Mon, 25 Mar 2013
Morningstar's Christine Benz addresses who sequestration will and won't affect, changing prices for long-term care, and a timely mortgage-paydown strategy.
Adam Zoll: For Morningstar, I'm Adam Zoll. The federal spending cuts known as the sequester went into effect earlier this month. Here to talk about the effect of these cuts on seniors is Morningstar's director of personal finance, Christine Benz.
Christine, thanks for being here.
Christine Benz: Adam, great to here.
Zoll: So many seniors may be concerned that the sequestration cuts may affect their Social Security. Should they be concerned?
Benz: They shouldn't because Social Security is exempt from the sequestration. So, it's not affected at all. If you're senior receiving Social Security benefits, you should receive your check on time just as you always did. Actually [instead of a check, it would be] direct deposit because increasingly seniors are being opted into direct deposit.
Where there might be a little bit of an effect is in the area of dealing with the Social Security Administration because there are some cutbacks in terms of personnel. So, if you need a question answered or perhaps you are filing a claim for the first time, you may see a little bit of a delay in processing, but it probably won't be significant. If there are any effects, they will be there.
Where there will be a more significant impact is in the area of Medicare because providers who are providing services through Medicare will see a cutback in the reimbursement they'll receive of 2%. So, there has been a lot of handwringing in the health-care industry saying that long term this might have a big impact on hiring within the health-care industry, and there have been some people who have said there might be some doctors who will not take Medicare at all. I think with the 2% cutback, it probably is not realistic to think that if your doctor was seeing you before the 2% cutback that he or she might decide not to. It's probably not a reason get too worried at this point given that that the cutbacks are fairly modest.
Low-income seniors may also see an impact. So, for example, there may be cutbacks or there will be cutbacks in terms of Meals on Wheels programs as well as energy-assistance programs. So a few other programs set up to benefit long-term seniors are seeing cuts under sequestration. Low-income seniors will probably feel the biggest impact of all.
Zoll: Switching gears to a topic that is also of great concern to many seniors and people who are approaching their senior years is long-term care. There have been some recent developments in that area as well, correct?
Benz: A couple of big headlines in that area. One is that Genworth, which is the giant in the long-term care insurance industry, announced that it's going to start introducing separate pricing for males and females. Certainly the actuarial tables all show that females on average tend to live longer than males. So, Genworth intends to start pricing its policies accordingly. So, the policies for women will tend to be pricier than they will for men because women are more likely to use those benefits over their lifetimes. So, that's something to keep in mind, and there has been a sort of widespread acknowledgement that as long as Genworth is doing this, we will probably see other long-term care insurers introduce pricing that is also gender-based.
One thing that couples might think about is purchasing long-term care insurance together, and in general, if they do so versus purchasing it separately, they will obtain better pricing in doing so because what the data show is that if a couple is together, one couple may in fact take care of the less healthy part of the couple, and that will reduce the overall pressure on that long-term care insurance. The couple might defer receiving long-term care insurance benefits as long as they are together.
Zoll: So more broadly, we're also seeing cost increases across the board for both men and women, aren't we?
Benz: That's right, and that's really an outgrowth of the very low-interest-rate environment we're in. So, if insurance companies can't really earn much on insured people's money, that means that they need to charge more for the insurance. And anecdotally, the claims experience for insurers has not been great; they've seen higher-than-expected claims. So, a lot of insurers have gotten out of this business altogether. Those that have stayed in have in fact hiked their premiums.
The American Association for Long-Term Care Insurance does periodic surveys and has shown that actually over the past year, the premium for a pretty basic policy has risen by $3,000 in one year alone, and that's for a policy that would provide $162,000 worth of current benefits which would rise to $330,000 at age 80. So, it's a significant jump up for a very basic type of package.
That's a worrisome trend. What the American Association for Long-Term Care Insurance found though was a wide variation in terms of pricing. So, it really does pay to do your homework. Definitely interview several insurance companies before deciding to purchase one of these policies, because insurance companies tend to be all over the map with this pricing.
Zoll: So it definitely pays to shop around?
Benz: Yes, it does. And another thing that some of our Morningstar.com users have been talking about is this concept of self-insuring for long-term care insurance. It's kind of a misnomer because if you are setting aside your own kitty to pay for long-term care insurance, you're not pooling your risk with other people. So, you're not really self-insuring. But people have talked about setting aside a separate bucket, if you will, for long-term care costs. I think that's actually a pretty interesting idea. And the reason I like it is that if you don't end up needing long-term care, if maybe you live well beyond your life expectancy, you live until age 95, you can use the money for that as well. Or perhaps you could use your money to pass on your heir. So, it does introduce an element of flexibility, but it's not truly insurance.
Zoll: You mentioned a little while ago the impact of low interest rates, and let's transition now and talk a little about what that means for people who are reliant on fixed-income investments right now. Of course, many people are skittish about bonds. People who may otherwise be rebalancing their portfolios after the stock market's recent highs into bonds may be thinking twice because of the expectation that interest rates will go up and bonds will get hammered. But you have a creative idea about a different way to rebalance out of equities.
Benz: Well, it really came out of two separate discussion threads we had going on Morningstar.com. So I wrote this piece recently about whether you should rebalance into bonds because chances are if your portfolio is heavy in anything, it's probably heavy in stocks, which would mean peeling back and putting money into bonds. There was a lot of controversy [among Morningstar.com Discuss users]; a lot of people were saying, "Are you crazy? Why would anyone buy bonds?"
Separately, we had this discussion about whether it pays to prepay a mortgage. So should you pay it off early? We had a lot of people who are firmly in that camp. Yes, it gave them great peace of mind. Other people saying, I can earn a much better return on my money by investing in the market. So I started thinking, well, if you are someone who is looking at your portfolio, you've done the X-ray, and you are heavy on stocks, maybe one idea is to think about taking at least some of the rebalancing proceeds and moving that into mortgage paydown.
The reason I like that strategy, especially for retirees who intend to stay in their homes, is that it's a guaranteed return on their money. So if you can retire that debt early, that is a guaranteed bang for your buck. Really anything outside of cash, all bets are off. There are no guarantees that you will get a return on your money and certainly not in bonds right now with all the worries that we have about interest rates.
So I thought it might be an idea for people who wanted to think about earning a safe return on money that they would otherwise be peeling back on and moving into bonds.
Zoll: I think that's a very creative idea. It's almost like putting it into a certificate of deposit that that you get to live inside of.
Benz: Exactly. And of course, you need to balance your need for liquidity. So certainly if you need to have liquid assets in an investment portfolio, you probably want to reinvest in the portfolio versus plowing it into your house. But if you are feeling OK about the size of your investment portfolio, then mortgage paydown will give you the best guaranteed return on your money.
Zoll: Christine, thanks so much for sharing your insights with us today.
Benz: Thank you, Adam.
Zoll: For Morningstar, I am Adam Zoll. Thanks for watching.