For the past few years, the Motley Fool has been releasing articles on the five worst things that you can do with your money. Their latest advice (brought to you by Sean Williams, a “Fool” since 2010), does not make sense in the big picture of retirement, especially when your health care costs are factored in, but does your health really matter to the financial industry?
Williams’ article plucks some pretty low-hanging fruit: don’t involve yourself in day trading, hold on to your investments, resist the temptation to keep your life’s savings in an old Folger’s tin buried out between those two birch trees in your backyard, et cetera, et cetera… Where he goes astray is with his argument that people should forgo the use of Annuities in their financial plans, as there are supposedly many other available options out there; i.e., ones that pay better marketing dollars.
Now this should come as no shock, as there are plenty of financial pundits who have been making this ridiculous and possibly harmful claim for years. But there just happens to be too much information to the contrary for these supposed financial gurus to simply overlook, and in the end, the only ones placing themselves in the cross-hairs of future financial suffering are the ones believing in this “advice”.
Here are the five very simple reasons why, if you plan on retiring and living in retirement for longer than five years, you may want to rethink this “Foolish” advice:
#1 – You have a mandatory cost in retirement: your health care.
You must have health care in order to collect Social Security, a rule since 1993 that was doubled-down on in 2010 through the Affordable Care Act. Yes, the Motley Fool and the rest of the financial industry have been neglecting to mention this for over two decades now.
This one expense, that less than 8% of Americans have planned for just happens to also be one of the largest expenses most people will face in retirement (and quite possibly their entire lives). What is not being reported is the fact that an average couple retiring today, who wants to be fully insured, can expect to incur close to $8,000 in Medicare premiums for the year (Part B $1,258.80, Part D $639.74 and a Plan F MediGap Plan $2100 – all costs based on national average for 2014).
The little bombshell: according to the Center of Medicare Services the inflation rate on this cost just happens to be about 6.2% while the bulk of this expense will be automatically deducted from your Social Security benefits.
Do the math: Medicare premiums for a couple retiring in 2015 total about $8,000, should they choose to be fully insured and at a 6.2% rate of inflation this cost is going to be much higher than projected. Sort of makes one think how Fidelity Investments only got to $220,000 for an average couple’s overall health costs. Someone must be implementing very funny math, but heck, it’s only finance and quite possibly your future. What’s the big deal???
So why an Annuity? Because, even though those “Fools” won’t tell you, you will need another form of guaranteed income, as your Social Security benefits won’t even come close to what you have been told they will be.
And where do you get that? No, not from the Folger’s tin buried next to Scrappy under the ol’ birch tree… You get it from an Annuity, but please just don’t tell those “Fools” though, it may just shatter their world.
#2 – This expense also happens to be means-tested.
Since 2007, Medicare has been working in tandem with the IRS and Social Security to calculate retirees’ income. For those that earn too much, they pay more. As it stands, this is not much of an issue as only about 5 to 11% of retirees are impacted, but the “Income Brackets” which are used to determine the penalties people will pay are expected to be lowered in either 2016 or 2017 by as little as 11% to as much as 46%.
Three key notes: 1) The penalties start at a 40% surcharge for Medicare and go as high as 360%; 2) These surcharges are automatically deducted from any Social Security benefit you may receive; and 3) The President of the United States in his Fiscal Budget has proposed lowering these brackets “until 25% of all retirees are impacted by them”.
Again, the need for another form a guaranteed income is a must, and an Annuity, the one instrument that can do it is being frowned upon by “Fools”.
#3 – The income used to possibly increase your health costs and lower your Social Security benefit is practically everything you have in your retirement savings.
According to Social Security, the definition of Income is “your adjusted gross income plus any tax exempt interest you may have or everything on lines 37 and 8b of the IRS form 1040”.
Some quick examples of what constitutes income: Wages, Social Security, Capital Gains, Interest, Rental Income, possible Pension Income, withdrawals from any Tradition 401(k), 403(b), SEP, Keough, and any Dividends which also include those from Muni Bonds.
What is not considered income: Life Insurance, distributions from Roth accounts and 401(h) plans, Equity from your home, and of course income from “Non-Qualified’ Fixed Annuities.
The reason why “Non-Qualified” Fixed Annuities work so well is that they tend to have a high tax exclusion ratio, meaning that a certain amount of the income you will receive will never appear on your tax return. But when it comes to your health, your Social Security benefits, and quite possibly your economic freedom, what does all of that matter to a “Fool”?
#4 – Ever think about Long-Term Care (LTC)?
I hope so, as LTC is no longer about protecting assets for future generations, but has become the key negotiating source to access of care. According to the Kaiser Family Foundation, in 2011 there were 15,465 certified nursing facilities in the United States. These facilities comprised about 1.6 million beds, and in 2011, 1.38 million of them were occupied. Yup, there were just under 300,000 unoccupied beds in Certified Nursing facilities in the US in 2011.
Now look at what we already know: according to the US Census Bureau, 76 million Baby Boomers happen to be retiring at a rate of roughly 10,000 per day, and will continue to do so until 2029. And according to the Department of Health & Human Services, close to 70% of these Boomers will need some form of LTC in retirement, while 25% are expected to need a stay in a facility of longer than 3 years.
Now why an Annuity? Because an Annuity has the ability to provide some form of coverage in terms of funding these expenses for an owner who in the unfortunate event may need it. And what are people being advised to do by a “Fool” with their future savings? The equivalent of driving down to Las Vegas and putting it all on black, because it’s the sexy thing to do.
Think about this: with the national average cost in 2014 for a semi-private room in a nursing facility being $77,380 according to Genworth, what investment do you have that is ready to cover that? Before answering, realize that the gain you take from it will be used against you when your health is on the line.
#5 – Let’s get Filial…Filial
I wanna get filial, so listen to the Jester talk… Now that you have been brought up to speed on health care costs and Long-Term Care, there is one other factoid floating out there that the “Fool” neglected to mention whilst pontificating about what is best for you and your money: the debt you rack up from health care and LTC expenses can and will be passed onto your children.
Twenty-nine states in the US have designed Filial Laws that “impose a duty upon third parties, usually (but not always) adult children for the support of their impoverished parents or other relatives”. In plain-speak: the children of the parents who owe a debt can be possibly stuck with a bill later on for it. Sound impossible? Sorry, it ain’t impossible.
The Washington Post cracked a story in mid-2014 about how the US Treasury was collecting decade-old debts from children whose parents owed the government. At the time, the US Treasury collected about $424 million in debts in just under 3 years. Nice work, if you can get it.
Other financial publications have been covering the stories of John Pittas from Pennsylvania, who was held responsible for paying his mother’s $93,000 nursing home bill, and Elden Linderkamp from North Dakota, who was held responsible for paying his parents’ $104,276.62 nursing facility bill when they passed away.
So as you can see there appears to be a penalty or some form of punishment for not planning for LTC and then possibly needing it in the future and again, one of the best options to funding for this problem of LTC – an Annuity, but just don’t tell those “Fools”.
These are just five simple reasons why someone may want to look at implementing an Annuity into their retirement portfolio. But are there really any other financial instruments that can provide guaranteed income that will not be used against you, while helping to control health costs, possibly mitigating your tax hit and saving a greater portion of your Social Security benefit?
Maybe only a “Fool” would know, but even that would seem very, very doubtful.