Investing, Personal Finance, Bonds
Sarah Rizk
The Unicorn
The Unicorn

Paying Rent in the Wrong Kind of Hotel: Part One

The fantastically prolific and always insightful Center for Retirement Research at Boston College (CRR) recently released a study focusing on the actual and perceived risks of paying for health- related expenses in retirement.1 Using survey research, CRR examined the differences in perceptions and knowledge of both Americans and their financial advisers.

The title asks an important question: “Do advisers help?”

What Can Go Wrong?

As a successful adviser who’s spent more than two decades working with the vast American middle class, I know you face one real financial risk. It’s the prospect of paying rent in the wrong kind of hotel for an extended period. (I developed this idea early in my career when it dawned on me that the daily cost of staying in a long-term care facility in which you had a roommate and an old TV and a shared bathroom cost more than a night at the Ritz Carleton in many cases.) This is the only thing, in my experience, that wipes out middle-class wealth.

All good advisers know this. I suspect most other Americans do as well. If you’re reading this and you certainly do. The questions for you and others include:

  • How likely is the risk?

  • Can it be transferred for a reasonable price to a third party?

  • What do governments offer in terms of social insurance?

  • What other, non-insurance risk mitigation strategies can I use to preserve my wealth?

 

I want to use the Center’s study as a base from which to examine each of these questions and explore the potential opportunities that the answers offer you. This exercise may allow you to put a plan in place that best meets your needs. This is a complex topic so I break it into a two part series I’ll address the first three questions in this piece. I’ll focus on the fourth in an article to follow. 

Focus on the Consequences. Not the Probability

How likely is it that an American retiree will end up needing long-term care? How likely are you to face a financially catastrophic illness? The Center’s study reports that 80% of Americans will need long-term care services. It reports that four in 10 of us will have high-intensity needs that last for more than a year.

This is consistent with other estimates you’ll see bandied around in the personal finance press. If this is true, it means that a married couple could expect at least one of their four parents to spend more than a year under intense custodial care.

I’m not convinced that this accurately represents the true probability. The Kaiser Family

Foundation, a leading research and advocacy organization in this field, reports that that only six

million Americans are currently receiving what it calls long-term services and support care. This is roughly 10% of the 58 million Medicare participants over age 65. 2

Something seems to be off here. And I think the something that is off is what’s classified as long- term care. If you have a knee replaced and spend a week or two in a rehab facility, is that long-term care? Perhaps, and I believe it’s counted in most numbers. But it’s not financially catastrophic, and it is paid by Medicare. It would also, I must note, not be a long enough stay to trigger traditional long-term care insurance policies.

The percentage of long-term care insurance contracts that actually pay would be an incredibly useful gauge of actual risk. I can’t find a recent citation of this anywhere.

Ultimately, the probability may not really matter to you. The point, after all, is not merely the chance of a horrible thing happening, but what are the consequences to you and your loved ones if it does? I put plenty of long-term care insurance policies in place for my clients using just this reasoning.

This brings up the second question. Can this risk be transferred to a third party for a reasonable price?

Those Were the Days

Imagine this possibility. You plan to retire in a decade. You project you’ll have investments at roughly $1 million, two Social Security payments totaling $60,000, and a $12,000 pension. You could easily pay your bills and manage most risks with asset allocation and perhaps an annuity that could, if needed, provide a lifetime of retirement income. You have three children. Two are financially independent. Your youngest daughter has special needs and, although most of her needs were provided for by your state government, she relied on you for life’s extras and her housing. As a result, dying broke terrifies you.

The insurance industry used to leap into the breach with terrific solutions. In some states, you could, at an affordable price, purchase a policy that, if needed, not only paid the bills but also allowed you to keep a dollar of investments for every dollar the policy paid and still, eventually, have the state pick up the tab. These are called Partnership policies. They are still available in some states, but the cost places them out of middle-class reach.

This took care of the dreaded outlier cases of more than five years of expensive care. Your house is protected for your daughter due to her disability. Better yet, if you elected a return of premium rider, if you didn’t use your policy, you didn’t lose by winning. Every dollar you paid in was returned to your beneficiaries. Your heirs lost the gains that money would have made if invested. That was the true cost of the policy.

This used to be standard planning and, believe it or not, it was often a struggle to get people to see the value in it.

We’ve Got New Policies

This, it turns out, was the peak product suite for long-term care protection. And it’s now long gone, killed by rock bottom interest rates among other actuarial considerations. If you have an old policy, hang onto it. But if you can work a financial calculator, you’re not likely to sign any new application for standard long-term care insurance given today’s prices.

The insurance industry has fallen back to hybrids. These policies are called hybrids because they add a long-term care rider to either a life insurance or an annuity contract. They are a useful innovation, and, in some cases, can play an important role in protecting your wealth. But there are always tradeoffs. And the benefit of knowing you’ll get a life insurance payment regardless of when you pass away means less protection for the large monthly long-term care bill.


Clearing Up the Confusion

So if the bill isn’t sent to a private insurer, who is likely to pay? This gets to the third question of what social insurance programs are available to provide support.

The study notes that 45% of Americans believe Medicare will pay for long-term care. This is wrongheaded, as all experts know that Medicare does not pay for custodial long-term care services after, at most, a 100-day stay.

Who’s Picking Up the Tab?

The point is that we Americans have a false confidence that we’re covered by Medicare and the premiums we pay to enjoy the program.

Are we wrong? Medicare may pay for the first 100 days and 100% of rehabilitation. How many admissions that are classified as long-term care are completed in this period? I can’t find data to answer this question.

The study also notes that only 6% of Americans believe Medicaid will pay. Yet Medicaid picks up 61% of the total tab. Medicaid is in fact the fallback long-term care financing plan for all Americans. We pay for it through taxes at the federal and state levels.

Some of the confusion is simply a conflation of Medicare and Medicaid. They sound similar and perhaps few non-health policy experts understand the difference. Some people who say “Medicare will pay” mean “Medicaid will pay,” which it actually does.

The problem you should have with this, however, is astutely noted by the same authors in another study. “Medicaid is a safety net, but not an effective form of insurance,” the authors write, “since its deductible is virtually all a household’s assets.” 3

I will address ways to avoid this deductible in my next piece.

About the author: Michael Lynch

Michael Lynch, CFP®, is a financial planner with the Barnum Financial Group in Shelton, Connecticut, and Cape Coral, Florida, and the author of three books, “It’s All About The Income: A Simple System for a Big Retirement” (2022), “Keep It Simple, Make It Big: Money Management for a Meaningful Life” (2020), and, most recently, “Taking Care of Your Future: The Nurse’s Guide to Retirement” (2024). You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

 

 

Securities and Investment Advisory services offered through qualified registered representatives of MML Investors Services LLC. Member SIPC. 6 Corporate Drive. Shelton CT 06484. Tel: 203-513-6000  CRN202805-8733306

1 Chen, Anqi, Alicia H. Munnell and Gal Wettstein. “Do Older Adults Understand Health-Care Risks, and Do Advisors Help?” Center for Retirement Research at Boston College, January 2025, Number 25-2. https://crr.bc.edu/do-older-adults-understand-healthcare-risks-and-do-advisors-help/

2 Priya Chidambaram and Alice Burns, “10 Things About Long-Term Services and Supports (LTSS)” July 8, 2024. https://www.kff.org/medicaid/issue-brief/10-things-about-long-term-services-and-supports-ltss/ 3 Chen, Anqi, Alicia H. Munnell and Gal Wettstein, “How Do Retirees Cope with Uninsured Healthcare Costs?” Center for Retirement Research at Boston College, February 2025, Number 25-4. https://crr.bc.edu/how-do-retirees-cope-wit

Paying Rent in the Wrong Kind of Hotel: Part Two

You’re approaching retirement with a pile of wealth and an expectation that Social Security will be there as a foundation. You’ve crunched the numbers, educated yourself on proven income generation strategies from assets, and you have a high degree of confidence that you’re financially set. The main risk that lingers is the possibility of what I call paying rent in the wrong hotel for an extended period.  I’m not talking about a late in life crisis and a Howard Hughes move into a fancy hotel suite.  Nope.  I’m talking about a shared room in a long term care facility.

In part one of this series, I relied on a Center for Retirement Research at Boston College (CRR)  study focusing on the actual and perceived risks of paying for health- related expenses in retirement.1

I explored the likelihood of the risk, concluding that estimates seem high, but no one really knows based on publicly available data. At any rate, the only statistic that matters to a person is if it happens to them and if so, what are the consequences.  I also looked to the private insurance industry for solutions. The conclusion here is that you’re not likely to find an affordable comprehensive insurance solution.  Finally, I focused on government programs and concluded that the ultimate price of near total asset spenddown may be unacceptable.

This piece will wrap up this important topic with a focus on the critical question you will eventually ask:

  • What, other non-insurance risk mitigation strategies can I use to preserve my wealth?

Move the Money

If private insurance is unaffordable and the price of government coverage is impoverishment, are there other alternatives?

Paying for long-term care when needed is at once simple—the facilities want U.S. dollars—and complex, as we all have the right to a dignified end thanks to our safety net, financed and managed by the U.S. government and the state in which we live.

This question amounts to: What non-insurance and non-investment strategies are effective? As someone who works in multiple states, I can confirm your answer will be highly dependent on the state in which you live. In some cases, it will even depend on the region in which you live. In Connecticut, for example, I discovered that whether you can use assistance from a grandchild in addition to a child as a means to protect your house value from Medicaid reimbursement depends on which courthouse you wind up in.  Same federal state law, same state, different outcomes depending on the culture of the courthouse.

There’s also the important nuance of how many assets you own and what kinds of assets they are: for example, retirement plans, real estate or after-tax bank and investment accounts.

A Step Away from a Government Payday

A couple with $100,000 of net worth, in my experience, has very little to worry about financially from long-term care. If they own a home that they want to protect against liquidation, they can easily protect it with a life use deed or a trust. These strategies, which should be untaken with experienced legal assistance, essentially split the ownership of the asset between the righ to live in the property, which you retain, and the right to the residual value, which you transfer to a person or a trust.

At $100,000 of assets, they will be close to Medicaid eligibility in many jurisdictions (if married). I wouldn’t see a large role for spending money on an insurance policy. Better to use that on vacations while healthy.

At the other end of the spectrum, a couple with $5 million invested, regardless of real estate, can sleep easy as well. At 5%, that generates $250,000 a year. Add in Social Security and this is enough income to finance the stay regardless of length. This couple should be able to afford to transfer the risk to an insurance company if that’s their preference, but given today’s prices, they’d likely conclude, alone or with the help of a competent financial adviser, that they’d be better served by retaining the risk and making sure their assets are working for them at market rates.

The CRR study finds that two of three Americans are not worried about needing and paying for long-term care services. This can have many causes. Some respondents surely have the cash to pay. Others are insured. Others may not worry about such things. Some may know that they are already close to Medicaid eligibility. Some may in fact be at risk of paying big bills but have developed an asset protection plan.

Malcom in the Middle

In a painful inversion of Aristotle’s Golden Mean, long-term care financing is a potentially financially devastating problem for the American middle class. America’s social safety net is not designed to prevent people from being poor. Rather, it protects them from the worst effects of it. In fact, the ticket to admission is often being poor—at least on paper. And this is how our long-term care safety net, funded by Medicaid, is designed to operate. And Medicaid is the big player in this space. It funds 61% of care.

Broke on Paper

The key to these strategies is to appear poor to the government. In other words, be legally poor,

while still having access to funds or preserving money for loved ones. Here’s where a good team of financial advisers can really earn its pay.

Again, I want to stress how important local rules are in this area. You cannot assume something that worked for your friends in another state will work in yours. But there’s a menu of strategies from which to choose.

The value of houses can be preserved with trusts, life use deeds, outright gifts and children. Yes, kids can be useful here. Disabled children will preserve the house for their lifetime. Under federal law, if other children keep you from needing institutional care for two years, they too can inherit the house. You can even sell your house and purchase the right to live in theirs.

Speaking of kids, it’s not typically a good strategy to give money to them in hopes of getting under Medicaid limits. You can, however, pay them to do the stuff that they should, in fact, be doing for free. Given the proliferation of home health care agencies and other support for the elderly, it’s not hard to determine real market rates, create a care contract and spend the money.

There are trusts. These are not typically last-minute silver bullets. But if you create and fund them prior to need, they can preserve substantial assets. The assets they can own run the gamut from investments to annuities, real estate and, of course, life insurance.



Why life insurance? Because it creates money from thin air in a tax-efficient way, provided of course that required premiums were paid. This is a perfect combination to protect wealth from a long-term care event.

By way of illustration, a person may be funding her egregiously high nursing home bill from IRA

distributions. IRAs can’t be moved to trusts without devastating income tax consequences. She’s down $500,000 when she dies. At that time, a $500,000 life insurance policy in a properly structured trust could replace every dollar she spent.

The main ingredients in any solid plan are time, trusts, family, money, a good planning team and the ability to make decisions and act quickly if the time comes.

Lifeboat Drill

Some of these strategies can and should be put in place well before any need is evident. They are part of a solid estate plan that includes tax-efficient asset protection, management and transfer. We put other strategies on standby. You spend time and money to create them in hopes that they will never be needed.

They are akin to the lifeboat drills people must complete at the start of every cruise or the fire drills we all did in school and now our corporate-controlled offices. The point is to understand where you need to go and who you’ll be relying on if a crisis emerges. At that point, time will be of the essence, and you’ll want to focus on the human needs of your loved ones, not the legal and financial details or complicated asset protection strategies.

Bottom Line

If you’ve made it this far, you know that planning for long-term care that may accompany your aging is complex and highly situation-specific. There may be a right answer for you, but it won’t come pre- packaged off the shelf from a financial supermarket. If you want to put a good plan in place for your family, it’s going to take a bit of work and some creativity.

About the author: Michael Lynch

Michael Lynch, CFP®, is a financial planner with the Barnum Financial Group in Shelton, Connecticut, and Cape Coral, Florida, and the author of three books, “It’s All About The Income: A Simple System for a Big Retirement” (2022), “Keep It Simple, Make It Big: Money Management for a Meaningful Life” (2020), and, most recently, “Taking Care of Your Future: The Nurse’s Guide to Retirement” (2024). You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities and Investment Advisory services offered through qualified registered representatives of MML Investors Services LLC. Member SIPC. 6 Corporate Drive. Shelton CT 06484. Tel: 203-513-6000  CRN202805-8733306


1 Chen, Anqi, Alicia H. Munnell and Gal Wettstein. “Do Older Adults Understand Health-Care Risks, and Do Advisors Help?” Center for Retirement Research at Boston College, January 2025, Number 25-2. https://crr.bc.edu/do-older-adults-understand-healthcare-risks-and-do-advisors-help//

2 Priya Chidambaram and Alice Burns, “10 Things About Long-Term Services and Supports (LTSS)” July 8, 2024. https://www.kff.org/medicaid/issue-brief/10-things-about-long-term-services-and-supports-ltss/ 3 Chen, Anqi, Alicia H. Munnell and Gal Wettstein, “How Do Retirees Cope with Uninsured Healthcare Costs?” Center for Retirement Research at Boston College, February 2025, Number 25-4. https://crr.bc.edu/how-do-retirees-cope-with-uninsured-healthcare-costs/



What's Next?

In my last column, I explored how to make your working days numbered by calculating your personal number. That is, the amount of assets you must amass to retire confidently and comfortably. I ended it with a profound planning question: when will you know that you have enough money and what will you do then?

Let’s ponder the “what then.”

Two Types of Planning

I’ve long maintained that we engage in two types of financial planning. The first, which I call the planning of scarcity, is where financial planners who work with diverse clients spend much of our time. The goals here are many: cash reserves, college for kids, and retirement. It’s all about allocating finite resources to achieve multiple goals. Something always seems to give.

It’s never clear that the finish line will be crossed, but it almost always is. That’s when we go to type 2 planning - the planning of plentitude. You know you have enough, what now?

As always, there’s the technical answer to this question. Financial planners are great at that, it’s our comfort zone. The nuts and bolts of planning for abundance will be a topic for another day.

Far more difficult is answering the human question of what’s next. It’s not easy to deal with, especially on a global or group level. You have enough now. You don’t need to work. What should you do?

No More Excuses

Pretending you can’t retire allows you to avoid this question, to wave it away. Hi ho, hi ho, it’s off to work I go. Meanwhile, to lean on a memorable lyric from Pink Floyd’s “Time”, “…the sun is the same in a relative way but you’ll be older, shorter of breath, and one day closer to death.”

How do you want to spend that day? There’s a cliché in retirement planning that instructs you to retire to something. What is that something?

It may be continuing to work. I have a physician client who says he’ll never retire. He practices at a highly regarded facility and reports that his patients retire and fall apart physically. He likes his work and wants none of that.

At first, I accepted this at face value. But I pondered it, and the retire and deteriorate observation didn’t fit with my experience of working with scores of middle-class millionaire retirees. With a few exceptions, my experience is that people love their retirement.

I suspected that this doctor’s patients were at the top of the workforce food chain and highly paid executives. He confirmed my suspicion the next time we talked. This, combined with their regular relationship with a specialist doctor, leads me to conclude that his experience is not universally applicable.

Keep Dropping the Hammer and Grinding Those Gears

It is a valid point, however, and may apply to you, regardless of your trade or profession. If so, embrace it. I have a trucker client, highly skilled, in his late sixties and still logging the miles. He’s in high demand and highly paid and enjoys his work. Why retire?

In Florida, where I live and actively boat through a boat club, most of the dock hands are part-time semi-retirees. Recent hurricanes put many at home for the last few weeks. I recently had one, a retired Teamster turned part-time dockhand, tell me that if that’s what full-time retirement is, he’s going to get back to jamming gears.

This point, in other words, need not come with a white-collar bias.

So Much (and So Little) Time

That said, when executives and business owners retire, they leave a lot at the office. Work provides friends and structured time, as it does for many. But they may also work far more hours and therefore have less of a life and identity outside the office. And if they’re blessed to work with a dedicated and flexible team, they’ll miss the support.

Substitute Fun for Work

A few years later, I was able to see this guy’s mistake through the experience of another client, a wonderful man who taught special education for more than 40 years before retiring. He collected his full pension and was financially solid but had a serious issue. His wife was still working full-time and didn’t want him sleeping in while she schlepped off to work.

As a result, he worked as a substitute teacher, basically full-time, for another 15 years. The pay was much reduced, but he was collecting his full pension as well. When I asked him why not just go back full-time for more money, he looked at me like I was crazy and explained that he didn’t have to do any course preparation, attend staff meetings, or deal with any staff politics. He was doing what he loved—helping students with intellectual disabilities—having a good time doing it, and putting a little money in his pocket, all the while keeping his wife happy. Not a bad deal.

Then Is Now

So back to that question: what will you do now?

For many this answer is easy. If you have any addiction—I mean hobby—the question likely appears stupid. I know people who live for fishing. Filling days is no problem. They have the money for fuel, repairs, and gear. If this is the case, you don’t have to think about it too long.

My clients who found bliss in Florida’s The Villages community have no problem with the answer. It’s frequent golfing, plenty of affinity clubs, and more social groups and restaurants than you can shake a stick at. I think of it as high school without any classes and plenty of money. For those of us who enjoyed high school—likely because we treated classes as optional even then--this ain’t bad. It’s an apocryphal tale that The Villages has a high rate of STDs. But there’s a reason it’s believable. Who ever really wants to grow up?

On the Road

For others, it’s a series of what I call aspirational trips, adventures really, with friends and family. These are the sorts of trips you just can’t do while employed. You go to distant places like New Zealand or the South Pole or multiple places in Europe for a month or more. You spend gobs of money, but money you have. It’s not high school without classes. Rather, it’s the summer on the Eurail Pass, and you’re not using the “book Europe on $20 a day” to book your itinerary.

Changing Diapers

One of the joys of getting older for some of us is being made a grandparent. “Then what?” may be to provide day care, either full- or part-time. Yes, I know, this does not sound like bliss to a few readers. But for others, nothing would make them happier. The Wall Street Journal recently ran a lifestyle feature on grandparents, whom it calls baby chasers, moving to be close to grandchildren.

I do see this, as well as both the part-time and full-time day care models, in my practice. Part-time is what it sounds like, a negotiated few days a week. Your children avoid day care costs. A great relationship is created for the grandparents and grandchildren.

The full-time option is, well, full-time. In an extreme case, I had a grandparent couple who had to secure a babysitter so they could go out to dinner. They weren’t upset. Taking care of their family is exactly how they wanted to spend their time and treasure.

Getting Tossed out the Door

Now for some of you “what’s next” may be a forced exit from a job you still love. Commercial airline pilots hit this wall at age 65.

Sometimes the push is financial, a vested pension embedded that must be taken by a certain age to retain its full value to the employee. If you have a pension, especially one that comes with a rule with a number, such as a Rule of 85, you should analyze the data. This is especially true for first responders who can often retire at a very early age.

Consider the math. A person who reaches age 59 with 26 years of employment is eligible for an unreduced pension. If she retires a month prior to age 59, her pension pays $5,500 a month. She hangs on for one month more and it pops to $6,300.

She’s happy at her job. No matter. I tell her to get out, since she’s about to get a massive pay cut.

You see, if she continues to work another six years to make it to Medicare age, her pension only increases to $8,800 a month. It looks like a big jump, until you crunch the numbers. If she keeps working, she gives up over $450,000 in pension income only to get $2,500 more a month at age 65. Straight math says it takes her 15 years to break even. Assume she could have earned a 5% return on the pension funds had she invested them, and she’ll die before breaking even.

But why did I say she’d take a pay cut if she kept working? Well, if she shows up to work every day, the company will send her $15,000 a month, pre-tax. If she stays home or goes to work somewhere else, it will send her $6,300. She’s no longer getting paid $15,000 a month, but 40% less. If she wants to keep working, her preferred move is what I call the victory lap. Collect the pension and pick up a new job at a similar company.

This could be you if you have a pension. I find most people don’t really consider this until I point it out. The exception is first responders, police officers and firefighters, who play it like Charlie Daniels on the fiddle. I met a police chief twice retired with two pensions who was still working part-time in security in the private sector.

If any of this applies to you, you should crunch your personal numbers. You may still love the work game and want to continue to play it. Consider taking a victory lap. You’ve got nothing but good options.

No One Gets out of Here Alive

Financial planners and the industry in which we are embedded constantly stress the need to prepare for a long, expensive retirement. If I had $100 for every time I’ve heard that a 65-year-old man has a 50% chance of still breathing at age 84 and a 25% chance of lawn bowling on this side of the grass at age 91, I might already have hit my number. (The ages are even longer for women.)

This is a half-full way of looking at it. Here’s another point of view. It means that one in two of us dudes will not be around to blow out 84 candles.

I’ve been to three funerals in the last four months, of men ages 65, 58, and 58. I have a photo of four people to whom I was very close and whom I loved very much. Three have now died at 85, 70, and 58.

Stephen R. Covey, the late great author of “The 7 Habits of Highly Effective People,” noted that the correct answer to the posthumous question, how much did he leave?, is “all of it.”

Keep these points in mind as you ponder the second half of this fantastic question: how will you know you have enough and what will you do then?

Your first task: figure out if you have enough. Then pick something. Anything. Even if it’s a job you love. And do it.

Michael Lynch, CFP®, is a financial planner with the Barnum Financial Group in Shelton, Connecticut, and Fort Myers, Florida, and the author of three books, “It’s All About The Income: A Simple System for a Big Retirement” (2022), “Keep It Simple, Make It Big: Money Management for a Meaningful Life” (2020), and, most recently, “Taking Care of Your Future: The Yale New Haven Nurse’s Guide to Retirement” (2024). You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Members SIPC 6 Corporate Drive, Shelton, CT 06484. (203) 513- 6000.

CRN202706-7770691

We've Got Your Number

What’s your number?

Which number, you may ask? My waistline, IQ, daily caloric intake? This world is filled with numbers to track. Please clarify.

I’m glad you asked. Your financial independence number--the amount of money you need to accumulate in financial assets to make work optional and retirement possible.

You may recall that there was a celebrated book written about it in 2006. It was actually titled “The Number.” Tellingly, I read it cover to cover and it never actually provided a number.

So what’s yours? Do you know it?

State of Confusion

Likely not, which is no fault of your own. If you pay too close attention to the personal financial news you may be too discouraged to try, or simply confused.

A prominent insurance company reports that, in 2024, Americans believe they need $1.46 million.[i] This is our own money, in retirement, investment and bank accounts.  The study is impressive. The number’s real.

Charles Schwab ups the ante a bit, reporting that Americans think they need $1.8 million, based on a survey of 401(k) participants it conducted in April 2024.[ii]

Yet another financial service company places the numbers as low as $50,000. Only one in ten retirees age 55 and older with between $10,000 and $50,000 accumulated reported that their retirement is in crisis.[iii]

Two Things Can Be True

Can this be true? It appears to be as real as the pages on which it’s printed.

A very smart person, namely my millennial niece, once told me that two things can be true. I hadn’t really thought of that before and it really hit me. Apply it here, and I believe that many things can be true, but perhaps not all for each person.

Yes, some people do need $1.8 million to retire. That’s their number. Others may be able to get by on as little as $50,000 in an emergency fund. Others may need $3 million and others still may need half of that.

Your Truth

As practicing financial planners, our team knows that the truth that matters is your truth—dare I say your number—and yes we can determine it with your help.  We won’t consult any expert studies, survey or reports. These may be useful in professional debates, but not when focusing on a data point of one. You.

We’ll uncover the number the old-fashioned way, by first focusing on your spending needs, then on your guaranteed income sources--Social Security and pensions--and then on determining how much income you need to generate from your financial assets—meaning bank, investment, and retirement accounts. For some, this number (total financial need for retirement) can be quite large. For others, who have substantial pensions and moderate needs, it may be zero.

There you have it. It’s somewhere between zero and infinity.

As I detail in my second book, “It’s All About the Income: Your Simple System for a Big Retirement,” this cash flow number, your spending amount needed, determines the amount of financial assets you need to accumulate to be financially independent. We’ll have no problem showing you this.

The Easy Part Is Over

Generating your number may in fact be one of the easier tasks in financial planning, both for you and us. For us, we typically must help manage the money to make sure you hit the number and, of course, keep it adjusted for such pesky things as taxes and inflation. We’ll make sure your family is properly protected with the efficient insurance and estate planning package. These are technical tasks that we handle systematically with our competent and caring team.

You face the bigger challenge of knowing at least one part of the big question in personal finance, which is really just life: when will you know you have enough and what will you do then?

For many of us, figuring out what to do then is the harder part.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT and Fort Myers Florida, and the author of three books, It’s All About The Income: A Simple System for a Big Retirement (2022), Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and, most recently, Taking Care of Your Future: The Yale New Haven Nurse’s Guide to Retirement (2024). You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

CRN202710-7316457

[i] “Americans Believe They Will Need $1.46 Million to Retire Comfortably According to Northwestern Mutual 2024 Planning and Progress Study,” April 2, 2024, https://news.northwesternmutual.com/2024-04-02-Americans-Believe-They-Will-Need-1-46-Million-to-Retire-Comfortably-According-to-Northwestern-Mutual-2024-Planning-Progress-Study

[ii] “2024 401k Participant Study,” July 2024, https://www.aboutschwab.com/schwab-401k-participant-survey-2024

[iii] ‘The Retirement Crisis: Perception vs. Reality” PGIM Global Communications, July 9, 2024, https://www.pgim.com/article/retirement-crisis-perception-vs-reality

It's Always a Problem: Heads It's Bad And Tales It's Even Worse

By Michael Lynch CFP®

Ever get the feeling that you just can’t win, that nothing ever goes right? As a daily reader of the financial press, I felt this way for years. It always seems to me that regardless of the state of the world, the apparent solution soon becomes the new problem.

There’s no end to it.

When the solution to a problem arrives, it isn’t hailed as “problem solved.” Rather, it’s viewed as the new problem.

Take employment—that is, the number of people working or the proportion of people working to those who want a job--as an example. These numbers usually come from surveys, which are themselves a problem.

When unemployment is high, as it was after the financial collapse in 2008 and briefly during the pandemic, economists, policy wonks, and other paid commentators declare disaster. I am prone to agree with them. If people want to work and can’t, that’s a problem. People suffer.

Why then when employment is high—and unemployment low—do these same publications scream about the lack of people to work, that is, a plethora of jobs?

It’s The Money

When there are plenty of jobs, the demand for labor pushes up wages. Again, this would seem to be a good thing. There’s been plenty of ink spilled on how the bottom half of the labor market has not shared in the great boom of the last two decades. Yet, once the wages increase, this becomes the problem. Now the scribes will write of $100,000-a-year Wal-Mart truckers and academic podcast guests will emote shock that plumbers often earn more than professors. This, it is claimed, causes inflation with the dreaded wage-price spiral.

Black Gold

The price of oil is a perennial problem. When it’s high, as it was in 2008 and 2022, there’s no end to the complaining. This makes sense, as we pay more to go the same distance, leaving us with less money for other necessities or even fun stuff. But you can bet a month’s payoff of your Shell Card that when the price of oil drops, you’ll be faced with article after article on the pain in the oil patch, companies struggling, wells capped, idle rigs, and jobs lost.

My general advice on this one—which is certainly not specific investment advice for anyone reading-- is to set yourself up to always be happy. Get a basket of energy securities. Then, when the price is high, you can focus on the expected value increase of your holdings. When the inevitable price decline arrives, you can focus on your savings at the pump.

Documenting the Doomsayers

I’ve felt this way for years about the press’s passion for problems. Last year, I did something about it. I went for a solution. I created a digital clip file, labeled it “Everything is a Problem,” and started saving articles that fit the bill. (This merely created a problem of having too many articles to write about.)

Here’s a smattering of examples taken from the articles I clipped and the problems they expose.

Rising interest rates have been a dominant financial story for two years now.  In 2022, the Fed started increasing rates and even after it paused, investors decided to increase the Ten-Year Treasury rate in the summer of 2023. These rate hikes, once thought good for banks, were now seen as bad. Banks after all had to pay interest on deposits or lose them.

“Everyone wants interest on their deposits, that’s bad for mainstream banks,” the Wall Street Journal headlined in July of 2023. Yet a few months earlier in March, it had noted that “falling rates could also be a headache for banks.”

No One’s Safe

We all know that a problem for savers for over a decade was, well, saving literally didn’t pay. Like--it paid nothing. Zero! We financial people who like equity and bonds talked of TINA—there is no alternative to investing.

Well, this problem has certainly been solved with bank CDs back to 5 percent and on-demand savings accounts and money markets paying nearly as much. Yep, people are now earning on their cash. The world is right. Or is it?

“Investors are finally making money on bonds and CDs,” screamed the WSJ headline that tipped its hat to good times in August of 2023, before warning, “be prepared to pay taxes.”

This is good for our government, and therefore us, no?

The same theme played out in investing. The dismal 2022 financial performance was followed by a strong rebound in 2023. This refilled accounts, which most people would consider a good thing. But not the intrepid writers at the WSJ who can always find someone willing to complain about something.

Come January and we were treated to a piece on the mixed blessings of a strong market, in an article headed “Americans’ required retirement income has never been higher.”

At first, I thought this was a statement on the great inflation of recent years, as in the McDonald’s dollar meals are now $3.99. But I was wrong. The article focused on the increased distributions that our most senior of citizens are forced to remove from their pre-tax IRAs and employer plans.

This is of course just another way of saying our senior citizens have never had so much money. That’s good, isn’t it? I guess it’s not if they don’t want to use it.

It’s a Wrap

I could go on and on examining this topic. It’s an endless spiral, Turtles All the Way Down. But I won’t. I choose to see the relentless negativity not as a problem, but as a solution to a boring paper and the need for future article fodder. If you have some solutions that became problems, feel free to send them along.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Ft Myers, FL, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial planning courses for leading organizations, including Madison Square Garden and Yale New Haven Health Systems. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

CRN202701-5767684

Choices, Choices, Choices

By Michael Lynch CFP®

As I settle in to write this in late October, I’m reminded of what a magical time of year this is. I’m not normal, so I’m not referring to the fall leaves or the overlapping of pennant baseball, college and NFL football, hockey, and the NBA.

Nope. For a personal finance dork like me, it’s all about open enrollment. It’s that magical time of year when employees get to pore over their employer’s benefit offerings and make elections on such fun and exciting items as disability income and life insurance, health plans, and flexible spending options. If you’re lucky, you may even get to ponder some prepaid legal plans and pet insurance.

For seniors, Medicare’s window is open from October 15 to December 7. For those of us who use the health exchanges to secure health care, our open enrollment period varies by state, but the most common is November 1 through January 15.

It’s these once-a-year opportunities on which I will now focus.

Employees of large institutions, government, corporations, and non-profits such as hospital chains typically enjoy a period in the fall of each year in which they can adjust their benefit elections, including health care, life and disability insurance coverage, and often ancillary benefits such as prepaid legal plans. The window is often tight—ten days for example—so it’s prudent to be prepared for the offering when it comes. These benefits are a key component of most people’s financial plans and it’s important to optimize them. (Our friends who are retired get a longer open enrollment period for Medicare, from October 15th to December 7th.)

Healthy Choices

Health coverage is traditionally the dominant benefit elected in open enrollment. The coverages and costs of the plans offered are compared in side-by-side tables. In recent years, high-deductible plans with health savings accounts (HSAs) have increasingly appeared on the scene. These can be confusing, as they present a higher potential initial out-of-pocket cost, but also contain a total stop-loss on payments, potentially an employer cash contribution to the HSA, and then the ability to accumulate money completely tax-free for spending on health care in the current or future years.

As a financial planner, I value these flexible tools and have written about them. You can find my article here: https://www.michaelwlynch.com/tax-me-never-yeah-baby. It does require some analysis to know if such a plan will fit a person. We are happy to help you with this. Contact Sarah at my office to schedule a call at 203-513-6058 or sarah.rizk@barnumfg.com.

If you’re on Medicare, it’s time to set an appointment with your policy advisor or yourself, and reflect on how satisfied you are with your current plans, supplement and drug plans or advantage plans, and investigate alternatives. This same goes for us on the health exchanges.

Who Doesn’t Like Tax-Free Money?

One way to spend $1 for every $1 you earn is to funnel it through a flexible spending account for health care. This is typically “use it or lose it,” so you need to figure out how much you are likely to spend on deductibles, copays, and other costs associated with the account.

The IRS offers a splendid publication, https://www.irs.gov/publications/p502, that details all that can be purchased under the umbrella of health care. Typically, you will elect either an HSA or a flexible spending account. The former accompanies a high-deductible plan, and the money will remain in plan from year to year. The latter sits beside a more traditional health care plan, and the money is “use it or lose it.”

Another tax break is available to those with children who need day care. A dependent spending account, which allowed up to $5,000 in contributions in 2021, will let you purchase childcare tax-free. It can also apply to a disabled spouse who needs attention or even to dependent parents. At a 35 percent marginal tax rate, moving $5,000 this way saves you $2,700 in income, Social Security, and Medicare taxes.

Protect the Money Machine

Income if You Can’t Go to Work

Disability income Insurance is increasingly becoming an option to elect at open enrollment. With disability, as with life, you should conduct a thorough needs analysis to determine how much after-tax income your family needs if you can’t work. Insurance is always an expense, so you want to make sure you obtain the proper amount. Here too we can help. Contact Sarah at my office to schedule a call, 203-513-6058 or sarah.rizk@barnumfg.com.

Plans vary widely, but one thing they all have in common is that they won’t replace 100 percent of your income. Given that most people live on all their income—when essential savings are included—I typically recommend taking as much as possible. Your needs analysis will determine if this is true for you.

Exceptions to this include people who don’t need their full income to support themselves and sometimes workers past age 65 for whom the group coverage would pay out for only a few months or years. The second election that is increasingly common is whether to have the benefit paid by your employer or have you pay it or pay tax on the premium. Counterintuitively, you usually should pay it or have the employer’s payment count as taxable income to you. Here’s why. If you pay the premium or have it included in taxable compensation—a small amount--the benefit, which is large, is free of income tax. If your company does not pass the premium through to you as taxable compensation, the benefit is taxable. Finally, if your group plan is insufficient to meet your needs— or unusually expensive—you should look to the private marketplace to secure an individually owned policy.

Money if You Don’t Return from Work

Don’t neglect your potential need for life insurance. Make sure you’re not paying too much for it. Most employers offer some group term life insurance. It’s typically easy to enroll and, when you’re young, it’s very inexpensive. There is a catch, however, which is that the cost increases as you age, and you may lose it or its low price when you leave the company or experience a long-term disability. Now is the time to determine two things. First, how much insurance do you need and for how long do you expect to need it? Ask yourself what happens to the ones I love financially if I’m gone. Second, is it more cost-effective over the expected time I need insurance to acquire it through my employer, the private marketplace, or a combination? If you’re in good health and you expect to need insurance into your 50s and 60s, the private marketplace is usually substantially less expensive. It also provides you with ownership and control of the valuable policy. If you need help with the analysis, contact Sarah Rizk at 203-513-6058 or sarah.rizk@barnumfg.com and our team will be happy to assist.

Bells and Whistles

Your company may offer other valuable benefits in addition to these core offerings. Common free offerings include employee assistance plans that provide professional help in tough times. A potentially valuable offering I’ve used myself in the past is group legal plans—I think of them as HMOs for lawyers—that provide access to pre-paid legal services based on a low payroll contribution. Common uses for this include real estate transactions, wills and estate planning, and even traffic violations. Be sure to read carefully the offering booklet your employer provides. You never know when you may need to rely on some of the services. They are part of your overall compensation package.

Don’t Delay

Life’s busy and open enrollment comes and goes quickly. The default is typically last year’s elections, although some benefits may expire unless renewed. The status quo may serve your needs or it may not. Do yourself and your family a favor and take the time to thoroughly analyze your employer’s offerings and compare them to private alternatives. It may just make a big financial difference someday. As always, we are here to help.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT, and the author of three books: It’s All About The Income: A Simple System for a Big Retirement (2022), Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and most recently Taking Care of Your Future: The Yale New Haven Nurse’s Guide to Retirement (2024). You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

CRN202711-7456825

Fundamentals of Finance

By Michael Lynch CFP®

We Americans, as a collective, underperform in our financial lives. Don’t get me wrong, I’m not saying we’re bums.

Quite the contrary. We’ve created the world’s most dynamic economy; we produce life-enhancing innovations at a pace that has never been matched.

We work hard, we work smart, we work creatively, and we are, in general, well rewarded for it.

In 2022, on average, Americans over the age of 15 earned just under $60,000 annually, according to the U.S. Census Bureau. Those who worked all year, full-time, pulled in just under $85,000. (U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements, 2022).

 

It’s Not What You Earn, It’s What You Keep

Yet I can’t help wondering why, for all the wealth produced, for all the income that flows through our checking accounts, why isn’t more retained by the average American household?

In 2022, half of American households had net worths under $193,000, according to the Federal Reserve Board’s 2022 Survey of Consumer Finances. The Fed’s survey also documents that at age 65, half of Americans have less than $200,000 invested in retirement plans. So, after a lifetime of working, half of us manage to squirrel away less than four years of income.

 

Money Misconceptions

I am convinced that our under-accumulation of wealth stems from a fundamental confusion about what constitutes sound financial management, a confusion of good business finance with good personal finance.

We’ve all heard the phrase, it takes money to make money. In business and investment this is certainly the case. We must spend money before any will come back to us.

The basic paradigm is the agricultural model, which provided humans with our first movement into stable, self-sustaining societies. In order to earn money farming, a person must acquire money, either through savings or loans, purchase land and seed, then work the land, rely on a bit of luck that no aberrant weather or other catastrophe wipes out the crop, then work to harvest, sell the produce, and pay off the loans. It is only then that the farmer earns a profit and starts the cycle again.

The bottom line: in business, we must spend money before we can have it to spend. Failure to spend will doom any business to stagnation and ultimate failure. Being too cheap will end an enterprise.

Our Households Aren’t Farms

The fundamentals of personal finance, however, are the opposite. In personal finance we should wait until we have the money to spend it. We must earn, set aside 10 to 20 percent, and let the pile grow. It is only after the pile has grown that the prudent person indulges in spending to upgrade one’s lifestyle.

This pay yourself first rule is not new and certainly not revolutionary. It was first put to print in 1926 by George S. Clason in his classic parable, “The Richest Man in Babylon.” Yet far too few Americans accept Clason’s advice.

Instead, we tend to justify today’s consumption with expectations of future earning increases. Many of us actually use the business paradigm to rationalize spending on the personal side.  We categorize personal consumption as an investment in business.

 

Can Old Cars Lead to Riches?

I may, for example, have a Toyota Camry that, while a decade old, is paid off, running fine and inexpensive to maintain. Not having a car payment of $500 enables me to invest an equivalent amount in a taxable account or far more in a retirement account, as I don’t have to pay taxes.

I want a Lexus. I don’t have the money saved. I will have to take a loan. No problem. I tell myself it is important for me to have a nice car for business appearances. Just as a dentist must have teeth, a financial advisor must drive an upper-end automobile.

I’ve rationalized personal consumption as a business expense and diminished my future net worth--my ability to achieve real financial freedom--in the process.  I could do the same with any number of nice-to-have lifestyle items, including a larger house, a vacation home, a country club membership, a boat, season tickets for the Yankees and Red Sox (I have clients who are fans of both teams,) private schools for the children, and expensive suits, just to name a few.

  

It’s Always a Judgment Call

Now some of these expenditures may in fact improve my bottom line. Dentists do need teeth and I can’t live in a tent and ride a bicycle to appointments with clients in second-hand blue jeans. Some purchases, such as vacation homes, may be a great investment in family time. But each dollar must come from somewhere and I can justify almost any purchase as an investment, when, in fact, many will simply be lifestyle-enhancing consumption.

Ultimately, there is no objective measure that can neatly pinpoint the optimal spot between the bicycle and the Rolls Royce or the second-hand jeans and the five-figure suit where I should place my marker. The principles, however, are useful. They provide a gut check as well as the ability for us to understand our spending habits, our choices, and the consequences of these choices. Most important, they allow us to be honest with ourselves and make smart money choices.

 

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Ft Myers, FL, where he focuses on his clients’ finances so they can focus on their lives. He teaches consumer-oriented financial education courses for leading organizations. He is a member of Ed Slott’s Elite IRA Advisor Group and the author of Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and It’s All About the Income: A Simple System For a Big Retirement, May 2022. You can find more articles and videos at www.simpleandbig.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

Michael Lynch is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484. Tel: 203-513-6000

Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.  CRN202706-6735304

Back to School

By Michael Lynch

It’s back to school time. Your little charges may be getting dropped off at preschool, boarding a bus for elementary school, or driving themselves to high school. Regardless, at some point in the not-so-distant future they may be heading off to college. That carries a financial wallop. It’s never too early to start planning.

The price tag hanging on college educations can appear staggering. Private colleges average $39,400 for just tuition, fees, and books. Living is extra. Throw that in for the full experience, and the sticker price jumps to $57,570, according to the College Board.[1] The average price of a new car, by way of comparison, is $48,644 according to Cox Automotive.[2]

Here in Connecticut, UConn will set a student back just over $35,000 a year for the full package of tuition, room, board, and books.[3] Even Connecticut’s two-year colleges cost more than $5,000 a year. That’s before you purchase a single book.[4]

The price, however, is often well worth it. According to the U.S. Bureau of Labor Statistics, bachelor’s degree holders earn an average two-thirds more than people with only a high school diploma.[5]

But how to pay? Like all things financial, there is no one right answer for everyone but a variety of options and strategies to investigate and pursue.

One is waiting and paying out of pocket or relying on aid. This is the most dangerous, as most aid arrives in the form of loans that will likely need to be paid back with some interest.

Some sort of pre-funding college remains prudent. There are many good options available, ranging from traditional college accounts to less traditional strategies. Most will employ some form of tax deferral.

The traditional college accounts are now state-sponsored 529 plans. Every state sponsors at least one. People can use any state plan, but up-front state income tax advantages often require the use of a resident state’s plan. In Connecticut and New York, for example, state residents get state income tax deductions for contributions to state plans for up to $10,000 for married couples.

Section 529 plans work like Roth IRAs for higher education. Contributions are made with after-tax money. The money can be invested in an array of options, depending on the state plan. It grows tax-deferred. When it’s spent on qualified higher education expenses, the gains will not be taxed.[6]

There are also prepaid tuition plans. These allow people to lock in today’s tuition rates, effectively hedging against inflation. A downside is that they tend to be state- or school-specific.

Other options include Roth IRAs, traditional IRAs, cash value life insurance, taxable savings and investment accounts, and uniform gift to minor accounts. Each of these can be appropriate for families depending on their unique circumstances.

A Roth IRA, for example, might be a good choice for a family that wants to maintain a favorable position for needs-based financial aid and whose adults are at or near retirement age when a child hits college. For families with younger parents, a cash value life insurance policy may provide similar benefits. For a family that has significant retirement assets but little non-retirement savings, tapping an IRA penalty-free for qualified higher education expenses can make sense.

And don’t forget grandparents. Anyone, including these very special people, can help with the college bill. If they pay directly to the school, it doesn’t even count as an annual gift for tax purposes.

Education is more valuable than ever for many Americans—and more costly too. Fortunately, our complex financial and tax system offers a variety of effective options for accumulating resources to pay tuition and other expenses. There is no one best way. There are a variety of tools that can be used to build a plan to suit a family’s unique needs. Like most things financial, the best strategy is to get started as early as possible. Contact us to get started.  We’ll help simplify the options to produce some big results. Time, combined with prudent tax advantaged investing, can make a little money stretch a long way[AR1] .

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT, and the author of three books: It’s All About The Income: A Simple System for a Big Retirement (2022), Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and most recently Taking Care of Your Future: The Yale New Haven Nurse’s Guide to Retirement (2024). You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032.

[1] Average Cost of College, Bankrate.com, https://www.bankrate.com/loans/student-loans/average-cost-of-college/ Accessed 8/25/2024. Source data from the College Board.

[2] Cox Automotive, New-Vehicle Prices Hold Steady in June, as price pressures continue to steer market, according to Kelly Blue Book Estimates, Wednesday, July 10, 2024. https://www.coxautoinc.com/market-insights/june-2024-atp-report/#:~:text=ATLANTA%2C%20July%2010%2C%202024%20%E2%80%93,in%20the%20U.S.%20was%20%2448%2C644. Accessed August 25, 2024.

[3] University of Connecticut website. https://financialaid.uconn.edu/cost/ Accessed August, 25, 2024.

[4] Data from Connecticut community colleges.  https://ctstate.edu/admissions-registration/investing-in-a-ct-state-education Accessed August 25, 2024.

[5] “Education Pays,” U.S. Bureau of Labor Statistics, https://www.bls.gov/emp/chart-unemployment-earnings-education.htm Accessed August 25, 2024.

[6] 529 plans are established by states or eligible educational institutions under IRC Section 529 as “qualified tuition programs.” There is no guarantee offered by the issuing municipality or any government agency. You should consider the potential benefits (if any) that your own state’s plan (if available) offers to residents prior to considering another state’s plan. There may be tax benefits to plans offered by your resident state. Non-qualified withdrawals from a 529 plan are subject to a 10% federal tax penalty and current income tax and may also be subject to state tax penalties. As with all tax-related decisions, consult with your tax advisor.

CRN202511-7104045

Summer's Going, Going, Gone!!!!!

By Michael W Lynch

As hard as it is to believe and accept, summer will soon be on its way out. I hope each of you is making the most of it. Hello football, falling leaves, and, for those working for large institutions, open enrollment for benefit elections. It’s this once-a-year opportunity on which I will now focus.

Employees of large institutions, government, corporations, and non-profits such as hospital chains typically enjoy a period in the fall of each year in which they can adjust their benefit elections, including health care, life and disability insurance coverage, and often ancillary benefits such as prepaid legal plans. The window is often tight—ten days for example—so it’s prudent to be prepared for the offering when it comes. These benefits are a key component of most people’s financial plans and it’s important to optimize them. (Our friends who are retired get a typically later and usually longer open enrollment period for Medicare, from October 15th to December 7th.)

Healthy Choices

Health coverage is traditionally the dominant benefit elected in open enrollment. The coverages and costs of the plans offered are compared in side-by-side tables. In recent years, high-deductible plans with health savings accounts (HSAs) have increasingly appeared on the scene. These can be confusing, as they present a higher potential initial out-of-pocket cost, but also contain a total stop-loss on payments, potentially an employer cash contribution to the HSA, and then the ability to accumulate money completely tax-free for spending on health care in the current or future years. As a financial planner, I value these flexible tools and have written about them. You can find my article here: Tax Me Never, Yeah Baby! It does require some analysis to know if such a plan will fit a person. We are happy to help you with this. Contact Sarah at my office to schedule a call at 203-513-6058 or sarah.rizk@barnumfg.com.

Who Doesn’t Like Tax-Free Money?

One way to spend $1 for every $1 you earn is to funnel it through a flexible spending account for health care. This is typically “use it or lose it,” so you need to figure out how much you are likely to spend on deductibles, copays, and other costs associated with the account. The IRS offers a splendid publication that details all that can be purchased under the umbrella of health care. Typically, you will elect either an HSA or a flexible spending account. The former accompanies a high-deductible plan, and the money will remain in plan from year to year. The latter sits beside a more traditional health care plan, and the money is “use it or lose it.”

Another tax break is available to those with children who need day care. A dependent spending account, which allowed up to $5,000 in contributions in 2021, will let you purchase child care tax-free. It can also apply to a disabled spouse who needs attention or even to dependent parents. At a 35 percent marginal tax rate, moving $5,000 this way saves you $2,700 in income, Social Security, and Medicare taxes.

Protect the Money Machine

Income if You Can’t Go to Work

Disability income Insurance is increasingly becoming an option to elect at open enrollment. With disability, as with life, you should conduct a thorough needs analysis to determine how much after-tax income your family needs if you can’t work. Insurance is always an expense, so you want to make sure you obtain the proper amount. Here too we can help. Contact Sarah at my office to schedule a call, 203-513-6058 or sarah.rizk@barnumfg.com. Plans vary widely, but one thing they all have in common is that they won’t replace 100 percent of your income. Given that most people live on all their income—when essential savings are included—I typically recommend taking as much as possible. Your needs analysis will determine if this is true for you. Exceptions to this include people who don’t need their full income to support themselves and sometimes workers past age 65 for whom the group coverage would pay out for only a few months or years. The second election that is increasingly common is whether to have the benefit paid by your employer or have you pay it or pay tax on the premium. Counterintuitively, you usually should pay it or have the employer’s payment count as taxable income to you. Here’s why. If you pay the premium or have it included in taxable compensation—a small amount--the benefit,  which is large, is free of income tax. If your company does not pass the premium through to you as taxable compensation, the benefit is taxable. Finally, if your group plan is insufficient to meet your needs—or unusually expensive—you should look to the private marketplace to secure an individually owned policy.

Money if You Don’t Return from Work

Don’t neglect your potential need for life insurance. Make sure you’re not paying too much for it. Most employers offer some group term life insurance. It’s typically easy to enroll and, when you’re young, it’s very inexpensive. There is a catch, however, which is that the cost increases as you age, and you may lose it or its low price when you leave the company or experience a long-term disability. Now is the time to determine two things. First, how much insurance do you need and for how long do you expect to need it? Ask yourself what happens to the ones I love financially if I’m gone. Second, is it more cost-effective over the expected time I need insurance to acquire it through my employer, the private marketplace, or a combination? If you’re in good health and you expect to need insurance into your 50s and 60s, the private marketplace is usually substantially less expensive. It also provides you with ownership and control of the valuable policy. If you need help with the analysis, contact Sarah Rizk at 203-513-6058 or sarah.rizk@barnumfg.com and our team will be happy to assist.

Bells and Whistles

Your company may offer other valuable benefits in addition to these core offerings. Common free offerings include employee assistance plans that provide professional help in tough times. A potentially valuable offering I’ve used myself in the past is group legal plans—I think of them as HMOs for lawyers—that provide access to pre-paid legal services based on a low payroll contribution. Common uses for this include real estate transactions, wills and estate planning, and even traffic violations. Be sure to read carefully the offering booklet your employer provides. You never know when you may need to rely on some of the services. They are part of your overall compensation package.

Don’t Delay

Life’s busy and open enrollment comes and goes quicky. The default is typically last year’s elections, although some benefits may expire unless renewed. The status quo may serve your needs or it may not. Do yourself and your family a favor and take the time to thoroughly analyze your employer’s offerings and compare them to private alternatives. It may just make a big financial difference someday. As always, we are here to help.

Michael Lynch CFP is a financial planner with the Barnum Financial Group in Shelton CT, and the author of three books: It’s All About The Income: A Simple System for a Big Retirement (2022), Keep It Simple, Make It Big: Money Management for a Meaningful Life, October 2020, and most recently Taking Care of Your Future: The Yale New Haven Nurse’s Guide to Retirement (2024). You can find more articles and videos at michaelwlynch.com. He can be reached at mlynch@barnumfg.com or 203-513-6032. CRN202511-6990081