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Retirement Tools That Are Misunderstood Yet Useful

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I’ve had an eye-opening week dealing with people’s misconceptions about retirement planning. In three situations I heard a potentially useful retirement technique attacked or dismissed. First, a reporter wanted to talk to me because she had heard so many bad things about annuities. Next, when discussing a friend’s concerns with his elderly mother’s finances, I asked if he had considered a reverse mortgage. He gave me the raised-eyebrow look and asked, “is that all you have?” Finally, at a legal conference, an acquaintance criticized a fellow attorney, saying “he’s the kind of lawyer who hawks living trusts.” Three viable planning ideas rejected.

Since retirement planning involves so many variables, we all have our prejudices about which products and ideas work – and which ones don’t. Some of our biases are borne out of our experience. Others are based on word of mouth from a trusted source. And some are the result of reliance on the verbal or written exhortations of pundits. I wonder how many planning opportunities have been missed because an idea is dismissed wholesale, not considering how the idea fits a particular situation. How many products, benefits or concepts went into the garbage can before getting a fair hearing?

Let’s consider a few examples of retirement concepts that sometimes get a bad rap. Let’s then ponder how these concepts may – in the right circumstances – be highly effective and useful. Going through this process is a good reminder to evaluate our biases and stay open to planning ideas. Retiring is a challenging enough process. We shouldn’t further limit our options by premature rejection of ideas.

Insurance

Most consumers recognize they need health insurance in retirement. But there are also three other, more optional, insurance products useful in retirement planning: annuities, life insurance, and long-term care insurance. Think of the hits these products sometimes take from critics. The head of a well-known investment company has run advertisements with the headline, “I HATE ANNUITIES. And you should too.” With life insurance, the old trope is that “you have to lose to win.” In other words, life insurance only benefits you if you die. And the newest kid-on-the-block, long-term care insurance, gets its bad rap from a checkered history of increasing premiums.

The criticisms of these insurance products may sometimes have merit. But does that mean they are per se a “bad deal”? Of course not. Electric cars are expensive, and it can be hard to find a charging station. However, that doesn’t mean there’s no place for Teslas on the road. Nonsteroidal anti-inflammatory drugs (NSAIDs) are anti-inflammatory drugs that can cause nausea, rash, and headaches. Yet few would question their value for people experiencing pain and fever. The fact is that insurance products have their place in retirement planning. It’s just a matter of identifying where and when they fit. 

              Annuities provide a predictable income that can’t be outlived; they have tax advantages; and they take the investment risk off the owner’s plate. 

              Life insurance can replace the income lost by the death of a spouse; deliver a tax-free retirement income; and provide a fixed legacy for heirs.

              Long-term care insurance can help with the costs of “living death,” i.e. being committed to a nursing facility. It can offer dignity in living and provide a way to avoid being a burden to children. 

To out-of-hand reject these valuable retirement planning insurance tools is to severely hamper a person’s retirement options. 

Housing 

Reverse mortgages are often both the subject of criticism from financial planners and the butt of jokes for consumers. We’ve all seen the cringe-worthy late-night commercials touting these contracts. Yet reverse mortgages, specifically home equity conversion mortgages (HECMs), have proven highly beneficial to many retirees. They’ve helped couples stay in their homes during retirement, and they’ve provided a stream of retirement income. They’ve been useful in estate planning and provided a source of needed liquidity. Like any loan arrangement, the consumer needs to approach this concept eyes-wide-open and even skeptical. But HECMs are a legitimate consideration for many homeowners approaching retirement. 

Another retirement planning idea subject to criticism is using Medicaid to pay for a retiree’s long-term care housing costs. Particularly loathsome to many is the tactic of planning in advance to have Medicaid finance long-term care expenses. It’s likened to gaming the system to live off the government dole. As with many planning concepts, however, it’s not always a black and white matter. Just like using planning to save taxes, there are legitimate ways to build in Medicaid as a benefit in retirement.

Medicaid has evolved over the years to a system that comprises give and take between the government and the retiree. Recognizing that middle- and lower-income individuals may need help in handling long-term care expenses in retirement, Medicaid has become flexible in certain financial arrangements for elderly individuals. Miller Trusts, Medicaid Compliant Annuities, and other planning arrangements can help qualifying individuals access Medicaid assistance without having to completely impoverish themselves. Further, some Medicaid costs are recouped after the death of the retiree through claims against the estate. The family is simply using Medicaid to finance housing for an elderly relative, and then giving up an inheritance to pay the government back for the benefit.  

Legal

Some retirement planning involves neither products nor government benefits; rather, it comprises legal drafting. For example, trusts. The living trust concept went through a phase of popularity in planning but has more recently been accused by some of being nothing more than a revenue generator for attorneys. Once again, it’s not all that simple. The use of revocable inter vivos trusts (popularly called “living trusts”) is still viable for many. The trust can help avoid the expenses of probate by transferring ownership of property prior to death. Further, it can marshal assets into one entity, making it easier to transfer partial interests to donees and heirs. While it doesn’t save taxes or suddenly make dysfunctional families happy, it can help simplify retirement and the transition into estate planning.     

Retirement planning isn’t a matter of absolutes. While there are multiple ways to mess up a plan, there are equally numerous ideas that can contribute towards a successful retirement. Just as you should be skeptical of claims of an ideal solution, so too should you not accept all criticisms as being universally valid. “It depends” is a truism in retirement planning, and it demands an openness to a variety of products, concept and ideas.  

Don't write off an idea before checking it out.

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