In Part I of The Unexpected Downside of Longevity, we alluded to a study by Harvard that showed that between 1992 and 2008, life expectancy for people aged 65 increased from 17.5 years to 18.8 years. This means that the average American can now expect to live much longer than their parents due to the wonders of modern medicine.
We outlined three unexpected side effects that this increased longevity created:
The bottom line is not only will junior be waiting longer to inherit assets, but he or she is likely inheriting much less. Exhausting one's assets in retirement is a growing concern for many in America.
In Part II, we will look at ways to sustain your savings and income for your lifetime and for future generations.
Let's start first with a few ideas to sustain your savings and income over your increased lifespan:
First, as mentioned in Part I, long-term care (LTC) is something 70% of the population will need going forward but is a cost that only 30% of the population insures against. It is costly to be in a skilled nursing facility with costs running upwards of $100,000 per year in many parts of the country. With an average stay is skilled nursing home stay of 835 days, according to LifeHappens.org, this cost can quickly destroy a nest egg.
The simple solution to this is to purchase long-term care insurance but many do not because it is costly and it is a "use it or lose it" cost and rightly or wrongly many do not like to purchase insurance they may never use.
The solution is permanent life insurance with a living benefit rider. This is life insurance that builds cash value that can be used for future medical costs or even lifestyle needs in retirement. If it is not used for medical or lifestyle, it will become a benefit for ones heirs. It is cost effective and most people need some form of life insurance anyways!
Second, is a suggestion that might seem obvious but is ignored by much of the population and that is to work longer and wait on retirement. Did you know the average retirement age for Americans is 63?
This means the average person cannot even wait till 65 or the current full retirement age for most Americans for full social security of 67 years. Just continuing to work to age 70 will do two things: 1) it will allow you to save longer and delay drawing on accumulated assets, and 2) it will allow you to delay taking social security.
Most people don't know that for each year you delay taking social security, it adds 8% to your benefit. That is a great investment return with no or limited downside!
Third, if you have an existing annuity and enough assets for retirement, consider converting part or all of that annuity in a tax free exchange to annuity with a continuation of benefits rider. In many cases you will get a magnified LTC benefit AND in certain policies will get to pay those future LTC costs with annuity funds that come out tax free. This works well for those with very low or zero cost basis annuities.
Next, here are a few ideas to on how to get the younger generation some of their inheritance earlier, while they can still enjoy it. Obviously, this only applies to those families who have plenty for their retirement and financial needs.
First, is an absolute "no-brainer" for affluent families. However, I see very few affluent families fully utilizing this option. The tax law currently allows an individual to gift $14,000 without gift tax to as many persons as he or she would like per year.
This means a couple can gift up to $28,000 per year to as many heirs as they would like annually. Over a series of years, this can be a pretty big deal to those heirs.
The best news here is this idea is something you can do right now and is not dependent on whether Congress or the President simplify the tax code (and potentially the estate tax regulations) or not. It still makes sense!
Second, the tax law allows you to pay for educational costs and medical costs for an heir if paid directly to the provider and this is on top of the $14,000 per annum per person.
The good news is that payments for medical insurance also qualify for this exclusion. Except in rare circumstances, you cannot deduct the medical expenses you pay for another person, and they cannot deduct the expenses either, since they did not pay the expenses. Thus, careful consideration should be given regarding whether you make the gift directly to the individual, subject to the $14,000 annual limit – which would allow the recipient of your generosity to pay the medical expenses and claim the medical deduction on his or her tax return – or whether you pay the medical expenses directly.
Educational payments can be for any level of schooling including elementary, secondary and post-secondary. Unfortunately, the cost of room and board aren't eligible as direct payments, nor are contributions to qualified tuition programs (such as Section 529 plans). When you pay the qualified post-secondary education tuition for another individual, it does not mean – as is usually the case for medical expenses – that someone cannot benefit tax wise. Tax law says that whoever claims the exemption for the student is entitled to the American Opportunity Credit or Lifetime Learning Credit for higher education expenses if they otherwise qualify.
The Take Away
You are going to be impacted by this trend of increasing longevity. Living longer is great, but it will likely lead to many more Americas who flat out run out of resources in retirement.
A great way to overcome this hurdle is to make sure you are prepared by making sure they are taking advantage of all available saving options, such as maximizing contributions to a 401(k) or some other retirement plan. Additionally, that you have some form of LTC insurance as you approach your 60s.
Probably most importantly you need a financial plan to navigate all those years in retirement. This is someplace where we can help you, click here to find out more.
According to a 2016 Harvard study, the combination of increased longevity and improved health status has led to a spike in life expectancy among older Americans. The study showed that between 1992 and 2008, life expectancy for people aged 65 increased from 17.5 years to 18.8 years. This means that the average American can now expect to live much longer than their parents due to the wonders of modern medicine.
The fact that Americans are living longer today than at any time in history has created some unexpected side effects!
First, by living longer Americans are putting a real strain on their savings. I wasn't in the business when many of my older clients started saving for retirement, but my guess is their financial plans did not anticipate them living into their 80s, let along 90s or 100s. In fact more than a few scientists are predicting that within the next decade it may not be uncommon for human lifespans to approach a maximum age of 120. I shutter to think what that might do to my client financial plans!
So not only is running out of retirement funds a real issue for Americans, but also for our government. You may have already read or heard that our Social Security and Medicare/Medicaid trust funds are quickly headed for insolvency. Just imagine how fast we get to insolvency if humans are living to age 120 after retiring at today's average retirement age of 62?
Second, is the unexpected toll on the next generation. Let's use my client who will have turned one hundred by the time you read this as an example. We will call her Dorthy.
In her case, she is a very affluent American who has planned well for her retirement and for her heirs. However, when she sits around the table as President of her family foundation, her kids are no longer spring chickens. In fact, they average from the mid-50s to the low 70s in age. Yet here they are still be beholden to mom and still waiting to take control over these assets as much older adults.
Because mom is involved in this organization as well as every trust or entity established to minimize estate taxes, the investment allocations within these entities tend to be conservatively managed. I have to believe that if these assets were already in the hands of her children they would be managed more aggressively and therefore growing more quickly outside of her continued oversight.
I also have to believe that with the mantel finally passed, these children could finally rise to official adulthood and not the children they felt like around mom's table for the past 50+ years.
Third, is the rising effect of health care costs and the devastating effect they can have on the value of the assets passed by those living longer. Let's face it, health care is not cheap! Someone must pay for the revitalizing care that prolongs longevity and increases the quality of life. Right now much of that cost is born by Medicare or Medicaid, but, as we alluded to above, how much longer can Uncle Sam afford to foot the bill for a society that is living much longer than anticipated when such social safety nets were established? The answer is likely not much longer based on the current structure.
So the result will likely be in the future that you, Mr. or Mrs. taxpayer, will have to foot more of the bill. Since just 30% of Americans have some form of long-term care insurance and health care deductibles, outside of Medicare and Medicaid, keep increasing this is likely to have a negative effect on the value of assets passed to future generations.
What this means is not only is junior waiting longer to inherit assets, but he or she is likely inheriting much less.
In our next post, we will give you some specific ideas you can use to overcome the unexpected downside of longevity.
Technology is literally changing our world on a daily basis and it is only going to accelerate exponentially in the future. In fact, there is even a law called Moore's Law that says that the processor side of this equation will continue to double every 18 months, and it has since this law was announced in 1965.
Many people over the years have proposed that there would be an increase in technology as the end of times approached. Among those espousing this view were renowned scientists Isaac Newton and Francis Bacon. On the frontispiece of Bacon's Instauratio Magna, ships of learning were depicted passing by the limits of human knowledge, with a quote in Latin from Daniel 12:4 which stated "But you, Daniel, roll up and seal the words of the scroll until the time of the end. Many will go here and there to increase knowledge."
In more recent times, this belief has been supported in books like Future Shock by Alvin Toffler and The Bible Code by Michael Drosnin.
In my meetings with clients, I find far too many that are not keeping track of where technology is going, especially among baby boomers and seniors. It takes constant work and a desire to keep learning not to be displaced by the very technology that is meant to make our lives simpler. Sadly, I see far to many Americans with their head in some video game or watching Netflix and not learning how to stay relevant in this fast moving time.
So with that in mind, this month I wanted to share with you some inspiring videos that I found particularly eye opening over the summer. My hope is that they will inspire you to think big, to focus on mastering this new technology and to stay ahead of the curve that I believe will radically change our society in the years ahead.
The Next Big Opportunities!
Let's start with one of the biggest thinkers in America today, Elon Musk. The things he is doing in his various companies boggles the mind!
Will Blockchain Change The World of Commerce?
Next, if you have been following the investment news at all you may have noticed a new type of currency called Bitcoin is skyrocketing in price. Since any currency is only as good as the faith that is bestowed on it, unless it is backed by some kind of collateral like gold, there has to be something that makes the currency appealing?
The answer it appears is that this new digital currency is built using an entirely new distributive digital platform that makes it significantly harder to manage or manipulate than other currencies, like the U.S. Dollar, that are controlled by a central group or government. This new platform makes it near impossible to change without the system noticing it has been changed and thus builds trust among those who use the currency for commerce that they have entered into a fair transaction with fair remuneration.
I believe this new distributive way of managing data, called Blockchain, will have a profound affect on the way not just digital currency ledgers are kept but everything we potentially manage that has data attached to it.
Ritchie Etwaru has done the best job I have seen of explaining this new technology and how it works in a way most of us can understand.
Could Ai Bring More Disruptive Change?
Tesla's CEO Elon Musk fired off a new and ominous warning recently about artificial intelligence, suggesting the emerging technology poses an even greater risk to the world than a nuclear confrontation with North Korea.
Musk—a fierce and long time critic of A.I. who once likened it to "summoning the demon" in a horror movie—said in a Twitter post that people should be concerned about the rise of the machines than they are.
Ironically enough, it was OpenAI's own technology that managed to beat two professional eSports players at a major tournament, after only two weeks of practice. The Dota 2 contest is known to be extremely complex, pitting two teams against one another in a virtual battle arena. After this tournament, Musk posted what appeared to be a photo of a poster bearing the chilling words "In the end, the machines will win."
The question is will Ai become man's greatest challenge or does it simply allow man to be more productive? The jury is still out on that question, but we believe Ai and the machines it's spawning have the ability to profoundly change our world.
As you will see in the videos below, it has already changed the landscape in such industries as agriculture, which used to employ hundreds of thousands of workers that have since been displaced by technology.
You may have read recently that Amazon purchased Whole Foods. It is speculated that Amazon will introduce same day delivery of prepared foods and automated checkout technology that could see the front end of grocery chains devoid of cashiers.
My wife works at Publix here in Tampa as a Floral Stylist. I have joked with her that the future has her as the only human in the front end of Publix. The majority of her job takes creativity and that is something that technology cannot replace. She, of course, is not amused!
So as you watch these next two videos think about the ways Ai could change your profession? It has already changed and is changing the financial services profession forcing lower fees, more focused planning and a move towards clients with greater sophistication to stay ahead of the roboadvisors.
Is it any wonder that the majority of robots in industry today (see chart above) are in high wage states? I think this trend will only continue.
I hope I have spurred you to think bigger about the future. Maybe to take that class on the latest version of Windows or some software application that you have been meaning to take.
Technology has the ability to radically change our world! I for one believe that if you are mindful and plan on the change, you can stay ahead of that change and benefit from the technology revolution that is upon us!
Let me know your thoughts in the comment section below.