by Dave Kutcher
Our clients at Frontier Retirement are almost exclusively from the 55 + age demographic. That makes sense since our concentration of services is in retirement planning. Financial goals and objectives are different for folks in this age demographic than they are for younger folks. Risk management is significantly more important and making wrong choices can be severe because time isn’t always on your side in this age group … meaning, there is less time to recover from either poor economic conditions or poor choices as to how your money is invested as well as potentially waiting too long to seek out risk mitigation solutions.
In the course of evaluating risks that can impact this age demographic, it is important that folks consider what impact the need for long term care (LTC) might have on their financial well-being in the long run. We evaluate these risks every day and we help bring solutions to our clients that make sense for mitigating the potential financial disaster that occur even with only one spouse requiring LTC during retirement.
The types of insurance solutions that are available for helping to manage this risk are numerous. The LTC insurance policies of the past are dwindling and the vast majority of current options today are in the category we call “hybrid” plans. Hybrid plans tie the LTC benefits to a life insurance or annuity base product and provide significant favorable attributes over the old individual LTC plans that are suffering from a multitude of issues.
So, where is the good news, you ask? Well, as most of you are aware, interest rates have risen significantly over the last 12+ months. When evaluating how that impacts the insurance companies that offer the LTC solutions, it seems reasonable that the majority of their general portfolio assets are invested in interest rate sensitive investments … aka BONDS.
So, these companies are now buying new bonds at much higher interest rate yields than they were able to in the past several years. In doing so, they will increase yields on their portfolios and that additional yield will translate into the products that are both in-force as well as those to be offered going forward. So, the good news is there should be moderate to significant improvements in product performance in this market segment … something that we look forward to in helping our client’s plan for this very real risk at this time in their lives.
Well, we said we have good news and bad news … so, what then is the bad news? The bad news is higher interest rates don’t necessarily help in other areas of our financial lives. Higher interest rates mean money has other choices besides the stock market so funds you have invested in your retirement plan that are allocated to the stock market might take the brunt of this change in economic factors.
Looking forward, we need to understand there were lots of companies out there employing debt (borrowing) to operate their business and they were doing so when already in a precarious position. These companies borrowed money at significantly lower costs in the past because the rate they were paying was relatively low … let’s call it 7%. Well, now that same borrowing is costing them 12, 13 maybe even 14% and will likely cause many companies to default on their debt and possibly close their doors. That does not bode well for the stock market. Market volatility is not behind us … we may very well be facing some tumultuous times ahead and interest rates may play a very real part in that turmoil.
This article is not to portray a doomsday scenario ahead. Far from it. For our clients who are in the distribution phase of their financial lives there is even more good news in terms of higher interest rates. We will save that topic for another issue. Suffice it to say though that there is much to look forward to and we would love the opportunity to share our optimism with you.
If you are 55+ years old and looking for help in planning for the next phase of your financial life, give us a call and let us share with you how both the good news and the bad news might impact you and your specific situation.
I am Dave Kutcher, a retired Marine Corp Captain and a managing principal at Frontier Retirement in Eagle River, AK. You can catch me on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio. Frontier Retirement, 10928 Eagle River Road; Eagle River, AK 99577, (907) 795-7452.
