Aren’t All Target Date Retirement Funds the Same? Spoiler Alert: No

Let’s talk about employer loyalty. For much of the 20th century, Americans (by and large) followed a standard script: enter the workforce and work for a single company for decades, then throw a retirement party at 65 and cash in a pension – a reward for years of company loyalty. This pension provided retirement income; usually, a percentage of the yearly salary the employee earned while working. American Express established the first corporate pension plan in the US in 1875. By 1960, about half of the private sector employees had a pension. Of course, in 1960 the average life expectancy was 67, meaning that if you retired at 65 (standard at the time), the average pension only had to provide income for two years.

Since 1960 there have been many advances in modern medicine raising average life expectancy to 79. Suddenly, plans designed to cover a few years of post-retirement income were expected to cover retirees well into their 80s and 90s. Companies offering pensions began to realize that their retirement plans were becoming increasingly – sometimes prohibitively – expensive to fund. As pension expenses continued to rise towards the end of the 20th century, many companies were forced to design new systems to ensure their employees were financially secure come retirement.

The 401(k) plan hit the streets in 1980. The employer-sponsored retirement plan was rolled out as a replacement to traditional pensions and has since become the most common retirement savings mechanism in America. In essence, the 401(k) provides a tax-deferred way for employees to set aside wages for retirement. Employees elect to divert a certain percentage of their income each year to a 401(k) account. The diverted funds grow tax-free in that account until the employee retires.

In addition to providing the account, most companies offer a savings-match system. For instance, in a 3% match system, the company would match up to 3% of an employee’s elective contributions to their 401(k) account. The employer match provides a strong incentive for employees to start planning for retirement. If an employee doesn’t divert AT LEAST the match threshold into a 401(k) they miss out on the employer match – in other words, they lose out on free money from their employer.

Let’s talk about the benefits. Funds in a 401(k) account are able to grow tax-free. Because growth is not disturbed by capital gains taxes, accounts are able to grow faster than a standard individual account. Of course, there’s always a catch: money in employer-sponsored plans – like a 401(k) – cannot be withdrawn prior to age 59 ½ without paying penalties. Most plans offer options for the participants to increase their contribution rate on an annual basis, and small increases in contribution rate (even as small as 1%) year over year can make a huge difference by the time you retire.

Contributing to employer-sponsored retirement plans such as a 401(k) or 403(b) – the non-profit version of a 401(k) – is a vital part of preparing for retirement. The money is automatically deducted before your paycheck is cut, making it easy to budget and painlessly save for retirement at the same time.

Contributing to employer-sponsored retirement plans is an essential step towards retirement planning – but it is only the first step.

Please contact me at zach.swaffer@trilogyfs.com if you are interested in discussing the next steps you can take to ensure retirement security.

In 2015, Americans spent $225 billion on long-term care. That’s 7 ½ times what was spent 15 years prior, in 2000. With the great advances we have made in medicine and medical technology, people are living longer. The downside to that is that it means people are more likely to need care and need it longer. In fact, over half of people turning 65 will need long-term care at some point in their lives.(1)

Types Of Long-Term Care

When you think of long-term care, skilled nursing facilities are probably what comes to mind. However, that is actually the last step in the long-term care journey. Most long-term care is not medical; it is simply assistance with basic activities of daily living like bathing, dressing, eating, and going to the bathroom.

Even without serious medical problems, most people become less and less capable of taking care of themselves as they age. Traditionally, people would turn to family for help with such things. However, in our modern era where families live far apart and adult children are already overburdened with careers and children, more and more people have to pay for long-term care services.

The most basic, and least expensive, form of care is homemaker services. Homemaker services do not involve anything medical, but rather things like meal preparation, cleaning, and running errands. The next step up, which does have a medical component, would be a home health aide.

Once basic in-home assistance is not enough, specialized facilities are needed. Care outside of the home can be in the form of adult day healthcare, assisted living facilities, and nursing homes.

Costs Of Long-Term Care(2)

Costs vary depending on the type of care needed and the part of the country in which you live. On an annual basis, the national average goes from just under $48,000 for homemaker services to over $97,000 for a private room in a nursing home, and that number is growing about 3-4% a year.

Things change drastically when you look at specific locations. In San Francisco, homemaker services are more than 150% the national average and growing twice as fast. A private room in a nursing home averages $171,185 a year. Even downgrading to a semi-private room still costs over $141,000 a year. Twenty years from now, that same semi-private room is expected to cost over a quarter of a million dollars.

As you can see, long-term care can be very expensive, especially with the rise of dementia, where people can live a long time while needing care. In 2018, the estimated lifetime cost of care for someone with dementia is $341,840,(3) and it’s probably much higher in a state like California.

Ways Of Paying For Long-Term Care

Because of the high cost, it is important to plan ahead for long-term care. There are a number of ways to pay for care, each with its advantages and disadvantages.

Medicaid

The vast majority of Americans turn to Medicaid for their long-term care expenses. However, it’s not because it’s a great option. Rather, it’s their only option. In order to qualify for Medicaid, you have to have a low income and low assets, so it’s not really something people plan for intentionally.

Self-Insure

On the opposite end of the spectrum from the people that can qualify for Medicaid are those who have amassed enough wealth to self-insure. If you have $50 million in assets, you can afford to pay $170,000 a year for a nursing home and it won’t have a significant impact on your finances.

The danger is that sometimes people take too great a risk thinking they can self-insure. Often, care is needed later in retirement when savings have already been spent down significantly. Having $500,000 in the bank may seem like a lot of money, but long-term care expenses can eat through it very quickly. Unfortunately, it’s not uncommon for a couple to spend all of their savings on the husband’s care only to leave the wife destitute at his passing.

Life Insurance With A Long-Term Care Rider

One option for those that find themselves in between broke and very wealthy is adding a long-term care rider to their life insurance. If you have, or are planning on purchasing, permanent life insurance, your policy may allow you to add a rider that would help pay for your long-term care costs. Using the long-term care option will often lower your death benefit, but many people appreciate knowing they will receive a benefit even if they never need long-term care.

Premium Paying Long-Term Care Insurance

Another option is buying pure long-term care insurance. Like with most kinds of insurance, you pay a regular premium in exchange for receiving a benefit when you need long-term care. One downside to this for many people is that you will only receive a benefit if you end up needing long-term care. As with car insurance where you have to get into an accident in order to get money out of it, if you never need care, you never see your money again.

Asset-Based Long-Term Care Insurance

The final option has been the fastest growing long-term care option over the last decade.(4) It is a combination of long-term care insurance and single premium life insurance, commonly called asset-based insurance.

The way it works is that you pay a large amount up front and then low annual premiums. You have several times your initial deposit available tax-free for long-term care needs. If you never use it or cancel your plan, you usually get your deposit back plus interest. Some plans even include tax-free death benefits.

Choosing A Long-Term Care Option

Looking at the statistics, you can tell that planning for long-term care is an important thing to do. Failing to do so can be a costly mistake. Because the multitude of options available can be complex and confusing, it’s important to work with an experienced financial professional.

An experienced advisor can explain all of your options to you, help you consider the pros and cons of each, and decide which is the best solution for your particular situation. If you want that kind of help choosing a long-term care option, call my office at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com to set up a no-strings-attached meeting.

(1) https://www.morningstar.com/articles/879494/75-mustknow-statistics-about-longterm-care-2018-ed.html

(2) https://www.genworth.com/aging-and-you/finances/cost-of-care.html

(3) https://www.morningstar.com/articles/879494/75-mustknow-statistics-about-longterm-care-2018-ed.html

(4) https://www.525longtermcare.com/asset-based-ltci/