Take Charge and Reach Your Goals (215) 496-9272 [email protected] Presenter: Risks, Rewards and Reality

Take Charge and Reach Your Goals

www.picpa.org • (215) 496-9272 • [email protected]

Presenter:

Risks, Rewards and Reality


Understanding Your Personal Risk

Greater chance of disability than death• At age 22, 8 times more likely than death• At age 35 to 65, 25% chance of being

disabled for more than a year AND a 5% chance of permanent disability• You have a 1 in 7 chance of being disabled

for at least 5 years before you turn 65

• Fincalc.com – Estimates risk by age


Understanding Your Personal Risk

• Social Security only pays for TOTAL disability

– after a 5 month waiting period – retroactive to day 1. You must be expected to be disabled for at least 1 year• Social Security disability benefits are

unlikely to replace your current earnings


What Would Happen If….

• Unless you have already saved enough money to replace the portion of your salary needed to pay your fixed expenses, (which is unlikely if you are under the age of 50) you would need some Disability Insurance


Disability Continued

Employer - Short Term Disability•Normally pays for 50% to 65% of your weekly salary for 26 weeks.

•Pays immediately if due to injury that did not happen at work (at work injuries are covered by workers compensation)

•If due to illness, use up sick days first


Long Term Disability

• Benefits are normally paid for a period of 2 to 5 years or until you reach age 65

• Replacing 60% to 80% of your after tax (net) pay is recommended. High income employees may only be able to get policies to cover 30% to 60% of their income

• In addition to income lost – consider inability to fund future expenses such as your child’s education and rising health care costs


Long Term Disability

•If you purchase coverage with after tax dollars – your benefits are tax free •If your employer pays for the coverage – your benefits are taxable


Policy Features

• Non-cancellable – can only be cancelled due to nonpayment of premium

• Guaranteed Renewable – Premiums cannot be increased unless raised for entire class of policyholders

• Social Security rider – extra coverage if you don’t qualify for Social Security (85% are denied by SSA)


Policy Features

•Cost of living adjustment•Residual Clause – reduced benefit for partial disability•Definition of disability•Limit of Liability


Death and Taxes

• What would happen if you died tomorrow?• What debts are left behind • Does your surviving spouse earn enough

income to pay for basic expenses?• Does someone close to you know how to find

your records? (unrelated to insurance, but very important)

• Save for the known, insure for the unknown


When Will I Die?

• A baby born today is expected to live 77.9 years

• The older you get, the longer you are expected to live - A man who is still living at age 65 is

expected to live to age 81.8. A 65 year- old woman is expected to live to age 84.8

- 50% of both of these groups will live beyond their average life expectancy


Causes of Death

•Heart Disease – same risk for men and women•Cancer – Higher proportion in men 1. Lung 2. Prostate 3. Colorectal - men 4. Breast 5. Colorectal – women

•Stroke•Chronic Lower Respiratory Diseases•Accidents•Diabetes•Alzheimer’s Disease•Influenza/Pneumonia


What Kind of Life Insurance Do You Need?

Term Insurance

•Most affordable – does not build a cash value - Premium will not change unless entire class of policyholders receives an increase

•At end of term, death benefit is ZERO

•Only available for periods up to 30 years



•Purchase to cover known “terms” or periods of financial insecurity. Ex. - 30 year mortgage, funds needed until children are raised and educated etc.

•Must be reevaluated as you get older as debts and cost of living increases, AND before you are too old to obtain affordable term insurance. (30 year term gets expensive if you are over the age of 45)



•May be in your best interest to renew or replace before the term ends.


Other Types of Insurance

• Permanent Insurance – cannot be cancelled due to changes in health after issue

– Whole life – level payments for life• Death benefit and cash value

predetermined and guaranteed• Dividends earned by provide for

additional paid up insurance.


Permanent Insurance

• Universal Life – Pay premiums at any time, in any amount as long as cost of insurance coverage is met

–Amount of insurance can be changed–Cash value will grow at a declared interest

rate–More flexible than whole life – as whole

life premiums can not be changed


Permanent Insurance

• Variable Life –Level premium for life–Neither Death Benefit or Cash Value are

guaranteed.–Policy contains subaccounts and the

performance of the investments affect the cash value, premiums, and death benefit.


Permanent Insurance

• Variable Universal Life – the most flexible permanent insurance

–Flexible premium–Death benefit can be increased or

decreased–Cash value can go up or down based on

performance of subaccounts.


Permanent Insurance

– If you are still insurable – all policies with a cash value can be transferred into a new policy that potentially provides a higher death benefit and meets your current needs vs. when the policy was issued.

(This is a 1035 exchange)


Other Uses For Insurance

•Loss of income for heirs

•Repayment of Debts

•Funeral expenses•Payment of inheritance and/or estate taxes, especially if your estate is illiquid. Ex. The family farm, can’t be easily and quickly sold, but there are deadlines to settle the estate

•Leaving funding for heirs because you didn’t get the chance to save that nest egg


Other Uses For Insurance

•Note that unless in an irrevocable life insurance trust, it is a part of your estate •Pension Maximization•Riders that allow life insurance policies to be used for long term care expenses•Planning to die with only income tax free assets (Second to die policies vs. first to die policies)


How Much Life Insurance Do You Need?

• Amount of debts that can’t be paid for by survivors +

• Cost of funeral +

• Remaining lump sum large enough that if 6% of it was spent each year, it would replace the income you generated to help pay living expenses +

• Any other goals you intended to save for before life was cut short


Playing the Odds

• At some point we will all die – but what about the other types of insurance?

• 1 in 88 – claims paid on homeowners policies

• 1 in 47 – claims paid on auto policies• 1 in 2 – people who will need long term care

as they age


Someone Close to You is Getting Older

• If you or someone you know is 50 or older – time to evaluate the money needed to care for you as you age and live longer.

• 63% of people needing long term care are over age 65 BUT 37% are under 65.


Someone Close to You is Getting Older

• By 2050, the amount of people using long term care will double and the expense will triple

• Excluding Alzheimers Disease – The average stay in a nursing home is 2.4 years, though in home care expenses precede the nursing home stay by 1.5 years


Long -Term Care: Longer Stays

• Alzheimer’s Disease:– Odds of developing Alzheimer’s Disease

DOUBLE every 5 years after age 65….

By age 85, the odds are 1 in 2– The duration can last from 3 to 20 years– 7 out of 10 people with Alzheimer’s live

at home


Long Term Care Insurance

• Term and Permanent• Dual purpose policies – solving death and

LTC.• Monthly and Daily Benefit Policies• $200 per day is just the beginning• Simple inflation and compound inflation• Individual vs. Shared Policies.


Cost vs Benefit

• Medicaid only steps in after most resources are exhausted

• Estate recovery to heirs from personal residence, life insurance, and other assets inherited.

• Calculate the cost of the premium vs the value of the amount of assets protected. Ex. $4000 per year of premiums to protect $1 million dollar nest egg (less than one half of one percent)


But What About Living Happily Ever After?

•Or how about just having enough money to feed yourself and your significant other

– 2 people X 3 meals a day ($5 per meal) X 365 days x 30 years in retirement = $328,500

– This food budget only cost $94,715 thirty years ago.


But What About Living Happily Ever After?

The cost of keeping you alive – Health Care• The average couple over age 65 spends

22% of their income on health care• Fidelity Investments estimates that a

couple will spend approx $200,000 on health care costs not covered by Medicare


What Will Retirement Cost?

Pre-retirement Income x 80% x Years in

Retirement Your Total

$30,000 $24,000 x 20 = $480,000

$60,000 $48,000 x 20 = $960,000

Experts agree you will probably need 80% of your pre-retirement income for each year in retirement.


What Will Retirement Cost?

You contribute You invest

Biweekly pay reduced pay

Annual income tax savings

Example of pretax savings for someone making $25,000 a yearResults rounded to the nearest dollar assuming a 25% marginal federal tax rate and biweekly pay periods

3%

6%

9%

12%

$29

$58

$87

$115

$22

$43

$65

$87

$182

$390

$572

$728

Neither Nationwide nor its representatives give legal or tax advice.


Growth Potential Without

Current Taxation

$200,000

$150,000

$100,000

$50,000

$0$11,356

$15,822

$46,960$57,581

$115,555

$158,981

Taxable Investment

Tax-deferred Investment

10 years 20 years 30 years

Totals shown reflect a $100 monthly investment with an 8% annual return, 4% annual wage inflation and a 25% federal tax rate. From the taxable investments, taxes are taken each month from deposits and annually upon gains. Taxes are taken on the tax-deferred investment’s end balance. This is a hypothetical compounding example and is not intended to predict or project investment results of any specific investment. Investment return is not guaranteed and will vary depending upon your investments and market experience. If fees were reflected, the return would be less.Assets withdrawn from a qualified plan may be subject to a 10% penalty tax if withdrawn prior to age 59 ½ distribution, and all may be subject to income tax.



What Are Your Priorities?


Career Begins Retire

Get married Changing jobsLiving expenses Upgrade house Travel

Drive car you deserve Expensive hobbiesPay off college Family vacation Care for aging parents

Buy a house Start a family Child’s weddingBusy social calendar Save for child’s college


Finding Money to Invest


How to Invest

• Diversification does not help you make more money…..but it certainly can help you from losing less

• This time it’s different….or is it?


How to Invest

•Characteristics of Asset Classes•The risk of chasing performance•Confusing volatility with risk•Balancing fear of losing with the risk outliving your money

Questions?

Documents

Take Charge and Reach Your Goals (215) 496-9272 [email protected] Presenter: Risks, Rewards and Reality