December 19, 2020

Protecting Yourself from the Three Big Risks In Retirement

Planning your retirement can be done easily but we may overlook the risks behind it. When creating your own retirement and legacy blueprint, it is important to take into account strategies to protect you from these risks.

In today’s episode, we dive deep into the three biggest risks in retirement with the options to protect yourself from these risks. 

In this episode, you’ll learn…

  • Chris’ positive focus for the week
  • Introduction to the risks in retirement
  • Tax Risk
  • What happens to tax brackets when the Tax Cuts and Jobs Act ends
  • How the country’s debt affect tax
  • Stretching IRA tax through the SECURE Act
  • How to minimize taxes for your retirement
  • Dealing with Market Risk
  • Diversification of investments
  • How to measure for risk/volatility 
  • Building a strategy for a soon bucket and later bucket of money
  • Long-term care risk
  • What is Private duty home care?
  • The difference between independent living and assisted living
  • Long-term care insurance
  • How does the Medicaid crisis planning strategy work?
  • Income planning as the foundation in retirement

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Episode Transcript:

This is The Chris Berry Show. Expert information on wealth, estate, and tax planning for the second half of life. Information that you can understand. Here’s your host, Chris Berry.

Welcome. This is Chris Berry. And of course, this is The Chris Berry Show. And we start this week off just like every other week with a positive focus. Actually have a few positive focuses. The first thing is that my daughter Madison, she just finished up her play and presented it with her other team members on Harry Potter. And she was the role of Harry Potter. So she was very excited when she got the role. She worked very hard on it, and she did great.

And then another positive focus is my father turned 77. So we’re able to celebrate his birthday. So that was pretty exciting. And then a third thing is we went to the Detroit Zoo and took a look at the Christmas lights. They had an event and you walk around and look at the lights. So it was very nice, a lot of positive things. And I think that’s important with everything going on in the world right now is to focus on the positive things.

So this week on the show, what we’re going to do is we’re going to talk about the three risks in retirement. And I think these are the three biggest risks right now. And those three big risks are tax risk, market risk, and long-term care risk. We’ll dig into why each one of those I think is important to take into account as you’re planning for your retirement and what you’re leaving to a legacy. And then also we’ll talk about some strategies to protect against those things. And really, it starts with creating your own retirement and legacy blueprint. And that’s something we focus on at Castle Wealth Group is creating a plan, a true plan for retirement and what you leave as legacy.

And the reason that I got into this is that I remember back when I was about 12 years old and I was sitting in my grandfather’s bedroom looking outside and I saw my three cousins arguing. My uncle had recently passed away. He didn’t have a lot, he was injured while working at Ford and was on disability, and ended up actually overdosing from prescription painkillers. So it was pretty sad.

And he had a will that said everything should be split up evenly amongst his three boys, who I was very close to. I myself was an only child, but my cousins Jake, Jeff, and Tim, they were really close to me, almost brothers in a sense. But I remember being 12 when my uncle passed away and I was at my grandpa’s, and my three cousins were arguing. Arguing so much that they had to take it outside. And it was on the borderline of getting physical. And you might be asking, well, what were they arguing about? Because their father just passed away.

Well, he didn’t have much. He had a will that said everything is split up evenly amongst three kids. And then he had a life insurance policy that said the $10,000 goes to the youngest of the three brothers. And that really was the only asset my uncle had at the time. So the question was, does the life insurance go to the youngest, or does it follow the terms of a will? Well understand a will only controls assets that end up in probate. So if there’s a beneficiary designation that says it goes to the youngest, well then guess what? That’s where it went.

And that was about at this point, 30 years ago. And because of how my uncle left things, my cousins still don’t talk to each other. The youngest brother said that, “Hey, that life insurance money is mine.” And the two other brothers said, “You know what? The will says it should be split three ways.” And it created really a family conflict that hasn’t been resolved, and it’s 30 years later. And I just remember thinking that there has to be a better way. So that was something that kind of sits in my head.

And then another thing I remember is I was in college. At undergrad, I studied finance as well as psychology. And I remember in 2002 being at a family gathering, and I remember one of the family members talking about how her portfolio just took a dive because of all the tech investments that her stock broker recommended back in 2002. And just how much money she lost in the stock market. And this was the time that I was actually studying finance and studying efficient markets, and market portfolio theory. And it was actually one of the things that really got me interested in getting into financial planning.

So in undergrad, I was considering becoming a financial planner coming out of undergrad, where I was interviewing at some of the big financial planning operations. But I had a business law class that I just knocked out of the park. And I was like, “Well I like school. So let me keep going. Maybe I’m not ready for the real world yet.” So I ended up going to law school actually, and I got a corporate concentration there. Spent one summer at the Wayne County Prosecutor’s Office. And I knew that I didn’t want to do litigation or go to court. I just really wanted to help people. So that’s what got me into estate planning back in 2005. I opened up my practice and we started doing estate planning, and then very quickly I was realizing my clients weren’t passing away. They were just continuing to age and face all the issues that go along with that. So I became a certified elder law attorney. So if estate planning is planning for what happens if you die, elder law is planning for what happens if you don’t. You continue to age and you face all the issues that go along with that.

And part of that is just making sure that people’s money lasts as long as they do. So in 2008, we started doing on a limited basis, some financial planning as well as legal planning for our clients. And now fast forward, here we are today. And I’m over 15 years in this practice. And one of the big things I see is just the risks out there for people who are moving into retirement and trying to plan their legacy.

And I think there’s three big risks. And we’ll talk a little bit about each one of these, and then we’ll talk about some potential solutions. And if any of these risks are something you’re concerned about, please don’t hesitate to give our office a call at (844) 885-4200. (844) 885-4200. And just tell them that you heard the radio show, and we can set up a time to talk about it.

So the first risk is tax risk. Now there’ve been a lot of changes in tax law recently. Starting in 2018, we had the Tax Cuts and Jobs Act, which is scheduled to run from 2018 to 2025. And the Tax Cuts and Jobs Act does a couple of things. Probably the most important thing is that it lowers marginal tax brackets across the board, 3 to 4%. So when the Tax Cuts and Jobs Act ends, if you’re at the 12% tax bracket, understand you’re going up to now the 15% tax bracket, if you’re at the 22% tax bracket, you’re going up to the 25% tax bracket. If you’re at the 24% tax bracket, you’re going up to the 28% tax bracket.

So across the board, when the Tax Cuts and Jobs Act ends, whether it’s 2025 or if it gets repealed sooner than that, taxes are going up across the board at least 3 to 4%. So that’s the first thing is we know that in the future, taxes are going up.

Second big concern is we look at the amount of debt this country has. As of right now, we’re about $30 trillion in debt. Prior to 2020, prior to the pandemic, we were about $22 trillion in debt. So we were concerned about this debt bubble continuing to grow. And then we had the whole pandemic of 2020. And with the CARES Act and everything else going on, government racked up another $8 trillion roughly of that, bringing us to $30 trillion.

So given that, do you think government’s going to cut spending in the future, or do you think they’re going to raise taxes? Most people say the taxes probably have to go up even higher than just the repeal of the Tax Cuts and Jobs Act.

And then in late 2019, we had the SECURE Act which passed. And the SECURE Act does a couple of different things. First of all, it pushes back the required minimum distribution age. So that age that you’re forced to take money out of the IRAs. They pushed it back from 70 and a half, which is kind of a weird age, to 72. So they’ve pushed back the age that you have to take out those RMDs.

Now that’s not the real reason why they passed the SECURE Act. The reason they passed the SECURE Act is because prior to the SECURE Act, when you inherited an IRA, you could stretch it out over your lifetime. Meaning you wouldn’t have to pay all the taxes all at once or up front. You could choose to stretch out those IRA taxes that are due.

Well with the SECURE Act, what they’ve done is they said you can only stretch out those IRAs up to 10 years. So what the government’s doing is because they know that they’re so much in debt, they’re trying to get that tax revenue in sooner rather than later. Even though in reality, the government wants you to defer paying taxes as long as possible. Because the longer you defer, the bigger the tax bill you grow, if that money grows. So the SECURE Act was a warning shot to say the government understands that they’re so far in debt, they need to pull this money in sooner rather than later.

And on top of the SECURE Act, we also have what we call the widow’s penalty. So if the SECURE Act is going after beneficiaries, the widow’s penalty is going after surviving spouses. And you might be asking, what is the widow’s penalty? Well, the widow’s penalty is what happens when you go from married filing jointly to now a single filing tax bracket. So if you go from a married couple and now one spouse passes away, they’re a widow. What happens is that tax bracket shrinks. So now that surviving spouse who probably has the same income need, is going to pay more in tax. And also his or her social security may be taxed more as well based on provisional income.

So given all of these different things, it’s important to understand that having a tax plan is super important. That it’s not just about tax preparation, looking in the past to see what happens. But looking in the future to minimize taxes over your lifetime. So it’s all about looking at taxes not through a micro lens and minimizing taxes in one specific year, but look at taxes through a macro lens of how do we minimize taxes for your retirement, and how do we minimize taxes for what you leave to the next generation?

Because the other thing we need to take into account is the estate tax. So when you pass away, the government can take another swipe of your assets. And while the Tax Cuts and Jobs Act is running, the state tax exemption for a single individual is $11 million. For a married couple, it’s 23 million. Meaning as long as you pass away with less than $11 million, you owe zero in estate taxes.

However, when the Tax Cuts and Jobs Act ends or expires, that $11 million exemption is coming back down to $5 million. And some people are even trying to lower it even further to three and a half million. So if you do have an estates or a net worth that’s in that area, you need to take into account the state taxes as well. So not only do you pay income tax while you’re alive, but now the government takes another swipe of your assets with the estate tax. Plus now with the SECURE Act, if you’re leaving pre-tax dollars to the next generation, understand they’re probably going to have to pay more tax on top of that.

And then another tax change that they’re talking about doing that they haven’t implemented yet, and I called us another stealth tax just like the SECURE Act is that they’re talking about getting rid of step-up in basis. And this is a stealth tax because a lot of people don’t even understand what step-up in basis is. An easy way to understand it is look at it like this. If you buy an investment, let’s say a second piece of property for $100,000, and then it grows to 200,000. And then you pass away and your kids sell it for 210,000, what is the tax or the gains that they’d have to pay?

Well currently when you pass away, you get a step up in basis where the basis jumps from 100,000 to your date of death, 200,000. And so the kids would just have to pay the tax or the gains on the difference between 200,00 and 210, which would just be $10,000 worth of gains.

Well, if government does get rid of step-up in basis, then understand that when those kids inherit that investment that originally was purchased for 100,000, grew to 200, and then the kids sell it for 210, now they’re going to have to pay the gains on the entire basis, which is from the 210 to 100,000. So instead of paying $10,000 worth of gains, now they’re going to pay $110,000 worth of gains. So just by getting rid of step-up in basis, the government’s able to generate some more revenue, which they obviously need. And it’s a stealth tax where it’s not really a tax on you as an individual while you’re making money, but it’s leaving money to this next generation. They’re going to have to pay more tax on it with the SECURE Act, with the lowering of the estate taxes. And now also, with the stealth, getting rid of the step-up in basis.

So given all of these things, it’s important to understand that taxes are one of the biggest risks moving forward. Where if you have pre-tax IRA money, pre-tax 401(k) money, pre-tax 403(b) money, it might be important to develop a strategy to minimize taxes while we have this window of opportunity right now. Because we all know that taxes almost have to go up in the future because we’re so far in debt. And we even see it with the Tax Cuts and Jobs Act potentially expiring in 2025, if not sooner.

So right now, we have a window of opportunity where we can not minimize taxes in a specific year per se, but we can minimize taxes for your retirement, and we can minimize taxes for what you leave as a legacy. And that’s why we’re talking about when we’re talking about creating a retirement and legacy blueprint. And that’s where with our retirement legacy blueprint, one of the areas that we focus on, and there’s five key areas. One of those areas is tax planning. Not just tax preparation, which we can do as well, but actual tax planning. Where we have a plan to mitigate taxes or minimize taxes. Again, not looking at through a micro lens of one specific year, but through a macro lens of minimizing taxes over your retirement, and what you leave as a legacy to the next generation.

And if you don’t have a tax plan, or these ideas are new to you, give our office a call at (844) 885-4200. Again, (844) 885-4200. And what we can do is we can start off doing a qualified tax analysis, where we can look to see how much tax potentially your family would pay. And we can look at some strategies to minimize taxes over your lifetime. Because no one can predict or tell you whether the markets are going to go up or down. But we can take control over our tax planning. And if we can pay less tax, put more money in your pockets, less in the Internal Revenue Service, then I think that’s a good plan. So stick with me as we continue this conversation.

Hi, we’re Madison and Ryan Berry.

Our dad is Chris Berry from the Castle Wealth Group.

The Castle Wealth Group used to be the Elder Care Firm, but dad wanted the company to be broader in its scope of services.

To not only protect and preserve assets, but to help people grow their assets to prepare for retirement.

As a certified elder law attorney and fiduciary financial advisor, our dad and his team at Castle Wealth Group can help you with lots of important things.

To tell you more, here’s our dad Chris Berry.

Thanks Maddie and Ryan. Here at the Castle Wealth Group, we can help you put together an estate plan to avoid probate, work with you on a tax plan to keep more money for your family and less for Uncle Sam, and protect you against the devastating cost of long-term care. Our team is here for your family. I invite you to learn more about the Castle Wealth Group at our next free workshop, where you will learn the three steps to create a legal, financial and tax plan for the second half of life. Call us today to register at (844) 885-4200.

The Castle Wealth Group, formally the Elder Care Firm.

Learn more at the castlewealthgroup.com today.

So we’re talking about the three big risks in retirement. The first one is being tax risk. The second big risk is market risk. And the third big risk is long-term care risk. So now we’re going to spend some time talking about market risk. And we need to talk about this from a historical perspective. And we look back and what we see is roughly about every 10 years or so, we see a market decline. And in fact, we had two within about eight years, 2002. And then 2008. I guess that’d be six years. And that decade is known as the lost decade. Where depending on how you had your investments structured, you might not have seen any growth for 10 years over that time period.

So the 2002 recession, a lot of that was caused by some people say September 11th. But also we had a big kind of tech bubble that burst where we had a lot of these tech companies that went out of business. And I remember being in college and studying finance at the time, and learning about efficient market theories and diversification. And I remember seeing some family members during that time lose a lot of money in the market because a lot of their money was in tech stocks. Because that was what all the stockbrokers were selling the public. Because you can’t go wrong with tech was the idea, but we saw what happened.

And then fast forward, we had 2008, which was another huge drops in the markets. And people talked about their 401(k)s becoming 201(k)s then. So understanding that market volatility is a big risk as you get near retirement. And we really were on a 12 year run from 2008 till 2020, when the pandemic hit. And we hit a big drop in March if you remember, where the markets went down about 30%. And miraculously enough, I think it was about 119 days later, they rebounded. And some of that might’ve been through some smoke in mirrors that the government was doing in terms of playing around with interest rates. But it certainly was a strange time. In 2020, in March, that was really a gut punch to say hey, this might not last forever, this run that we’ve been on. So it might be time to rethink how much risk we’re really willing take on.

And the big issue is as you’re accumulating wealth, you don’t have to worry so much about the volatility, unless you’re one of those people that kind of checks your portfolio every day. Because as you move into retirement, this is when people fall into what we call an income gap. Where now that you’ve retired, you’re going to have to start drawing on those assets. And one of the big concerns, and this is called sequence of return risk. And it goes hand in hand with market risk is that if you’re drawing on these portfolios in retirement and the market drops, understand it can have a devastating effect on your retirement, on making that money last at least as long as you do. Because now you don’t have as much time for those investments to bounce back. So if you were investing in 2008 and you’re still working and nowhere near retirement, then it was okay if the market dropped because you had time for the markets to come back. But if you were planning on retiring in 2008 and you saw your investments drop 30%, and now you have start drawing on those investments, understand that your portfolio doesn’t have as much time to come back.

So we have various strategies to try to protect against market risk. And one of the first things we do is just understand time horizons. And understand that maybe investments that we might need over the next year should be invested differently than investments we might need over the next five to 10 years. Which maybe should be invested differently than money we might need 10 years out. And understand that we can break portfolios into different sleeves to have what I call an all weather portfolio. So if the market goes up or down, it’s not something that you necessarily need to be concerned about. Because you have a true plan. But if you have all your investments just in one bucket, and all of a sudden the market dips, and now you’re having to draw on those investments. Understand due to sequence of return risk, it can really have a dramatic negative impact on your overall portfolio.

So one of the first things we do when we’re working with clients is we help calculate what is their risk score. How much risk or volatility are they willing to take on? And then we run a report comparing it to the amount of risk existing in their current portfolio. And a lot of times, what we find is a disconnect where let’s say the way that we measure volatility, we assign a risk score on a scale of one to a hundred. Think of it like this. It’s kind of like a speed limit. 80 would be aggressive. An 80 as a speed limit would be going pretty fast down the highway. Good chance that you’ll get to your destination quickly, but also there’s a chance you might wipe out, right? Versus a risk score of 25, that’s like driving safely and slowly in a school zone. You’re going to get to your destination slower but safer, less chance of wiping out.

And a lot of times what we’ll do is we’ll have different risk scores for different buckets, different time horizons. So maybe we’re willing to take on more risk in that later bucket versus the money that we’re going to need over the next say five to 10 years, which we would call our soon bucket.

So what we do is we figure out how much risk are you willing to take on? And then we do analysis of your current portfolio to say, where does it fall? And it’s not uncommon for me to talk to clients. And they say they’re at this point relatively conservative. And when we figure out what their risk score is, it might be a 25 or a 30. Because they’ve worked hard for this, and they don’t want to lose that money that they’ve worked so four. And then when we run the analysis, it turns out that the risk score of their portfolio is maybe a 50 or 60, or I’ve seen as high as 70 for someone that said that they were conservative.

So what we need to do is get that portfolio in line with your risk tolerance, with your age. And I’m not a big fan of rules of thumb because they’re just generalities. But there is a rule of thumb, and it’s called the rule of 100. And what it is is you take the number 100 and then subtract your age. And that’s how much should be in the more aggressive side of your portfolio. So let’s say you’re 70 years old. Doing the rule of 100, we have 100 minus 70, and that equals 30. So maybe 30% should be geared more towards the equities, the aggressive growth. With the remaining 70% of the portfolio should be geared more towards safety and income.

And in the investment world, when we’re putting together a portfolio, understand that any investment, any specific investment really only has two out of three potential characteristics. So any investment can have any of these three characteristics. But typically, they only have two of them.

And the first characteristic is growth. You want your money to grow. Second characteristic is safety. You don’t want to lose your money. And third character is liquidity. You want to get access to your funds. Now if you think about it, any investment really only can have two out of those three characteristics. For example, let’s focus on safety and liquidity. Well, that would be like having money at the bank. You have it sitting in checking, savings. The money is liquid. You can get access to it any time. It’s not going anywhere. You’re not going to lose that money. But it’s not growing either. What do you get in terms of interest rate on your savings account? Maybe 1%, if you’re lucky. So you’re sacrificing growth. And that’s what we call our now bucket of money, and that’s money that you should have for any expenses you have throughout the year, whatever your emergency fund is. If you’re planning a big trip, you want that money safe and available. Or if you’re paying for your kids’ college this year, you want to make sure that you have that safe and liquid.

And then we move over to growth and liquid. And here we have to sacrifice the guarantees of safety. So this would be having the money in the market. And this is where we do a risk analysis to identify a risk score on a portfolio. And it could be anywhere from a risk score of 90 to 100, very risky, very volatile. All the way down to a risk score of one where there’s no chance of loss and maybe a potential of growth depending on how we invest.

So everyone has their own risk score. And that’s where we tailor portfolios geared towards your individual volatility tolerance. Because every family’s different, every investor is a little bit different. And as an independent advisor and attorney, we’re not tied to any specific product, or stock, or anything like that. We’re crafting portfolios that are in our clients’ best interest. And we’re crafting portfolios so that it matches the risk tolerance. So whenever we have March 2020 where the market declines, we always go back to the plan. And that’s where we’re trying to put together portfolios that can weather all the seasons. Because if you had a portfolio and you saw the drop, and it concerned you, well understand that was just a gut punch. We might have another drop that lasts longer than 119 days. Remember the lost decade from basically 2000 to 2010. Due to the two drops, 2002 and 2008, really there wasn’t much growth at all.

And then continuing the thought, we have growth and safety. And here we have to sacrifice a little bit of liquidity. So in the short term, we have things like CDs. Offered by banks, typically in a three month, six month, nine month time horizon. Maybe one year, maybe two years. You might see 1, 2% rate of return on these. Really, these aren’t much better than just keeping your money in savings at this point.

Continuing on, on a little bit longer of a time horizon, we have things like multi-year guaranteed annuities or MYGAs. Basically the same thing as CDs, but offered on a two year, three year, four year, five year time horizon. And here you see interest rates anywhere from 2 to 3, maybe 4%. So a little better rate of return.

And then on a longer time horizon, we have things like fixed index annuities. These are typically on a 10 year time horizon where you can pull out up to 10% a year without any penalty. And you see interest rates of anywhere from 5 to 6, 7% rate of return. The sacrifice of course is the liquidity, where you’re telling the company that you’re not going to pull out more than 10% a year over those 10 years. And then when the 10 years are up, you can do whatever the heck you want with your money.

And then also along the same lines, I have what’s called index universal life insurance. It might be odd to think about life insurance as an investment, but there is index universal life where the cash value and your contributions can grow tax-free. And you can pull the money out in the future as a tax-free source of income. Plus, you can have a death benefit that could also double as a long-term care benefit. So more of an advanced tool. But again, they’re typically on a time horizon where you don’t plan on pulling the money out for 10 years. Because you need to take advantage of all of that tax-free growth.

So when we’re putting together a portfolio, we’re looking at a mix of all these different characteristics. And a lot of times, we might have that soon bucket of money, money we might need sooner rather than later, focused more on the safety side. And then the money that we might need later, that later bucket of money, that might be on the growth and liquidity side. But that’s where we use these different tools to structure a portfolio that’s in our client’s best interest. And these portfolios can be constructed to minimize the market volatility. Which again, I think is one of the three big risks facing retirees and pre-retirees these days of taxes, market risk, and long-term care risk. So how do we fight against market risk by crafting a portfolio that covers our income needs and investing in such a way that we can insulate ourselves, at least in the long run from the market volatility? Where we can invest the money in different buckets. And those buckets could be based on time horizons. Where we have a now bucket of money, which is money that’s at the bank. And that’s money that we might need over the next year. That would be our emergency fund, cover whatever expenses we have throughout the year. Cover that income gap if we are in retirement, we know that we need income each year or each month. That money should be at the bank safe and liquid.

And then we need to come up with a strategy for a soon bucket and later bucket of money. And that soon bucket maybe has more safety in it than growth, because we know that we’re going to need it. So maybe it has more safety than the volatility. So that we can fight back against that sequence returns, where we don’t want to be in a position where we’re having to pull money out of an investment that’s tanking because the market’s going down.

So again, it’s all about building that all seasons or that all weather portfolio. And over the past 12 years, it’s been pretty easy to build a portfolio that grows, because we’ve been on a 12 year bull run. But understand that a true portfolio should be invested in such a way that takes into account what happens if the market drops. That’s what a true plan takes into account. And that’s what a retirement and legacy blueprint can do for you is it can build in protections. It can build in peace of mind. So if the market drops, understand that you have other investments that will be insulated.

And if you want help with that, give our office a call at (844) 885-4200. Again, (844) 885-4200. And we can get started on your retirement and legacy blueprint to insulate your investments so that if market volatility is a concern, you can have peace of mind around that. Again, give us a call at (844) 885-4200. And stick with us as we continue the conversation talking about the third risk, which is long-term care risk.

Hi, Madison and Ryan Berry here from the Castle Wealth Group, formerly the Elder Care Firm.

Our dad is Chris Berry.

He’s an attorney and fiduciary financial advisor, which means he helps families plan, protect, and preserve their assets.

The entire team at the Castle Wealth Group can help you with lots of important things. To tell you more, here’s our dad Chris Berry.

Thanks Maddie and Ryan. Here at the Castle Wealth Group, we can help you put together an estate plan to avoid probate, work with you on a tax plan to keep more money for your family and less for Uncle Sam, and protect you against the devastating cost of long-term care. Our team is here for your family. I invite you to learn more about the Castle Wealth Group at our next free workshop, where you will learn the three steps to create a legal, financial, and tax plan for the second half of life. Call us today to register at (844) 885-4200. (844) 885-4200. Or visit us at castlewealthgroup.com.

The Castle Wealth Group, formerly the Elder Care Firm.

Learn more at the castlewealthgroup.com today.

So we’re talking about the three big risks in retirement. First, we had taxes, second market risks. Now we’re going to talk about long-term care risk. And really what we’ve seen is people are living longer than ever. And they’re not going from healthy to passing away. They’re going through this aging process. So we see what we call the long-term care journey of living at home independently until we can’t live at home independently anymore. And then we might have a spouse as a caregiver, or maybe the kids help, or maybe we start paying for private duty home care. Private duty home care typically runs anywhere from one to three, $4,000 a month. If you’re buying a couple of hours per day, a couple of times per week. If you’re paying for 24/7 home care, that could easily be over $15,000 per month.

And then we might transition to independent or assisted living. Independent living and assisted living, the lines are starting to blur between the differences there because your independent livings are bringing in home care to mimic assisted livings. And the cost for independent or assisted living might range from two to $5,000 per month. Think of it kind of like a hotel or apartment type living with some additional services available.

And then we might transition to assisted living with memory care, which could run five to $8,000 per month. And this is the same hotel or apartment type living, but now there’s additional services. It’s more of a protective environment. There’s memory care services available. And again, that’s going to run you anywhere from five to $8,000 per month.

And then the next step is nursing home care. Now a nursing home can run eight to $12,000 per month. The average cost of a nursing home is about 9 to 13, $14,000 per month. The question is how are we going to go about paying for that?

And the current statistics around nursing homes are that one out of every two individuals will need nursing home care. So if you’re a married couple, one out of the two of you will need nursing home care at some point in your life. The average stay in a nursing home is about two and a half years. I’ve had clients who never set foot in a nursing home. I had a client whose mom was in a nursing home for 19 years.

So if we know that one out of two people need nursing home care, average stay in nursing home is two and a half years, the average cost can be nine to 13, $14,000 a month. And it’s important to plan for that. And if one out of two individuals will need nursing home care, currently about three out of four will need some form of long-term care. And this is why I think long-term care risk is the third, not necessarily in that order of importance, but the third big risk that families need to take into account as they’re planning for their retirement and what they’re leaving as a legacy. Because at the end of the day, we only have six ways to pay for long-term care. We can private pay, pay out of our own funds. We can have the kids pay. A lot of times they don’t pay financially, but they pay in terms of their time. Whether they take time out of their day to visit the elder law attorney, or they put their life on hold to become a full-time caregiver.

Third, we have long-term care insurance. And there’s the old, pure, traditional style of long-term care. Which really we don’t see much of anymore. And we’ve never had to put a client into one of those policies. The reason for that is twofold. First of all, the ever-increasing premiums. I’ve had clients who purchase policy a number of years ago. They were paying $4,000 a year. And then all of a sudden after paying on this for 20 years, their premium increased to $10,000 a year. So they’re left with a question of paying a higher premium, taking a reduction in benefits or letting the policy lapse.

And then the other big problem with traditional long-term care insurance and why I’m not a huge fan of it is that you could pay on the policy your whole life. And then if you pass away peacefully in your sleep, there’s nothing left over. All that money was lost to the insurance company. So for those reasons, I’m not a big fan of traditional long-term care insurance. Instead, we might look at what’s called asset based long-term care, where we can have our longterm care bucket of money, but also it doubles as a tax-free death benefit. Because you’re either going to need long-term care, or you’re going to pass away. And it might be some combination of both.

So that’s long-term care insurance. The fourth way to pay for long-term care is Medicare. Now Medicare doesn’t really pay for long-term care, it pays for short-term rehab. And that’s only if you have the right type of supplemental Medicare policy. And if you do have questions on Medicare, you can give our office a call. We have a Medicare specialist on our team.

And then fifth is veterans benefits. So the VA benefit. So if you’re a veteran or surviving spouse, we could potentially bring in an extra 1,000 to $2,000 a month to help pay for long-term care. Now there’s some qualifications around this. First of all, you have to have served 90 days active duty. One of those days has to be during a period of conflict. You cannot be dishonorably discharged. And then you need to have more long-term care costs going out, say home care or assisted living expenses, than income coming in. And then there’s an asset test where if you have more than $120,000 of assets, chances are you’re not going to qualify for that VA benefit.

But if you do meet all the requirements of the VA benefit, then potentially the VA could bring in extra 1,000 to $2,000 a month tax-free to help pay for home care or assisted living. But when we get to nursing home care, that VA benefit is just a drop in the bucket. And that’s where we look to Medicaid is a way to pay for longterm care.

Now, Medicaid is not really going to pay for home care assisted living. It’s only going to pay for nursing home care. And to qualify for Medicaid, a single individual can only have $2,000 worth of countable assets. Countable assets are basically everything other than a home, small cash value of life insurance, prepaid funeral and automobile, and personal belongings. Everything else is a countable asset.

And also, Medicaid looks back five years to see if you moved any money around. And if you have, they’re going to penalize you. You’re going to have what’s called a divestment penalty. Where even though you’d otherwise be qualified, meaning below the asset limit, they’re still not going to pay out any benefits because you gave away money. So that’s that five-year lookback period.

Now, if you do have a loved one in nursing home, you can just spend down the money until you run out of money. We call that that nursing home or Medicaid spend down. Or, we can do crisis planning techniques. Where if you have a loved one in a nursing home right now paying 9 to 12, 13, $14,000 a month, there’s things we can do at the last minute to protect at least half of those assets. And we can do what’s called a Medicaid crisis planning strategy.

Think of it like this. One strategy would be what’s called a half loaf plan. Think of it like this, a loaf of bread. Half the money has to go to the nursing home. The other half we’d be able to protect. So we call that a half loaf plan. So half of the bread has to go to the nursing home. The other half can remain with the family. And it’s a complicated process, but it’s something that is available. So if you do have a loved one in nursing home right now, understand we can protect at least half of the assets.

Or we can look at planning strategies, pre-planning strategies. Where we have certain legal entities, more specifically a castle trust. Where if we move the assets into the trust and we make it five years, everything inside of the trust would be protected from that nursing home or Medicaid spend down.

Now this isn’t all trust. Not all trusts work this way. Like a revocable living trust which is one of the more basic trusts, does not protect against long-term care costs. We need to look to an asset protection trust like a castle trust. And also if you have a revocable trust, we can always upgrade or move towards that castle trust. But unfortunately the five-year clock doesn’t start until the assets move into that castle trust. So even if you have a revocable trust from 15 years ago, that five-year clock doesn’t start until we move the money into a castle trust.

So what a castle trust does, if we play our cards right, is we move the assets into the trust. And then it starts that five-year clock. And once we make it five years from the time we set up the trust, then everything in the side of the trust is protected from that nursing home or Medicaid spend down. So once we make it five years from the time we set up the trust before we are in a nursing home and apply for Medicaid, then everything inside of that trust is protected from that nursing home or Medicaid spend down.

So a castle is a great legal strategy to protect against the devastating cost and nursing home care. And then a lot of times, we still would look at those asset-based long-term care strategies to cover home care and assisted living, to make sure that we’ve protected against the whole long-term care journey. And again, that’s the third risk that I think most retirees and pre-retirees are facing as they’re putting together their planning.

So how do we plan for retirement and plan for a legacy? How do we protect against these three big risks of retirement? How do we protect against tax risk, market risk, and long-term care risk? And actually before I do that, there’s a fourth risk. So this is a bonus risk, if you will. And that is probate risk. So when you pass away, there’s four ways assets transfer out of your name. One is through joint ownership. Two is through beneficiary designations. Three is through a trust. But if an asset doesn’t pass through one of those first three ways, then it ends up going into probate. And why do we want to avoid probate? Because it’s a court process. It’s time consuming and it’s costly. By statute, if assets end up in probate at minimum, it takes five months to go through the probate process, at minimum. Sometimes even longer, sometimes over a year, especially if there’s real estate involved.

Second it’s costly. 5% of any assets going through probate typically get eaten up in costs according to a study by AARP. So if we can avoid 3 to 5% of the assets getting eaten up by inventory fees, filing fees, publication fees, and sometimes attorney fees, then you’re putting your family in a better position.

Also, probate is public. Meaning anyone can see what’s going on in the probate system. So if little Johnny is supposed to get $300,000, everyone’s going to know the little Johnny is getting $300,000. So how do we avoid probate? By understanding of state administration and relying upon maybe joint ownership, or a beneficiary designation, or more specifically a trust as a way to avoid probate. So that’s a bonus fourth risk that should be planned for when it comes to creating a retirement and legacy plan. And that’s what we do by creating our retirement and legacy blueprint.

And really, what we’re doing is we’re focusing on five key areas with our families. And if this is something you want assistance with, give our office a call at (844) 885-4200. And those five areas that we focus on are income planning, investment planning, tax planning, healthcare planning, and legacy planning. And there’s more that goes into each one of those, but let’s start with income planning.

Income planning is that foundation in retirement. You need to have a plan for income in retirement. How are you going to utilize what we call the three legged stool of social security, pensions if you have them, and then your assets to make sure that you have a foundation for income to cover your expenses and retirement? Because all of a sudden those paychecks go away. So we need to recreate those paychecks and maybe even create some play checks for you.

So the first step is that income plan. Second is investment planning. Making sure that your assets are invested in such a way to last a lifetime and also maybe leave some to the next generation as well. And that’s where we have our risk score. And that’s where we have our different buckets of money. That’s where we have our pick two conversation where we look at the different characteristics any investment can have.

Third is having a tax plan. So we do have a CPA that’s affiliated with our team and we do tax preparation, but really what we’re talking about here is having a tax plan. How are you going to use these latest changes in law? How are we going to take into account the federal debt that this country has, and where taxes could go in the future? What can you do to minimize taxes? Maybe it’s looking at Roth conversions, moving money from the tax deferred bucket to the tax free bucket. Maybe it’s reanalyzing where you’re saving money so you’re not over-funding those traditional 401(k)s.

Fourth is healthcare planning. Having a plan for health insurance in retirement, which Medicare plan makes the most sense. Should you look at a Medicare advantage, Medicare supplement plan, Medicare part A and B and D? Or are you going to look at the advantage Medicare part C? What’s your drug plan? Do you have the best drug plan? As well as long-term care planning. What is your plan for long-term care? Is it just bury your head in the sand and hope it doesn’t happen? Or do you have a true plan for long-term care?

And then fifth is legacy planning. And it’s not about making sure the kids get millions and millions of dollars, or make sure the kids are wealthier than you. Maybe it is. But really it’s to make sure that everything goes as efficiently and effectively as possible. Do you want to be remembered for leaving a mess for your kids, or do you want to be remembered for having a smooth transition plan? Don’t be like I said when I started out, that I have family members that still haven’t talked to each other 30 years later just because of a $10,000 life insurance policy. So that’s the legacy that my uncle left. So my hope in one of the reasons that I do what I do is to help families plan better. To help families plan, protect, and preserve what’s important to them. And we do that through our retirement and legacy blueprint process. Where we take a look at your income, we take a look at social security optimization, income versus expenses. Do you have an income gap? We take a look at your investments, making sure your investments are invested in such a way that you’re comfortable with. Having a plan for taxes. And again, this is probably the biggest risk and the biggest opportunity right now is making sure that you’re in the best position from a tax perspective.

Having a health care plan. Not just which health insurance or Medicare plan you’re going to choose, but also a plan for long-term care. And then last, having a legacy plan. Avoiding probate, making sure that your wealth goes to the people you want, in the manner you want, with as little hassle as possible. Maybe it’s looking a trust. Maybe it’s a castle trust. Maybe we’re building in trusts for your loved ones. So whatever they inherit are protected from divorces, lawsuits, creditors, bankruptcies.

If you want assistance with any one of these areas, please give our office a call at (844) 885-4200. Or join us on one of our weekly webinars, which we do every Wednesday at 1:00. You can go to wisdomwebinar.com to register, and we answer questions live on the fly as well as pre-submitted questions. So this has been Chris Berry. I hope you have a wonderful week. In fact, make it a great week. Take care. Bye Bye.

Learn more about Chris Berry and how he can help your family by visiting online at thechrisberryshow.com. That’s thechrisberryshow.com. You can also call Chris Berry at (810) 355-2584. That’s (810) 355-2584.

This program content reflects the opinions of Chris Berry and his guests, not Castle Wealth Group or advisors excel. And is subject to change at any time without notice. Content provided herein is for informational purposes only, and should not be used or construed as investment or legal advice, or recommendation regarding the purchase or sale of any security, or to follow any legal or tax strategy. There’s no guarantee that the strategist’s statements, opinions, or forecasts provided herein will prove to be correct. Past performance is not a guarantee of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk, including the potential for loss of principal. There’s no guarantee that any investment plan or strategy will be successful. We recommend that you consult with a professional dedicated to your needs. This program is furnished by Chris Berry and Castle Wealth Group.

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