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Squash the What Ifs of Retirement

Carefull, thoughtful planning can eliminate some retirement uncertainty.

Judith A. Hasenauer, 12/03/2009

America's aging seniors spend a great deal of their time pondering "what if." These "what ifs" include such imponderables as:

1. What if Social Security and Medicare go broke?
2. What if I outlive my assets set aside for retirement?
3. What if I have to go into a nursing home and run out of money?
4. What if I do not have anything left to leave to my kids or grandkids?

Most senior Americans have pondered these questions. Some of these "what ifs" can be resolved by preparation. Others cannot. When it comes to questions like what if Social Security or Medicare is no longer available, only the politicians in Washington have any control over the outcomes. However, the other "what ifs" may be solvable by prior planning and some judicious use of financial products. Indeed, some of the new combination products may well provide a relatively easy solution to some of the "what ifs."

Few Americans understand the technical aspects of longevity planning. Nevertheless, the huge growth in sales of deferred annuities over the past 20 years shows that they understand the basics, even if they do not understand the technical details. Long-term care products to cover the exorbitant costs of nursing care are a relatively new financial-planning product, and the availability of such products is somewhat limited. Moreover, there is the perception that those who can afford long-term care coverage do not need it and those who need it cannot afford it.

Most senior Americans have almost an obsession to leave something to their kids or grandkids. This desire to leave a financial legacy represents a need to provide a tangible representation of paternal love. In many cases, this desire to leave a legacy transcends common sense and causes financial hardship for those without the resources to live in comfort while leaving something of substance to the next generation.

It is possible to categorize seniors by several different standards. First on the list are those who are so affluent that they need not worry about any of the "what ifs." These fortunate folks are more interested in tax avoidance than they are in the "what ifs" that plague most of the rest of us.

At the bottom of the list are those for whom there is little or no financial hope. This is the "you cannot get there from here" group. For whatever reason, their resources are so scant that no amount of planning will allow them to reach a comfortable level of retirement and financial security when you take into account the amount of time they have left before they want to retire.

The remainder of the list represents those who have enough time and resources that planning and innovative products will help them to rest assured that the "what ifs" that are actually within their control have, indeed, been controlled. It is for this group that combination products, like a combination of life insurance and long-term care coverage, might provide the answer.

Combinations of annuities and long-term care have been available for quite some time and have been fairly successful in the marketplace. These products can go a long way toward resolving the "what ifs" of living too long and of nursing home expenses. However, they do not resolve the issue of leaving a legacy to the kids and grandkids. Moreover, when distributions are taken from an annuity for living expenses, the income tax considerations can be daunting. Cash-value life insurance policies can afford a very tax-effective way to supplement other retirement funds (or to pay unforeseen medical expenses) by way of systematic policy loans. Then, when the insured dies, the legacy element is handled b the payment of any remaining death benefit. It can provide a "win, win, win" solution--particularly when combined with a long-term care coverage.

There are a few combination products of cash-value life insurance and long-term care coverage in various stages of development, and there are a few already in the market. Obviously, a cash-value life-insurance product that also provides a fixed and variable option has an inherent flexibility in the amount of risk/reward the client desires. It also enables a choice between the amount of face value versus cash value that is necessary to permit the client to achieve his goal. Some of the new products will also provide greater flexibility in the event catastrophic events force clients into the need for public assistance. Preparation for these types of events is where a planner provides perhaps the best assistance to the client.

The next few years portend a greater need for flexible planning and flexible products than perhaps at any time in recent decades. Vast numbers of baby boomers will enter the retirement pool, economic conditions are unstable, and many of those financial elements that we have all long taken for granted are no longer assured. The only way to be sure that those "what ifs" are of little concern is to plan for them and to utilize innovative products to mitigate their effects.

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