Long-Term Care

Want to Protect Your Family? Make LTCI a Priority

In a 1997 speech, Rosalynn Carter, the wife of Jimmy Carter, the former President of the United States, made a statement, “There are only four kinds of people in this world”:

  • Those who have been caregivers,
  • Those who currently are caregivers,
  • Those who will be caregivers, and
  • Those who will need caregivers.

Long-Term Care’s Profound Effect on a Family

When a loved one requires long-term care, it can have a profound effect on a family. Studies have shown that providing care to people who are chronically ill can have a detrimental effect on caregivers. This is especially true when the caregiver is the individual’s spouse or other family member.

In addition to the physical and emotional toll it takes on the caregiver, sibling relationships are often challenged when a parent requires long-term care and a family member provides the care. This is true even in the best situations where the family all live in the same area and have previously enjoyed a good working relationship with one another.

This is a huge and growing problem given the following five facts:

  • 10 – 12 million people in the U.S. currently need long-term care services.
  • 70 percent of people who reach age 65 will need some type of long-term care.
  • The number of people over age 65 is projected to increase from 42 million in 2010 to 84 million in 2050.
  • Longevity continues to increase with individuals reaching age 65 having an average life expectancy of 83.2 years.
  • Over 70 percent of all long-term care is provided by family members.

The problem is exacerbated by the fact that 60 percent of family caregivers are employed and the average length of family provided long-term care is 20 hours per week. Alzheimer’s/dementia cases, which currently comprise approximately 20 percent of all long-term care claims, present unique challenges for professional caregivers, let alone family members.

In a best-case scenario, assuming that the family caregiver lives in the area and isn’t working, his/her (most likely her since approximately two-thirds of family caregivers are women) previous day-to-day routine will be a thing of the past. The family caregiver’s emotional and physical well-being will inevitably be compromised as a result of this radical lifestyle change.

Long-Term Care Insurance to the Rescue

Assuming that you understand that (a) long-term care isn’t an isolated situation and (b) there will be a physical and emotional toll on family caregivers and the extended family of individuals requiring long-term care services for an extended period of time, it makes sense to plan for this situation long before it ever becomes reality.

While it generally isn’t inexpensive due to the high cost of benefits and requires a long-term commitment, long-term care insurance, or “LTCI,” is the best solution in many cases. While you’re technically the “insured” when you purchase a LTCI policy for yourself, you’re actually insuring your family.

The fact that long-term care insurance relieves family members of caregiving responsibilities and all of the associated problems that go with it is worth its weight in gold. If ever needed, the cumulative premiums paid for long-term care insurance will generally pale in comparison to the benefits provided, not to mention lost income experienced by family caregivers.

What about the peace of mind knowing that a long-term care plan will preserve the emotional, physical, and financial well-being of those you love and care about? How do you place a price tag on this?

Do you want to protect your family? Make LTCI a priority.

Retirement Income Planning

Ladder Your Retirement Income

“Don’t put all of your eggs in one basket.” This is a saying that’s often tossed around when it comes to retirement income planning. Usually it’s brought into the conversation to address different types of investments one should consider to generate retirement income.

While diversification is a fundamental principle when it comes to both pre- and post-retirement investment planning, income timing is just as important in retirement. The first thing that needs to be recognized is that retirement isn’t a single financial event. It’s a process that includes multiple stages, each with its own financial demands.

There are unique types of expenses associated with each stage. For example, there may be an emphasis on travel in the initial stage of retirement, potentially requiring a large initial budget for this item that may decline, and ultimately be eliminated, in later stages. Another example may be a mortgage that gets paid off during retirement. Finally, health and long-term care expenses tend to dominate the final stage. Nonrecurring, or infrequently recurring, expenses, such as car purchases and home improvements, need to also be considered.

Given the fact that income needs to cover expenses and there will be various types and amounts of expenses with different durations associated with each of the various stages, different streams, or ladders, of income need to be planned for to match one’s needs. Several types of income need to be analyzed to determine which ones will be best suited to match the projected expense needs of each stage.

When considering income types, it must always be kept in mind that after-tax income is used to pay for expenses. If the income source to be used to pay for a particular expense is a retirement account such as a 401(k) plan, a larger distribution will generally need to be taken from the plan than would be required from a nonretirement money market fund or from a Roth IRA account. Income tax planning is essential when it comes to income ladder design.

Complicating the income ladder design process is the decision regarding when to begin receiving Social Security. While Social Security can provide a solid base, or floor, to meet income needs for the duration of retirement, the amount of income that you will receive is dependent upon the age when you begin to receive your income. Given the fact that the amount will increase by 8% per year plus cost of living adjustments between full retirement age and age 70, it may make sense to defer the start date depending upon one’s retirement age, marital status, health condition, and other potential sources of income. The types, timing, and amounts of income ladders are directly affected by the Social Security start date decision.

Keeping in mind that successful retirement income planning includes planning, managing, and protecting income, an analysis of one’s income protection plan is also essential to the income ladder design process. As an example, to the extent that long-term care insurance has been purchased, a large income stream won’t be needed to pay for long-term care expenses. Funds will generally be needed, however, to pay for long-term care insurance premiums throughout retirement unless a claim arises.

As you can see, retirement isn’t a smooth ride whereby you can plan for the same amount of expenses each year increased by an inflation factor. Given this fact, an analysis of different types of projected expenses, including amounts and timing of each, is critical, followed by the design of an after-tax income ladder plan to match your expense needs.

Long-Term Care Medicare

Are You Depending on Medicare for Long-Term Care Coverage?

I’ve wanted to write this post for a long time, however, I just haven’t gotten around to it. Over the years, clients and others I’ve talked to have been reluctant in initial conversations about long-term care planning to consider the purchase of long-term care insurance (LTCI) because they thought that Medicare will take care of them.

Let’s put it this way, if you’re part of this school of thought, you experience a long-term care event, and you don’t have LTCI, you’re in for a big surprise. A large part of the problem is that most people don’t know what constitutes a “long-term care event,” let alone how this compares to what Medicare will cover.

Long-Term Care Event

In order to qualify for benefits under a tax qualified LTCI policy, which represents 95% of policies sold today, you’re required to be certified by a qualified health professional as having a chronic illness that will last for at least 90 days whereby the illness must result in you:

The six ADL’s include bathing, dressing, eating, continence, toileting, and transferring.

Will Medicare provide benefits for either of these two situations? It’s not likely, and, if there’s coverage, it will be limited as far as number of days, dollar amount, and type of coverage.

Custodial Care

The majority of long-term care expenses are for custodial, or personal, care, none of which is covered by Medicare. Custodial care is designed to assist a person who has limited ability to perform daily activities due to deficiencies in physical and/or cognitive functions. It’s provided to help someone with his or her ADL’s or instrumental activities of daily living (“IADL’s”). IADL’s are the cognitive functions pertaining to comprehension, judgment, memory, and reasoning. Activities include shopping for personal items, managing money, using the telephone, preparing meals, managing medication, and doing housework.

Medicare Event

Medicare wasn’t designed to handle significant long-term care expenses. Medicare only covers medically necessary care with the focus on medical acute care, such as doctor visits, drugs, and hospital stays. There are three qualifications that you must meet in order to receive Medicare benefits:

  • Have had a recent prior hospital stay of at least three days
  • Admitted to a Medicare-certified nursing facility within 30 days of your prior hospital stay
  • Need skilled care, such as skilled nursing services, physical therapy, or other types of therapy

Medicare Benefit Period and Benefit Amount

If you meet these strict requirements, none of which are necessary to qualify for LTCI benefits, Medicare will pay for some of your costs for up to 100 days. Medicare will pay for 100% of your costs for the first 20 days, with the cost being shared for the next 80 days. In 2013, you’re required to pay the first $140 per day and Medicare pays any balance for days 21 – 100.

Home and Other Care Services

In addition to skilled nursing facility services, Medicare will pay for various services when your doctor says they are medically necessary to treat an illness or injury. If you’re unable to perform ADL’s and/or IADL’s that’s unrelated to the treatment of an illness or injury, Medicare won’t provide any coverage for home and other care services.

The home and other care services that Medicare covers, some of which are for a limited number of days, include part-time or intermittent skilled nursing care, physical and occupational therapy, speech-language pathology, medical social services, and medical supplies and durable medical equipment. Once again, custodial services aren’t covered.

Are you depending on Medicare to be your long-term care plan? If so, you may want to revisit your plan.

Long-Term Care Longevity Insurance

The Retirement Income Planning Sweet Spot

If you know me professionally, you know that I’m big on distinguishing between retirement income, vs. retirement asset, planning. This isn’t about semantics. It’s about being practical. Unless your lifestyle allows you to survive solely on Social Security or a comparable monthly benefit if you don’t qualify for Social Security, you need to create your own pension. This is, after all, the theme of this blog: Innovative strategies for creating and optimizing retirement income.

In order to create your own pension, you need assets. The question is, when should you transition from a retirement asset planning to a retirement income planning approach? Tied into this question is a related question: Is your current financial advisor trained, experienced, and equipped to offer solutions to assist you with making this change? If not, it may be time to look for a new adviser who specializes in retirement income planning.

See What Tools Does Your Financial Advisor Have in His or Her Toolbox

So when should you begin creating your own pension? This is a daunting task since the primary goal is to ensure that you won’t outlive your income while surrounded by many unknowns, including, how long you will live, potential health issues and timing and cost of same, as well as changing inflation and tax rates, to name a few. Given this situation, there ideally needs to be a significant amount of lead time to do the necessary planning.

As with all financial planning goals, you need to work backwards from your target date. By definition, the applicable date for retirement income planning would be the age at which you would like to retire. Given the complexity of the process together with the many unknowns, a 20-year lead time is generally advised. Assuming that you would like to retire at age 70, you should have an initial retirement income plan prepared at age 50.

This doesn’t mean that you need to transfer all of your nonretirement and retirement investment assets into income-producing assets on your 50th birthday. This is simply when the transition from a retirement asset planning to a retirement income planning process should begin. Strategies will generally be implemented gradually over the course of the years leading up to, as well as after, retirement as your situation changes and different opportunities present themselves. Your retirement income plan needs to be vibrant, proactive, and responsive to change since you will experience many of them at an increasing rate as you approach, and move into, your retirement years.

In addition to retirement income planning strategies, your plan should include income protection strategies for yourself and for your spouse if married. An unprotected, or under protected, life event such as disability, long-term care, or death can severely reduce the longevity of, and potentially prematurely deplete, your, or your survivor’s, investment assets. Income protection strategies should be included and implemented as part of an initial retirement income plan due to the fact that they become increasingly expensive and potentially cost prohibitive with age, not to mention the risk of being uninsurable as you get older.

So what if you’re within 20 years of retirement and you haven’t begun retirement income planning? No need to panic. While your strategies and potential opportunities may be more limited depending upon how close to retirement you are, it’s never too late to start a retirement income plan. As previously stated, retirement income planning strategies are generally implemented both before and during retirement as your situation changes and different opportunities present themselves.

Social Security

Approaching 62? – Stop Before You Leap – Part 1 of 2

As I’ve dealt with clients and nonclients alike over the last three decades, one of my ongoing observations is the lack of formal and informal financial education we receive as a society when it comes to how to recognize and plan for critical life-changing financial events in our lives. This is especially true as it pertains to one of the most, if not the most, important financial decisions most of us will make during our lifetime, i.e., when to begin receiving Social Security retirement benefits.

By way of background, although you may apply to begin receiving Social Security retirement benefits at age 62, your benefit will increase each month that you defer your start date until age 70. While it’s tempting to turn on the faucet at age 62, this may not be the best age to begin receiving benefits if you’re concerned about maximizing and prolonging your retirement income stream and that of your spouse if you’re married.

The timing of the Social Security claiming age decision occurs at the crossroads of most peoples lives when many decisions need to be made that will affect the financial and emotional success of one’re retirement years. It comes at a time when:

  • The financial and psychological security of full-time employment will be ending in the near future for most people.
  • The sequence of investment returns can make or break one’s retirement if not properly planned for.
  • There will be a prolonged period of financial uncertainty without the associated safety of a paycheck, including unknown investment performance, inflation, and income tax rates.
  • Health begins to decline for many people with escalating health insurance premiums, potential higher out-of-pocket medical costs, and potential uncovered long-term care expense.

Given the far-reaching and long-term consequences of the Social Security claiming decision, it should be a high priority for anyone approaching age 62 to have a professional retirement income planner prepare an analysis as part of a retirement income plan to determine the optimal age to begin receiving Social Security retirement benefits.

The choice of a Social Security starting age will differ depending upon each person’s unique circumstances. This will become more evident when you read the reasons why the choice of your Social Security claiming age is so important in Part 2 of this post next week.

Retirement Income Planning

Do You Have a Retirement Income Portfolio?

Investopedia® defines a portfolio as “a grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts.” It completes the definition by saying that “portfolios are held directly by investors and/or managed by financial professionals.”

In other words, an investment portfolio consists of a mixture, or collection, of financial assets. During our working years, we typically finance our fixed and discretionary expenses from current sources of employment income, including salary, if we’re employed, and from draws, if we’re self-employed or a partner. Employment income is also used to fund an investment portfolio, including retirement and nonretirement investment plans through, and independent of, employers.

Following the concept that income is required to pay for expenses, when we retire, we need retirement income to pay for our fixed and discretionary retirement expenses. Given the fact that traditional pension opportunities are dwindling, combined with the uncertainty of Social Security in its present form, it’s incumbent on us to have a retirement income plan in place several years before we retire.

Every retirement income plan should include a plan for transitioning a portion, or in some cases, all, of one’s traditional investment portfolio into a retirement income portfolio. The amount and timing of the transition is dependent upon projected non-asset sources of retirement income compared to projected retirement expenses. Projected non-asset sources of retirement income consists of income that you will receive that is independent of assets that you own and are projected to own. This includes Social Security and private and government pensions.

Projected retirement expenses should be the focus of every retirement income plan. While current expenses can be used as a starting point, it’s important to remember that the expenses that we incur today are most likely quite a bit different than those we incurred ten or twenty years ago. Similarly, it’s critical that we visualize our retirement lifestyle since the type and amount of expenses that we incur during our retirement years are likely to be different than what we’re experiencing today. In addition, retirement should be broken down into different stages to take into consideration potential decreased levels of physical activity and different types of expenses associated with each stage.

Care must be taken to include potential extraordinary expenses in one’s list of projected retirement expenses, especially those related to health and long-term care needs. In addition, an appropriate inflation factor needs to be applied to all non-fixed expenses. Furthermore, different inflation factors should be applied to different expenses to reflect the projected reality of the marketplace.

Once we have a handle on our projected annual retirement expenses and subtract projected non-asset sources of retirement income, the difference will be the annual projected after-tax income that is required to be generated from our retirement income portfolio. It is then, and only then, that the individual components that will comprise the retirement income portfolio can be determined. As with traditional investment portfolios, it often makes sense to turn to a professional, in this case a retirement income planner, for guidance.

Annuities Deferred Income Annuities Retirement Income Planning

Designing Your Income Annuity Plan

While one of the benefits of income annuities as stated in Immediate Income Annuities: The Cornerstone of a Successful Retirement Income Plan is reduced dependence on ongoing investment management, anyone considering the purchase of an annuity should first engage the services of a professional retirement income planner.

A professional retirement income planner, after discussing your retirement income needs with you and analyzing your financial situation, will prepare an income annuity plan that includes a comprehensive analysis and recommendations. The analysis should include multi-year cash flow, income tax, and portfolio projections that illustrate the following:

  • Use of income annuities vs. other types of annuities
  • Use of income annuities vs. other types of investments
  • Amount of taxable vs. nontaxable annuity payments in the case of nonqualified annuities
  • Taxation of projected Social Security benefits with and without single premium immediate annuities (“SPIAs”) and deferred income annuities (“DIAs”)
  • Affect of the use of income annuities on projected required minimum distributions (“RMDs”)
  • How income annuities are being used to close one’s income gap
  • Advantages and disadvantages of implementing an income annuity plan now vs. later
  • Projected portfolio assets in the event of a long-term care situation
  • Projected portfolio assets upon death
  • Projected ongoing cash flow following death to surviving spouse and other beneficiaries
  • Implementation of other planning techniques that can be used in conjunction with income annuities

If it is determined that fixed income annuities should be part of the recommended solution, the recommendations should discuss specific design parameters, including the following:

  1. Contract type: nonqualified or qualified
  2. Whether SPIAs and/or DIAs should be used
  3. Number of SPIA and DIA contracts to be purchased
  4. Initial purchase amounts
  5. Ongoing purchase amounts and timing of same
  6. Source of funds to be used for initial and ongoing purchases of each contract
  7. Whether the annuity contract is replacing another annuity contract or life insurance policy
  8. Plan type: period certain, life, joint life
  9. Payment commencement dates for DIAs
  10. Payment amount
  11. Payment frequency: monthly, quarterly, semi-annual, or annual
  12. Inflation percentage increase
  13. Number of payments in the case of a period certain
  14. Owners
  15. Annuitants
  16. Beneficiaries
  17. Life insurance companies

As you can see, the analysis and parameters associated with the design of an income annuity plan is complex, to say the least. Annuities should never be purchased as stand-alone products when used as part of a retirement income planning solution. A professional retirement income planner should always be engaged to perform the requisite analysis and make recommendations that will result in the best solution for determining, and closing, your projected income gap before purchasing any annuities.

Annuities Deferred Income Annuities Retirement Income Planning

Mirror Your Retirement Income Needs With Period Certain Annuities

One of the most difficult financial planning challenges for any financial planner when planning for any goal, retirement or otherwise, is screening, performing due diligence on, and selecting, financial products that have the greatest potential for helping a client attain his/her goals while being suited to the client’s investment temperament. This is especially true when it comes to retirement income planning given the fact that the planner’s mission is to (1) find a way to use assets to create predictable, inflation-protected, and whenever possible, tax-efficient, income streams that, (2) when combined with other sources of income (Social Security, pensions, etc.), are designed to match a client’s projected and unknown (e.g., potential uninsured long-term care expense) retirement income needs for an unknown period of time (i.e., the remainder of one or more lives), (3) while also retaining a portion of those assets to pay for lump-sum expenses (e.g., car purchases, home improvements, weddings, etc.), and (4) to also accomplish the client’s estate planning (e.g., leave money to children and/or to charitable organizations) and other objectives. Suffice it to say, this isn’t an easy task, to say the least!

Two weeks ago, Annuitization Payment Option: The Financial Decision You Will Live With for the Rest of Your Life introduced a financial strategy, annuitization, for generating guaranteed (subject to individual insurers’ claims-paying ability) and tax-favored (when used in nonretirement accounts) income, often for life. It discussed the four types of annuitization payment options available with annuity contracts:  life annuity, life annuity with guaranteed payment, joint and survivor annuity, and period certain. Last week’s blog post, Lifetime Annuity Payout – Watch Out! explained that, while a life annuity payment option offers the security of lifetime payments, there are several downsides associated with this choice. As pointed out, one of the most notable is that it won’t provide for different and distinct income streams to match your retirement income needs.

The fourth type of annuitization payment option, period certain, or term certain, as it is often referred, offers perhaps the greatest potential of any type of investment strategy to provide guaranteed (subject to the individual insurers’ claims-paying ability) income to mirror retirement income needs over defined periods of time. Under this option, a life insurance company is obligated to make periodic payments to an annuitant for a specified number of months or years. The payments, which can be inflation-adjusted, can begin today, through either annuitization of an existing annuity contract or purchase of a single premium immediate annuity (“SPIA”), or at some future date at least 13 months from today, via purchase of one or more deferred income annuity (“DIA”) contracts.

Whether the period certain annuity begins today or sometime in the future, it will always be a specified payment for a specified period of time, e.g., $2,500 a month for ten years. Unlike any other type of annuitization payment option, you will always know the total payout, e.g., $300,000 in the previous example ($2,500 x 12 months x 10 years) that you will receive from a period certain annuity before you purchase it. This, in turn, provides you with the ability to precisely calculate an internal rate of return on your investment and, furthermore, compare it to other fixed-rate return investments. The internal rate of return is often provided by life insurance companies in their pre-sale illustrations.

Because of their flexibility to begin and end at any time, combined with the ability to increase payments by an inflation factor, period certain annuities can be structured to dovetail with the amount, frequency, and duration of other income sources to enable better and more predictable matching of total income to one’s retirement lifestyle needs than with most other types of investments. As an added benefit, in the case of nonretirement assets, a portion of each payment is nontaxable since it’s considered to be a return of principle.

Finally, unlike the life annuity payment option whereby payments terminate upon the annuitant’s death, payments from period certain annuities are made dead or alive. If an annuitant dies during the payout term, the life insurance company will continue to make the same payments that were being made to the annuitant to the annuitant’s beneficiary until the end of the specified term.

If your objective is to find a financial product that will provide you with predictable, inflation-protected, tax-efficient (in the case of nonretirement assets) income streams that, when combined with other sources of income, will have a high likelihood of matching your retirement income needs, you would be hard-pressed not to include one or more period certain annuities as part of your solution.

Retirement Asset Planning Retirement Income Planning

Retirement Asset Planning – The Foundation

Last week, in Retirement Planning Risks, I discussed six risks associated with retirement planning in general. In order to understand and appreciate the value and importance of retirement income planning and its associated strategies, let’s take a closer look at retirement asset planning.

As was presented in The Retirement Planning Paradigm Shift – Part 2, the focus of retirement asset planning is on the accumulation and “spending down” of one’s assets. The accumulation phase is common to various financial planning areas, not just retirement, including house purchase planning and education planning, to name a couple. With most types of planning, you’re typically designing a plan for the purpose of accumulating funds for either (1) a single expenditure at some specified, or target, date, in the future, e.g., a down payment on a house, or (2) a series of expenditures for a limited and specified series of target dates, e.g., a four-year college education.

With all types of financial planning, there are two major stages:  (1) design, and (2) funding, or plan implementation. Similar to an architect, a financial planner, after consultation with his/her client(s), designs a financial blueprint, or plan, for achieving a particular goal, or series of goals. Assuming that the client approves the recommendations, the plan is generally funded with a single lump sum or a series of payments over a specified period of time, depending on the plan’s goals, the client’s current and projected resources, and various other factors.

With most types of financial planning, when you reach the plan’s target date, you immediately, or over a limited number of years, e.g., four in the case of college education, see the results of your plan. What distinguishes retirement asset planning from other types of planning and adds to the complexity of the plan design and funding strategy is the “spend-down” phase.

Unique to retirement asset planning, the timeframe of the “spend-down” phase is undefined. It can last for less than a year and, although it is unlikely, it can go on for as many as 60 years, depending upon when it starts and a host of many variables.

Unlike most types of financial planning where you get to see the results of your plan after reaching a specified target date, this is not the case with retirement asset planning. As a result of all of the risks discussed in last week’s post, there’s an inherent uncertainty associated with retirement asset planning. Even if you’ve done an excellent job of accumulating what appear to be sufficient assets for retirement, you generally won’t know if this is true for many years.

While retirement asset planning can provide a solid foundation for a successful retirement plan, unless it is accompanied by a customized retirement income plan at the appropriate stage in your life, there is a higher likelihood that your retirement income will fall short of your needs and that the plan, itself, may not succeed.

Financial Planning Retirement Asset Planning Retirement Income Planning

Is Your Retirement Plan At Risk?

Before I write about the specific risks associated with retirement asset planning and the strategies that retirement income planners use to address, and, in many cases, mitigate, these risks, let’s take a look at risks that are common to all retirement planning. While many of these are uncertain and/or uncontrollable, each of them needs to be addressed in a retirement plan.

The risks that will be discussed are as follows, with the first three common to all types of financial planning, and each one intended to be a brief introduction vs. a comprehensive discussion:

  1. Inflation
  2. Investment
  3. Income tax
  4. Longevity
  5. Health
  6. Social Security benefits reduction


Although it is unpredictable as to amount and fluctuation as it pertains to individual and overall variable expenses, a key risk that must be considered in the design and funding stages of all retirement plans is inflation. Unlike most types of financial planning where it is a factor only in the accumulation phase, inflation is equally, if not more important, during the withdrawal stage of retirement planning. The longer the time period, the more magnified are the differences between projected vs. actual inflation rates insofar as their potential influence on the ultimate success of a particular retirement plan.


Unless you are living solely off of Social Security or some other government benefit program, you are directly or indirectly exposed to investment risk. Even if you are receiving a fixed monthly benefit from a former employer, although it isn’t likely, your benefit could potentially be reduced depending upon the investment performance of your former employer’s retirement plan assets and underlying plan guarantees. Whenever possible, investment risk should be maintained at a level in your portfolio that is projected to sustain your assets over your lifetime while achieving your retirement planning goals, assuming that your goals are realistic.

Income Tax

Even if income tax rates don’t change significantly as has been the case in recent years, income tax can consume a sizeable portion of one’s income without proper planning. With the exception of seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) that have no personal income tax and two states (New Hampshire and Tennessee) that tax only interest and dividend income), the rest of us need to be concerned about, and plan for, state, as well as, federal income tax. In addition, if you have a sizeable income, it is likely that income tax legislation will be enacted that will adversely affect your retirement plan on at least one occasion during your retirement years.


Unlike other types of financial planning, the time period of retirement planning is uncertain. Although life expectancies are often used as a guide to project the duration of a retirement plan, no one knows how long someone will live. The risk associated with the possibility of outliving one’s assets is referred to as longevity risk. In addition, life expectancies, themselves, are changing from time to time. The August 19, 2009 edition of National Vital Statistic Reports announced a new high of nearly 78 years for Americans. Planning is further complicated for married individuals since you are planning for multiple lives.


An extremely important risk that is sometimes overlooked or not given enough consideration in the design of retirement plans is health. Under-, or uninsured, long-term care events as well as premature death in the case of a married couple, can deal a devastating blow to an otherwise well-designed retirement plan. It is not unusual for a prolonged long-term care situation, such as Alzheimer’s, if not properly planned for, to consume all of one’s retirement capital and other assets. Inadequate life insurance to cover the needs of a surviving spouse can result in dramatic lifestyle changes upon the first spouse’s death.

Social Security Benefits Reduction

Once considered to be unshakable, the security of the Social Security system, including the potential amount of one’s benefits, is questionable. In addition, it was announced in May that for the first time in more than three decades Social Security recipients will not receive a cost of living adjustment, or COLA, increase in their benefits next year. While beneficiaries have received an automatic increase every year since 1975, including an increase of 5.8% in 2009 and a 14.3% increase in 1980, this will not be the case in 2010.

Each of the foregoing six risks needs to be considered, and appropriate strategies developed, in the design and implementation of every retirement plan to improve the chances of success of the plan.