Q. As I approach retirement age, I want to get a snapshot of how I stand financially. I have securities that I inherited at one firm and a 403(b) account with another firm. I have had each of the firms evaluate my financial position in order to project where I will stand in retirement. They both have recommended that I consolidate everything with their firm, but one forecast is a fully funded retirement with money left over for my heirs after I pass away at age 95.
A. Most of the difference is in what each firm is assuming about future investment performance. One, for instance, may be anticipating very low returns and very high inflation. Another might be anticipating historically average returns and historically average inflation. The historical return on a balanced portfolio, for instance, is about 8 percent. Factor in average inflation of 3 percent and you have a real return of 5 percent. Now suppose the assumed returns are 6 percent for a balanced portfolio and 4 percent for inflation— then you have a real, after inflation, return of only 2 percent.
That’s a big difference. It is large enough that one portfolio would have a high probability of lasting 25 or 30 years while the other might last half as long.
As a practical matter, you don’t need to “believe” anyone. No one knows the future. Not them, not you, not me. All we can do is plan for the worst and hope for the best. That usually means taking a close look at your living expenses and reducing them— and no one wants to do that. My personal guess for the future— and it is just that, a guess— is that both equity and fixed income returns will be lower than their historical average while inflation will run at its post-war average of about 4 percent. That means retirement savings aren’t going to last today’s retirees as long as they lasted for people who retired in the 80s and 90s.
Q. We have been paying for long-term-care insurance since June of 1998. The company we are insured with is increasing our premium by 50 percent in December. They are offering an Enhanced Contingent Nonforfeiture Benefit if we stop paying. Do you know of a way to evaluate our options that include reduced coverage? —B.B., Port Ludlow, WA
A. Events like this are one of the reasons you don’t see much about LTC insurance in this column—The insurance company raises your premium after you have paid in for many years, when you are old enough to be more likely to need long term care and when your income may have eroded enough that paying the original premium is difficult. I believe it happens too often to make LTC insurance a reliable solution to the problem of long-term care.
What you are being offered, the “Enhanced Contingent Non Forfeiture Benefit,” is something now required by most states if an insurance company raises its premium over the original premium. Basically it is a way to recognize that you are entitled to something after paying premiums for many years. The benefit allows you to stop paying premiums in exchange for accepting a lower policy benefit when, and if, you eventually make a claim. With the benefit fixed at a lower amount you will have less protection than you have now. So you will be exposed to greater expenses if you eventually need long-term care. The best bet is to take the reduced benefit… and hope for the best.
It is very likely that long-term-care policyholders can expect many such premium increases in the future. The reason for this is simple— insurance companies are like the rest of us. They depend on investment returns to support a portion of the benefits they promise. They price their LTC policies in the expectation of investment returns as well as premium income. When investment returns are lower than they expect, they have to raise premiums.