Transcript
Paul Winkler: Welcome to The Investor Coaching Show, Paul Winkler. Well, we all came from a background of being brokers, insurance agents, and selling investment products. That’s typically how you get in the industry. You sell and go to work for a company. They have products that they want you to sell and get out there and you learn a few things and get out there and sell. And that was kinda my introduction to finance, the insurance industry, selling life insurance products, long-term care, disability, even property and casualty, homeowners, and auto insurance.
The Financial Industry
For those of you that don’t know what that is, homeowners auto insurance, business insurance, you know, health insurance plans. I mean, we did just spend everything and you know, I look back and go, man, I’m glad I did everything. Cause now there’s not a lot that I run into that I haven’t dealt with or sold in the past. We sold mutual funds, commission-based mutual funds, commission-based annuities, all of that. And, you know, I just came to this conclusion that you know, that I didn’t want to be on that side of the industry anymore.
So, I moved away from it and had a day of reckoning where, you know, the broker dealer I was working for, the company I was working for, you know, it’s an investment company. So you see commercials for investment companies and you hear commercials for investment companies and securities offered through it. And you know, you’ve got a broker dealer and typically, you know, the advisor works for that broker dealer and it sells for that broker dealer and mine was going bankrupt and they were actually going out of business because of a lawsuit. And I was like, ah, I’m thinking I’m gonna get outta here. And the compliance officer goes, well, Paul, what are you going to do? And I said, I don’t know, what are you going to do? I got to go to work for another broker dealer. I’m going to start an attorney, you know, and that’s what I do. I do compliance for broker dealers and say you ought to go become a registered investment advisor.
You’ll set up a registered investment advisory firm. I was like, great. What’s that? They said, well, you represent your clients. You don’t represent the companies anymore. You know, you, and that’s the thing, you know, the beauty of it is, I have all this background, a lot of different things. And then I brought up other guys around me and ladies around me and we, you know, just that was, that was it. We wouldn’t get away from that. Now I want to talk about something. So one of the things I like to do is talk a little bit about case studies from time to time, you know, a situation, you know, what I’ve seen in my career. And I’ve seen a lot, you know, doing this over 30 years in situations that I’ve run into and how you can help avoid messes that can be created by some of these situations, because it’s much better to learn by other people’s mistakes.
Nursing Homes Can Be Extraordinarily Expensive
People actually have good moves sometimes, when they do the right things. And then all of a sudden their whole world falls apart and all their preparation has paid off. You know? So one situation that I’ve had, one I was born to work with for many, many years. And one of them actually ended up with the husband and ended up with an illness. And that illness is something that very, very likely can lead to a nursing home stay, where somebody can’t take care of themselves anymore. And you don’t think about it necessarily as a husband, wife, and you think, I’m going to take care of her and, you know, make sure that she’s, you know, okay.
I don’t want to send her off to a nursing home. You hear people say that. And the real issue is, is this. Sometimes you can’t take care of that person. And the reason being that you can’t watch them all the time, you know, you might have a, a person that gets up in the middle of the night and does something and you’re sleeping. You have no clue that they’re doing it. Or, you know, you have been with the person all day long, you gotta get out, you gotta go grocery shopping, you gotta go get things. You gotta get outside the house. And, you know, you need to get away sometimes just to have a break from constant watching of the person. And it has nothing to do with, I, you don’t, I don’t love you anymore or anything. It has everything to do with, you need a break and you can’t watch somebody all the time and it’s draining.
And you know, I’ve seen that so many times in my career where, you know, you have that and they’re just like, Oh my gosh, what do I do? Well, that’s why nursing homes exist because you have, you know, a staff of people watching a lot of people. And, you know, sometimes it’s intermediate care facilities are a step up to that. And then you go to, you know, nursing homes and maybe Alzheimer units in nursing homes or off-hour separate units. And, you know, the reality of it is, hiring somebody to come in there and help out with things becomes extraordinarily expensive. And you can take $20 an hour and, you know, look at the number of hours in a day, obviously, right, 24 and you got $500 and then he’d go take that time 365 days a year.
And before long, it’s extraordinarily expensive. You can’t do it. It doesn’t work. The economics can’t possibly work. So what you do is you have a nursing home or some kind of a facility that you go to and you go, Whoa, wait a minute. Those things can cost $70,000. You know, some States it’s even higher than that. And even in the state of Tennessee, it can be significantly higher than that, depending on the level of care needed. And you got, you know, what on earth do you do? Well, you can get long-term care and you know, those types of things. And some people look at that and go, well—and this is this scenario that I often struggle with, just because, you know, the policies can be terribly expensive.
For some people, you can’t qualify. If you have certain healthcare conditions and then benefit long benefit periods are a thing of the past. You know, people typically do not get really long benefit periods on long-term care and which is okay, because most people don’t stay in a long-term care facility that many years, you know, a couple, three years, and that’s about it. And that’s a typical stay, you don’t have the cases where people are in a nursing home, you know, for 10, 15 years or anything like that. Now there are cases that happen, you know, you’ll have some people, I have a family member that has actually been in a nursing home for quite a few years, but that’s unusual. It doesn’t happen as often.
How Can We Prepare for Retirement?
So typically benefit periods tend to be fairly short and, you know, a whole, what else do you, do? You know, how else do you prepare? Well, one really good thing is preparing for retirement, right? And make sure that you’re super well prepared for retirement. So that in that eventuality you have what it takes. And one such case I don’t want to talk about as husband and wife, they both were professionals working for companies. And, you know, one of them was more of a self-entrepreneur type of, you know, scentless selling and sales. And what happened was this is that they both kind of knew that they really needed, needed to do planning.
And maybe it was instilled in them from when they were young, but they were savers, you know, in 401(k)s. And they made sure that they at least took advantage of the match if not more on their 401(k). And I always recommend people do that, you know, make sure if you’ve got a 401(k), okay, go up to, and even many times beyond the match, it just depends on the investment vehicles. Inside many companies, their 401(k)s are very, very heavy, large US company, very large US company-centric. They may have very lousy choices outside the US for international smaller companies and, and even US small companies and value companies and things like that. So it really depends on what the choices are as to whether I go above that level.
Now in recent years, that would have been fine. And, some people may feel really bulletproof just because of the fact that large US companies have done well in recent years. And I’ve talked about that a lot lately. So I won’t belabor that right now, but that is typically what I’m looking at is what is the level of choices? What kind of choices do you have? What level of diversification, you know, because you can go, you know, 20-year periods with no returns in those asset categories, if you’re not very broadly diversified, and you’re mainly in, you know, bigger US companies, which they tend to be more popular, you know, you a familiarity with those types of companies, because you hear about them in the news every day. So 401(k)s tend to focus on them a lot, but if you have lots of broad choices, that would be where I would go, even above the match on the 401(k) and typically saving the more the merrier that what you can do simply because at some point in time, you’re going to need to live off of money.
You have come that you’re earning right now, living on well, less than that is the idea and smooth your consumption as we call it. In other words, I have a high income. Now I will have no income in the future. So I reduce my income now by deferring some of it into a 401(k) plan by investing some of it, deferring it to the future. And then when I’m in retirement, that’s when I’m living off of that. So you basically balance it out. Now that is, you know, case number one, one of the things that you want to do now, another thing that you want to do is you may want to use non-qualified investments, which are taxable investments.
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Taxable Accounts
You know, so if I have an account with a 401(k), or if I’ve got IRAs or Roth IRAs or simple plans or CEP, they all have one thing in common, which is that they have contribution limits. And you’re basically limited on how much money you can put aside for the future, especially for a higher income earning person. That can be a problem. You know, if you’ve got a higher income and you’re basically limited to a smaller amount of money that you can put away into these qualified plans, retirement plans like 401(k)s, 403(b)s, and simples and SEPs, and those types of defined contribution plans as we call them, then you got a problem and cause you’re not going to have enough money in retirement.
So you might have to use actually non-qualified accounts, which don’t have limits because they’re taxable accounts. The government doesn’t put a limit on how much you can put away. So what if you don’t have income coming in and you can’t make contributions to your 401(k), what are you doing in that particular case? Well, that’s where disability insurance comes in. You know, you have a CC of work because you’re disabled, you can’t work. And most disabilities are not of a nature that you got into an accident and Oh, no accident, let’s say, and now you don’t have the use of your arms and your legs anymore.
Life Insurance and Long-Term Disability
Most disabilities are a lot different than that. You know, think about the people that you’ve known that ended up with cancer. I think that the people that you’ve known that ended up with heart disease and they ended up laid up and they can’t do anything before that ended up with maybe just, you know, back injuries. Maybe they have a job where it’s a lot more physical and they physically can’t, you know, get up and do the things that they used to do. Maybe, you know, maybe they can move around a little bit. But, you know, lifting is out of the question and maybe their job required a lot of that type of physical work. Well, here, you’re up a creek. I mean, what do you do in that particular case? I mean, it’s basically a living death and we buy life insurance to pay.
If I am not around fogging a mirror and I buy life insurance to actually make sure that, you know, people that used to depend upon my income can still depend on an income from the life insurance proceeds. But what do you do if you’re still around and that’s disability? You know, so a lot of times people at workplace plan, so they’ll have disability programs, you know, group disability, short-term long-term, and short-term, you know, I’m not as adamant that somebody, somebody have that, you know, that’s very optional may because, you know, I insure things that I can’t do without. I can do without, you know, three months of income. I could do without that. It wouldn’t be the end of the world, but doing without 30 years of income could be a problem.
So long-term disability is really, really important. But one of the things that in this particular case study that I had, and this is real life, I mean, this is, this is real stuff. As the person knew that, you know what group disability can be taken away from you. And, you know, let’s say that the group cancels the plan, or you leave the company, you’re no longer working at the company or whatever you lose the disability coverage and you’re toast. You don’t have anything. So individual insurance is something that this person actually got. And that was because one, you know, one of them actually worked for an insurance company and just knew about disability insurance and about individual disability insurance.
And I used to sell this stuff years ago. There were a lot of fairly big companies out there that sell this type of product. And I became really, really aware in going to a workshop one time where this dentist, he was a retired, he was a nicely retired dentist. He was a disabled dentist and was retired, forced into it. And what ended up happening is this guy was in a wheelchair, and I will never forget it. And he comes in and he talks about what it was like being a disabled dentist. And I was like, Whoa. And, and you know, ever since then I’ve had family members. I’ve known people. I’ve been doing this a long time. I’ve seen a lot of it, you know, and you know, people not being able to work.
And then they, all of a sudden, need a paycheck. I had a friend of mine actually was on a basketball court with a bunch of kids and ended up with a neck injury and they literally got run into by him. And bam. Now he’s got a neck injury. He can’t do it. He didn’t get knocked out. It was little by little, little by little. He was, you know, he could work, you know, eight hours in a day. And then he got back to you to work more than six hours because he gets super, super tired and the neck is bothering him and all that. And then it’s down to four hours a day and it just gradually went down and, you know, individual disability insurance is where you pay a premium yourself.
It’s your policy. You get to keep it. Nobody can take it away from you. And you know, you’ll have policies that are what are called non-cancelable, which means that they can’t raise the premium. They can’t ever cancel you, hence non-cancelable. And then you get guaranteed renewable, which is they can’t cancel you, but they can raise the premium. But in my experience, as long as I had done it, I just, and I still haven’t seen where companies go in and raise the premium that morbidity statistics are pretty stable, and I just don’t see it. And you get quite a nice discount by going with a guaranteed renewable type of contract, and then you’ll have different benefit periods. You might have, you know, if you’re in a really high risk occupation, you may only be able to get 5 years of benefits or 10 years of benefits where the insurance policy pays for 5 or 10 years.
But if you’re, you know, let’s say you’re a white collar worker, let’s say that you’re in maybe a physician or an attorney or a salesperson or whatever. You might be able to get a classification with a longer benefit period. Now, maybe at age 65 or 67 or something like that. And in this situation, the person had a disability policy. Now, not only that, but also didn’t have a position where they hid their social status. They hid their income. So they paid theirs. And some people do that. They get paid under the table or they accept payment under the table for what they do. And the problem that you run into when you do that—hey, it’s not legal. The other thing is this: If you’re not paying your social security benefits, your social security benefit gets reduced, you know, later on.
So your declared income is lower. And all of a sudden, now when you get to retirement and you have this paycheck that would have taken you all the way till death, do you part, and that paycheck is much reduced because of the fact that you hadn’t been paying the social security premiums. This can be an issue. You have to keep in mind, tell you what the, you know, I want to continue on with this because there’s more to the story that makes this really interesting on how, in this particular situation, this case study, everything actually worked out pretty well. There were right things that were done.
What Went Right?
And I think that’s one of the things that you want to do is you go, okay, I can look at what went wrong all day long, but what went right? When somebody does something right, what did they do that specifically made things good?. Okay. So I’m going to talk about that more right after this. You’re listening to The Investor Coaching Show.
Alright. Back here, Paul Winkler on THe Investor Coaching Show. So back to this case study, so situation, a couple worked for many, many years and into retirement, all of a sudden illness strikes, and now they have to depend upon their planning.
You can’t go in and you get them all again and do it over. I mean, basically, you’ve got to rely on your planning. So learning from an experience where somebody did it right. I just want to use this because I think it’s so important, you know, because you want to avoid people’s mistakes, but you want them to go, okay, well, it’s great to avoid mistakes. What, what can I do to make, make sure that I do it right now? So the first one we talked about was making sure that you’re putting money in retirement plans, qualified plans, 401(k)s, 403(b)s up to the match, maybe above the match, maybe significantly above what your employer will match. And you’re making sure you diversify the portfolio is a huge thing too, you know, making sure that you have all different areas of the market, not just focused on what seems to be myopically, the thing, the investment area of the day right now, which is just stick everything in big US companies.
Individual Insurance Policies and Group Insurance Policies
Cause they’re, they’re just, you know, rockets and they’re super expensive right now compared to other areas of the market too. And, you know, so it could be a huge, huge mistake going forward. And then the second thing is making sure you have disability insurance. Now, a lot of times companies are going to have group disability insurance, and you might look at actually putting an individual policy on top of that. So let’s say that you have a group disability policy, it may cover 60% of your income, maybe 50% of your income. You may be able to do a buy-up. In other words, buy more insurance to cover a higher percentage of your income. Now, if you have a lower percentage, you can actually add to that an individual policy.
This is a policy that you own yourself. You pay the premium on you, pay it with after tax dollars is pretty much the way you do it. So that hence the benefit will be tax-free because, you know, if you have a disability policy and it’s, pre-tax like a group policy and it was paid for by the employer, or, you know, you have it under a cafeteria plan, let’s say, and you pay with pre-tax dollars, your benefit ends up being taxable. And so you gotta keep that in mind now. So have a policy that you’re paying on yourself. Now, if it is something where you have a group policy, sometimes I’ll look and say, Hey, can we get some kind of a guaranteed issue rider on this thing?
In case the person loses their group disability insurance, they can actually get a policy that is guaranteed issue that the insurance company, no matter what their insurability is, you know, so you’re, let’s say you’re in between jobs, for 20 years you’ve been working for a company that had group disability, insurance, and you’re in between jobs because you got laid off or whatever, and you’re going to work for another company and they don’t have disability insurance. And you run into a situation where you have a health problem now and you’re going well, I can’t go to their underwriting. I can’t actually have the insurance company go, Hey, are you insurable now? And we’ll we, you know, put disability, well, no, we’re not going to put disability. Cause you’ve got this health problem.
We’re not going to issue a policy on you. Oh great. What do I do? Well, if you’ve got a policy with the guaranteed issue writer, you can actually get more insurance without going through the underwriting process. You know, you can get guaranteed policy benefits and that can help out significantly when this particular situation, all their insurance was individual insurance, all of it. And of course what happens as I said, as they get closer to retirement and the disability is total can’t work, can’t do anything. Then you get a social security disability that pays a benefit.
You can get your social security benefit before age 62, if you’re disabled, because social security has a disability benefit. Now it’s fairly low compared to what your income has been. And you can actually see this on. If you go to ssa.gov and get your social security statement, or if you know, they have been mailing them like at every fifth birthday, you know, like at age 40, 45, 50, 55, you can actually look at it, see what your disability benefits are on there. Now it’s going to be based on your income as well. So hiding income again, can be a detriment to you because it reduces your social security disability benefits as well. But if you have a disability policy that doesn’t have a social security office set, which means that if social security pays, they’re going to reduce your personal benefit.
Let’s say your total disability benefit is $3,000, $2000 from your individual policy and $1000 from your social security. And then all of a sudden, you know, if you become disabled and you have an offset and social security pays instead of your individual policy paying $2000. It may only pay $1000 because social security paid the other $1000. You know, so let’s say, well, your individual policies $2000, but if social security pays, that’s going to be offset by how much social security pays. So you can end up with a situation where your benefit isn’t any higher than what the individual policy is.
In this situation, they didn’t have an office. So they get both benefits. Nice, really helpful. Then, then the other thing is, is that they’ve got that. And they had a pension because they also had a pension at one of the companies. So that pension kicks in at 65 when the disability benefit stops. When the benefit from the insurance company stops, the pension kicks in, then there’ll be getting the pension and the social security, both of those. Now, how do you bridge the gap? Well, the rich, the gap with retirement savings is what you can do.
And if you save for retirement, you can have that money and use it for that. Bridging that gap between the time when you’ve got social security and you’ve got the disability benefit and the pension coming in, and then you can have the pension on top of that. That becomes really nice, especially if you’ve got to pay now for some kind of nursing care benefits. So you can see what happens here all of a sudden, now you might have to have long-term care expenses and you might have $60,000 of benefit or cost for the long-term care facility.
And then you might have the one spouse that has to stay at home. They still have to take care of themselves. They still have the expenses of upkeeping the house. And you can start to see where if you had done no planning, this could be insurmountable. So this is why it’s so critical. You know, studies show that people that do financial planning have way more peace of mind than people that don’t. And the reality of it is there are a lot of moving parts and I’ve only hit a couple of them here. It can get really complicated in a hurry, but there are so many different things to consider. And I think about insurance, whether it be life insurance, with disability, insurance, homeowners insurance, auto insurance, whether it be long-term care insurance, whether it be your property coverages and things like that, those are, those are all like a moat around your house or around your castle.
Get a Financial Planner
So to speak, you know, your castle is your financial wealth is the way I like to put it. And the castle is the thing that you’re trying to protect with all of the insurances. And what are those insurances? Well, disability is one of them. And I just thought it would be one of those ones that I hadn’t talked about in a while. And I figured I just needed to bring it up because I think it is one of the most overlooked types of insurances out there, period. End of sentence. Very few people think about it, but it is one of the biggest reasons for mortgage foreclosures is disability. And people don’t think about that. So, you know, hopefully, you know, some of this has helped somebody out there who has been thinking about man, you know, why do you know, what kind of planning should I be doing?
What should I be thinking about? Well, this is one of the big areas to be thinking about. And this is one of these areas where I tell people, you know, get a fee-only financial planner, somebody that doesn’t sell, you know, it’s, you know, it’s not a problem to have a person that sells insurance get a commission because it’s almost always sold based on commission, but it’s a good idea to have somebody that doesn’t have a dog in the fight, giving recommendations, saying, Oh, here are ways some ways to cut some costs and some things that you might think about to keep the expenses reasonable, and somebody that’s looking at the entire financial picture to tell you what types of insurance that you need. And a degreed family planner sounds like a commercial.
And it is, I mean, it’s sort of this because that’s what we do. And that’s, and I don’t talk about that a whole lot, but you know, that is one of the things that I think makes what we do very unique. And anyway, listening to The Investor Coaching Show, Paul Winkler.
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