So again, it is transferring health care risk to an insurance company if you needed the help early in retirement. Because if you needed it later in retirement and you still qualify for long term care, yeah, it's gonna be there. But now you're playing, would it have
David:been better to put in
Mike:the market or not? So just understand the actual definitions of it. It's okay if you have it. We sell it. We're just really bad at selling it because we show them the whole plan.
Mike:We do plan first. Yeah. Then we explore the strategy second and say, look, you've got got a million dollars in your Roth. Are you sure you wanna put 50 k in a long term care policy? Like, you can afford average health care costs and and if it skyrockets, well this is only gonna pay so much anyway.
Mike:Yeah. It's fine if you do it, but when you break down the math, a lot of people go, not really sure I wanna do that. And I'm okay with that. I don't know. It might be an overshare.
Mike:We might be more profitable if we pushed it. But it's we're fiduciaries. We legally bound to what's in people's best interest Right. Which means showing people the break evens. And when they see the break evens, they sober up.
Mike:Yeah. Because they go to the dinner event, they're scared to death about it, and so they're asking for it. And I'm like, hold on. Hold on. Let's slow down and just do a simple comparison.
Mike:Now if you have family history issues, if you if there's a compelling reason, I can see certain people that might want it. But there's other ways you could also hedge your bets. Another one is to buy life insurance. Permanent life insurance, specifically something like indexed universal life insurance. And the reason why this is interesting is because you're able to grow your cash value a little bit better.
Mike:Let's say slightly better than bond funds. That's the idea at least. And if you could replace part of your bond fund allocation with an IUL, it's gonna take ten years to fund. And you could fund it over five years. But really the fees are so heavy for the first ten years that if you're 65 years or younger, you kinda wanna get started on something like this.
Mike:If you're 65 years or older, the cost of insurance might not make it worth it. That's a general assessment. 60 to 65 is kind of the threshold where things tend to switch, in my opinion. But then you can fund it. And so you can use it from three different things.
Mike:One is you have to qualify for life insurance. You have to be healthy. Now you've got a death benefit. But they've got these riders. So if you do need long term care help, or you have chronic illness, or terminal illness, you can tap into the death benefit early.
Mike:So it's similar to what long term care did. You're putting more money into it, but you've got a cash value that's growing, and you've a death benefit you could tap into early, which helps protect the surviving spouse. And then when the first spouse passes, the rest of the death benefit goes to the surviving spouse, who also may have gotten a life insurance policy. And so then they would be able to tap into their death benefit, protecting the portfolio a little bit.
David:Okay.
Mike:And paying for these long term care costs and so on. So if you're concerned about health issues, you buy health insurance. You don't buy life insurance or any version of these types of insurances if you're not concerned. Because you don't wanna pay for a death benefit or these riders if you don't want those benefits. You don't buy an IUL strictly for tax efficiencies.
Mike:You buy it because you wanna pay for the things that are being offered in the products. So index universal life insurance is a very compelling way to structure a way to have a death benefit that could help, you know, $300,000 death benefit. Maybe you put a reasonable amount of money in there, so you can use it as income because the cash grows. You could use it for helping hedge against earlier death or something like that that would happen for a surviving spouse, and so on. But it's because these are the strategies you're concerned about that you wanna implement.
Mike:Step two. Plan, strategies, portfolio. Right? So those are two different ways. Another one I'm seeing is some people are wanting to buy lifetime income from an annuity, knowing that you could double your income in case of a health care issue.
Mike:Oh. Now that's not life insurance. You don't need to pass any sort of health care test. But the thing that people miss is when your cash value of the annuity is gone Mhmm. That benefit is gone.
Mike:Oh. What they're doing is they're saying, hey, well, gosh, you're the you're the annuitant on here. So if you end up in the hospital, we'll double your income because there's a death benefit anyway. So we're gonna give you your money back faster because if you die, we have to give it back to you anyway. But once the cash value is gone, that benefit is gone.
David:Now notice how that was very clever.
Mike:You're not gonna get life insurance if they think you're gonna die or get really really sick early on. They're gonna give you an income doubler, but they don't think you're gonna get sick or die early on.
David:Yeah.
Mike:So they all do the same thing in their own different way.
David:Right.
Mike:You're probably not gonna use it. If you do, they're okay with it. But the odds from a probability standpoint are in the insurance company's favor. Doesn't make it wrong. It's just the definition of insurance.
Mike:Transferring a risk to another entity. That's it. Yeah. So and then the other option is you can just do some married Roth conversions. Grow Roth tax free.
Mike:Roth pays out tax free, kinda like an insurance. Mhmm. You've got complete flexibility. You've got more growth potential, and it can go to the kids tax free. And there is a breaking point with your death benefit.
Mike:As in, at some point, you
David:would have had a larger death benefit by growing your assets if you live long enough than the death benefit of life insurance.
Mike:There's a break even, and a lot of people miss that.
David:So you're saying you can just use your Roth kind of as your insurance policy? Like, if if I had a a sickness or an illness or I needed a big surgery, I just take it out of the Roth to pay for it.
Mike:Well, I mean, you you have Medicare too.
David:Mhmm. Oh, yes.
Mike:That should absorb a lot of the costs. Yeah. And to make sure you you get it checked out, that it's approved by the state, and all of those things, you gotta go through the right the right hoops. I mean, some people need, like, a hip replacement. Yeah.
Mike:And it takes them a little bit to to get that sorted.
David:Right. Right.
Mike:But I mean that so it's it's the excess. Yeah. The things that Medicare maybe doesn't fully handle.
David:Yeah. And your Roth is there to cover that those extras. Yeah. So Those uncovered things.
Mike:The strategy section of plan strategies portfolio, that section is what are you concerned about and how do you hedge against risks you're concerned about. How do you get more out of your money? I mean, it's that's really the brainstorm session. And that based on that conversation is what picks out the right investments or products.
David:Mhmm.
Mike:I mean, we do we do help people get indexed universal life insurance or lifetime income because they're concerned about it. Mhmm. We also convince people to not do these things because it's not suitable for them based on their overall goals.
David:Right.
Mike:And the only reason why we can actually sort the right ingredients is because we plan first, we have strategy second, and then we do the portfolio for the tools are assigned at the end. If you're listening in on this and you're going, gosh, I wanna do on my own, but I just want some guidelines. Look, if you go to retireontime.com, subscribe to our newsletter, you'll be a part of our first wave of our public subscribers. This is something we've held for our private clients. This is something we've been holding for a very special group of people, but we're making it more public for for anyone that wants access.
Mike:We're gonna be launching that. You just have to subscribe to get first access to us. So go to retireontime.com. Click subscribe to our newsletter, and you'll get access to the the first wave of the public access to our models, the KDRC model and so much more. All of it is intended to help you make better decisions as you prepare for retirement and retire.