Let’s review the five greatest challenges alternative investments present to investors.

1. Lack of transparent information on the investment strategy

The information on alternative investments is not transparent: each fund or investment interest keeps information very closely guarded so that other alternative investment or hedge fund managers do not use it to benefit themselves or to trade against their competitors. Most offering memoranda produce documents that range from 80 to 200 pages. Each is vague on specific details of the investment strategy while outlining all of the ways the investment may fail and limiting the offering entity’s liability should the investment strategy fail.

2. Lack of regulatory oversight

Much of the alternative investment universe is either thinly regulated or virtually unregulated. Historically, government regulators only allowed the wealthy to invest in most forms of alternative investments for two reasons: the wealthy were by definition sophisticated and therefore would have their attorneys and accountants review each deal and provide their own due diligence; they could also afford to lose money without undue suffering. The regulators set very specific “accredited investor” guidelines. Fortunately or unfortunately, most attorneys who have been in practice for 10+ years now qualify as accredited investors based on their income and their total net worth.

This might be viewed as unfortunate because the original “accredited investor” guidelines were not indexed for inflation. As my revered grandmother once said, “A million dollars is not what it used to be.” “Wealth inflation” allows many attorneys to “play” in an area once reserved for the ultra affluent. While this is good because it gives us all many investment options, it’s important to remember that the alternative investment area is also one of the riskiest and least regulated.

3. The broad nature of the definition of “alternative investment”

By its very title as an asset class, an “alternative investment” is anything other than a “conventional” stock, bond or mutual fund. It is very easy to get lost in the complexity of this world. Most investors begin to focus on a specific subset of alternative investments if for no other reason than to whittle down the options from which to select.

4. The high fees and high minimums inherent in the nature of alternative investments

Because of the individual nature of alternative investments, they often require more employees to execute strategy. For example, you may need a group of business experts who research problems in the market segment, and desks of currency traders. Annual fees can range from up to 2-5% of the assets, on top of which are success fees that can range from 20-50% of the growth of the investment annually or upon distribution. Minimum investments can also be high, ranging from $250,000 to $5,000,000 per investor.

5. Illiquid Investments—Easy Buy, Hard To Sell

For the most part alternative investments are either thinly traded—meaning that there are a very small number of buyers and sellers at any one time—or they are not traded after the initial investment. Some alternative investment funds allow you to redeem the investment if they have the cash on hand, but only at a discount to the original purchase price, which is often 15-20% less than you originally paid. When a fund does not have its own redemptions and when an investment is thinly traded or not traded at all, individual owners may actually have to find someone else to buy the investment from them. That is, they may not be able to rely on a stockbroker or other “market maker” to sell their shares. This is often called “the greater fool” method of selling an investment because you must locate someone more foolish than you to whom you can sell the investment. If you are selling your investment to another person in a secondary sale, you may encounter a very real problem of disclosure and liability. Generally, once you buy an alternative investment, you own it for the duration of the investment period.

Despite these real challenges, alternative investments are an important part of wealthy clients’ asset allocations. They should be used judiciously, with ample caution and never with money that may be needed within short periods of time. For most people, keeping alternative investments to no more than 5% of their total portfolio is within their risk tolerance. Just remember: anything that looks too good to be true is probably false.

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If you’ve got another 20-30 years of tread left on your metaphoric tires, what’s it going to be like? How will you get along with your spouse when you are both home “24/7?” You pledged “for better or for worse,” but nobody mentioned being home for lunch together every day for the next 30 years.

In our later years, most of us will nurture old and new hobbies, perhaps volunteer or mentor, and pursue other meaningful outside interests. To thrive through midlife and beyond, it’s advantageous to understand the “Domains of Living.”

We Live In Seven Intermingling Domains

There are four operational domains that affect our experiences in the world: Wealth, Health, Home, and Life Structure. There are also three inspirational domains that determine the quality of life and well being: Relationships, Cognition, and Spirituality. Taken together, these domains describe the weave, colors, and patterns that compose the fabric of our lives. They have always affected us, but we tend to take more notice of them “in retirement,” if only because we have both the time and the wisdom to appreciate their beauty, complexity, and importance.

These domains don’t line up in any particular order, nor do they occur one at a time; rather they intermingle somewhat chaotically, triggered by the major transformative events of midlife.

Understand The Four Exterior Domains

1. Wealth is important to a good retirement as we rely on our hard-earned savings for income. Those in middle age and beyond need to manage this domain well so that you have enough for all your needs. Is your Will up to date? Do you have the appropriate Inter Vivos and Irrevocable Trusts? Have you updated your Medical Directive and Durable Power of Attorney? Have you designated a health care “agent?” Have you considered what kind of medical treatment you want near the end of life? Has it been well articulated to your family and loved ones? Can your designee locate the various documents that will be needed to facilitate your wishes before and after death? Have you considered how comfortable you want to be near the end of life, or expressed how you want to be treated? And finally, perhaps most important, have you taken the time to tell those closest to you—your children, grandchildren, spouse, friends—all you want to say to them, the things you’d want them to remember about you? These are our truest legacies.

If the answer to any of these questions is “No,” “It’s on my list,” or “I haven’t thought about it,” you may want to order a copy of “Five Wishes,” a pamphlet published by Aging With Dignity. The pamphlet includes a clear explanation of the issues addressed by the above questions and also provides forms that, when completed and signed, meet the legal requirements of most states.

2. The domain of health incorporates nutrition, exercise, laughter and playfulness. Most readers would affirm the value and importance of good nutrition and daily exercise in our effort to thrive; the nuance, however, is to make it a primary focus. Mother Nature seems to work against our best interests: our bodies don’t metabolize food as well at 60 as at 20, so we have to work harder just to keep the status quo. It’s more of a struggle to go to the gym because there are so many things we’d rather do or need to do!

One of the key ingredients of health is maintaining a sense of humor and finding as many opportunities as possible to laugh and express joy. According to Elizabeth Scott in her “About-dotcom” Guide to Stress Management, “Laughter reduces the level of stress hormones likes cortisol, epinephrine, and adrenaline. It also increases the level of health-enhancing hormones like endorphins and neurotransmitters. Laughter increases the number of anti-body-producing cells and enhances the effectiveness of T cells. All this means a stronger immune system, as well as fewer physical effects of stress.”

Among many web resources, My Comics Page and PM Caregivers provide a daily dose of humor for those of us wanting to age with a smile on our face!

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Boomers are proud to know they’ve played such a significant role, but the best is yet to come. On January 1, 2006, the first Baby Boomer turned 60. Half of the leading edge cohort will likely live beyond age 90 while the trailing edge can probably add 10 or more years to that if biotechnology and gene therapies fulfill even a fraction of their promise.

Recent polls of leading edge Baby Boomers indicate that maintaining good health—physically and financially—worries them most. Certainly concerns over stock market volatility, low rates of return on savings, and loss of company-funded pension plans in favor of worker-funded 401(k) plans is fueling anxiety about having enough money to retire in comfort. Paradoxically, the more science promises to extend lives, the more Boomers worry about “outliving the money.”

Whether good health or funding retirement is their top concern, the Boomers’ underlying imperative for the next 30+ years is the desire to thrive. Many are asking how they can achieve this goal through and beyond midlife.

Map The Three-Stage Journey Through Middle Age

In their book Thriving Beyond Midlife, authors MacBean and Simmons suggest that having a “map” to help us understand the journey and the issues raised along the way helps us thrive.

Midlife (or middle age) is identified as the first of three stable periods that probably start after the kids have been educated and are on their own, and extends not to a specific age but rather to a specific event they call Ready or Not—a sudden life change that can include loss of a spouse, the significant illness of a spouse, or one’s own prolonged illness. It tends to occur quickly, and proves both more intense and dramatic than the period leading up to or following it.

Ready or Not leads to a stable time period called The New Me. Imagine the death of a spouse: After the grief and sense of loss have somewhat subsided, the surviving spouse must completely redefine him or herself; she’s no longer “Mrs. Jones” in the context of having a husband. To thrive (and many widow(er)s do), she must move on and accept a new persona: Herself as a single person.

Ideally, The New Me is a period of stability and thriving, but eventually another event comes along (sometimes many years in the future; sometimes just months away): Like it or Not. While probably just as intense as Ready or Not, this event is more personal as it defines our own transition into frailty and dependence. The relatively stable third period that follows is referred to as The Rest of Living, with emphasis on “rest.” It’s a time of expression in realms other than the physical, and can be brief or prolonged. It leads to the last phase, which is, of course, Dying.

Envision The Future Conceptually, Not Chronologically

One of the most valuable aspects of the map is that it helps to define the future in terms of phases and events instead of ages. Rather than contemplating when “old age” might begin, it encourages us to think conceptually rather than chronologically, as we progress through the map’s stages.

When we think about the next 30+ years in terms of the map, we realize that we need to revamp some other notions and even some of our vocabulary. We used to think of “retirement,” for example, as synonymous with “old age,” but retirement is simply a transition from going someplace five days a week at 7:30 in the morning, and then not doing this. It’s an entirely inadequate word to describe the richness of those many years. “Old” is certainly a relative term; everyone knows people in their 40’s who seem “old” and others in their 70’s who seem “young.”

If their goal is to thrive, leading and trailing edge Boomers alike are best served by talking to financial service professionals who can help them explore the territory “beyond the money.” It’s never too early to pay attention to concepts defined by the midlife map.

In the next article in this series, we’ll address “Where Will You Live?”—a process you can use to consider issues you need to confront now so that you’ll be prepared when The Rest of Living phase begins.

____________
RESOURCES

MacBean, E. Craig and Simmons, Henry C., Thriving Beyond Midlife, Institute for Integral Retirement Planning, 2006.

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Shore Up Your Health Insurance

Virtually all of us are covered by group health and life insurance; some have dental care, and others group long term care insurance. We probably take those plans for granted, assuming that our premium share is nominal compared to the actual cost. But as we Baby Boomers begin to appreciate that “retirement” (we prefer to call it “thriving beyond midlife”) doesn’t necessarily begin at the arbitrary age of 65, we have to rethink those benefits. Many of us may chose to work part-time as a way to reinvigorate the last third of our life. If we work fewer hours than those needed to qualify for health plan eligibility, health and dental benefits should be available under COBRA—but neither group life nor group LTC are mandated under COBRA. In any case, eligible benefits—at a personal premium of 102% of the plan’s actual cost—can be continued for only 18 months.

If you end up with a gap after COBRA and before Medicare eligibility on your 65th birthday (Medicare doesn’t believe in a flexible retirement age), you still have options. Working spouses can provide dependent coverage under his or her plan at the next open enrollment period. Otherwise, determine what your state mandates in terms of available health insurance without reference to pre-existing conditions. For example, Massachusetts has some of the best options in that regard for individuals; California allows businesses with just two employees to obtain such coverage. (Spouses make a great addition to the solo practitioner team).

Depending on where you live, a benefit-rich health plan can cost more than $2,000 a month for a couple in their early 60s. Even high deductible plans combined with a Healthcare Savings Account (an “IRA” for healthcare expenses) can still run close to $20,000 a year. While dental coverage will likely be available with no eligibility requirements, look closely at the benefit caps and deductibles compared to the premiums you’ll pay. The first year or two of coverage will arbitrarily limit “major” expenses to avoid anti-selection. Even when such limits are lifted, dental insurance is often not economical when premiums are compared to benefit maximums. Remember, though, that our bodies and our teeth need more attention as we get older: bone loss rates accelerate; periodontal disease is more common and expensive. If you choose not to pay dental plan premiums, consider setting aside the amount of premium you’re not paying as a reserve for those expenses.

Don’t Enroll In Social Security Prematurely

According to the Social Security Administration, well over 50% of those eligible at age 62 have elected early benefits. Yet in most cases a decision to elect at age 62 rather than 66 will forever lock in a 25% reduction in monthly income. (If you were born from January 1943 through December 1954, your normal retirement age for full Social Security is 66; those born in 1960 and later will wait until age 67 for normal retirement benefits, with fractional years interpolated between 1954 and 1960). Deferral to age 70, on the other hand, can add 32% to the normal retirement benefit. That’s an almost 60% difference in monthly income benefits for those who believe they will live well past age 85.

There can be good reasons to sign up for early benefits, but don’t do it just because you’re worried about the viability of the program. Although it is often mischaracterized as a financial disaster ready to bankrupt the country, Social Security is projected to be self-supporting until 2040—when early Boomers are turning 94.

Also, while the last major change in benefit structure and funding occurred 25 years ago, given the politically incendiary nature of making any changes, it is reasonable to assume that future changes will be initiated progressively. In other words, the cost of early election merely to “protect” benefits is most likely a higher price to pay than necessary.

Therefore, don’t elect early benefits simply because you can. While there are exceptions to every rule—and the rules are incredibly complex—most financial advisors recommend that if you expect to earn more than $36,000 a year between 62 and normal retirement age (negating any benefit to which you would otherwise have been eligible), primary wage earners should consider deferring their benefit election at least until age 66/67. Depending on financial need and a sense of your own life expectancy, some people will defer to age 70 (the latest age for which delaying the start of benefits provides a progressive increase in the benefit itself).

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While most lawyers in practice will defer enrolling for benefits at least until their normal retirement age (66 for Boomers born between 1943 and 1954), the mere availability of Social Security often sets the mind wandering through the considerations associated with the transition from working to not working. “Where will you live?” is one of those important issues.

In turn, attempting to address “Where will you live?” begs two further interacting questions: “How will you pay for it?” and “How will you live.” Taken together, there’s much to consider.

Face Painful Questions Now To Ensure Easier Transitions Later

Where/how much will it cost/how you will live are key questions addressed by Authors MacBean and Simmons in their book Thriving Beyond Midlife. While the answers typically don’t confront us until we enter The Rest of Living phase of life (recall the Map discussed in the last column of this series on thriving), our willingness to look at the possibilities today will make the reality (whether 5 years or 20 years from now) a lot easier.

Because our homes are typically an important part of who we are, it’s useful to consider those things about home that will continue to be important—and those things that are no longer as valuable. Neighborhoods once chosen for good schools may simply represent additional property taxes after the kids have moved out. A one and a half acre homestead that once provided privacy, a pool and large garden may become a maintenance nightmare as we get older. Overly large homes are expensive to heat, cool, and clean.

It’s natural to put off these unpleasant thoughts of change and loss of independence, but think about older friends or parents who entered The Rest of Living phase, either through a dramatic medical event such as a stroke or accident, or a deteriorating condition that has finally forced them to address the reality that they could no longer live independently. Where did they then live? How traumatic was the transition, especially if there had been no prior process of planning? How did the rest of the family handle it? Now consider: where will you live?

Consider Which Of Five Scenarios Fits Your Future

The following is a brief introduction to the five strategic choices most people make. Ideally it will inspire more questions (and answers) that can make it easier to begin to tackle the conversation. We rarely find couples who—on their own—sit down to figure this out. Often, husbands and wives have different, not well-articulated or communicated ideas about how they want to spend the next 20-30 years of their lives. How does it look for you?

Consider:

• For many of us, the automatic answer is “Home Sweet Home.” It’s most often expressed as “This is my home, and they’ll have to carry me out of here in a wooden box.” After all, it’s where you’re most comfortable. But the neighborhood may not sustain you the way it once did; the house may no longer “work” for you. How will it be when there’s only one of you? Is this where you’re going to maximize your well-being through all the phases of living? At a very practical level, will the stairs between the living area and the bedrooms become an insurmountable barrier to living comfortably in this home? Are the halls and bathrooms wheelchair or walker “friendly?”

• While not as popular as it was one or two generations ago, the “Family Plan”—moving in with a family member—has its attractions. Certainly it’s based on expectations formed in prior generations. When it works, it’s the best expression of family values that we all romantically cherish. When it doesn’t work, it’s a disaster. Should you just show up one day with suitcases in hand? Probably not! If you can’t have a conversation about toileting another person, you probably shouldn’t consider the family plan…and most people can’t have that conversation. Make sure to communicate your intentions in advance and make sure you know what all the rules are going to be. From the kids’ standpoint, if Mom moves in after Dad has died and she later starts to date, will she have a curfew?! The Family Plan is a desirable image, but it’s more difficult in reality to make it work.

• Then there’s the “Life Style Resort” (more popularly known as a Continuing Care Retirement Community—or CCRC). It’s a lifestyle choice with care implications. You tend to move in when you’re relatively young (late 50’s-early 60’s) and can take advantage of all the facilities and social opportunities that are provided. The “con” may also be the “pro”—it’s the proverbial first day of the rest of your life. How will it be to be locked into something that you typically can’t unlock?

• Next is the “New Frontier.” It’s a trend we increasingly see in which people band together based on friendship or common interest to form a small community to age together. Examples can include one floor of an apartment building; or co-housing in which people build a whole community with common kitchen, meeting space, and even a gerontologist or health care professional “on staff.” The New Frontier provides both housing and services; it’s an intentional decision to age together in an intentional community.

• Finally, there is the “Progressive Retreat.” This is for those who don’t want to make a choice, but recognize that choices need to be made. It takes the form of saying and agreeing with family members, “I recognize the issues; I want to stay where I am as long as possible; when I can no longer do X, I’ll do Y. When I can no longer live in A, I’ll move to B.” In other words, the Progressive Retreat is about setting up the criteria in advance, especially for when others have to facilitate the change. “When I can no longer garden, I’ll move to an apartment. When I can no longer drive, I’ll move to assisted living.” Name the trigger points. It’s very logical and thought through and offers relief to those who will be assisting in the actual move when it needs to occur.

It’s easy to defer answering the question “Where will you live…” because of the uncomfortable follow-up: “…when I/we can no longer take care of myself/ourselves.” But it’s not just a future question. How you hope and expect to live in middle age will have an influence on your longer-term choices. A couple deeply involved in their grandchildren’s lives will likely make a choice that keeps them close by, possibly enabling a successful Family Plan later on. If you love golf or other activity, you may choose a CCRC. If these current decisions include the process of down-sizing from the family home, you’ll get an entirely new set of questions to resolve, starting with “What will I do with all my stuff?!”

In the next article in this series, we’ll continue the conversation with a consideration of the Domains of Living that can help us in Thriving Beyond Midlife.

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While attempting to reduce the national deficit, the DRA also included some dramatic changes in Medicaid. Most significantly, it changed both the “look back” period from 32 months to 60 months for transferred assets, and the authority for all states to adopt “partnership long term care insurance plans.”

Prior to DRA, only four states had the authority to adopt partnership plans. Although the National Association of Insurance Commissioners (NAIC) has recommended model legislation for the states concerning policy design, benefits, and continuing education (CE) requirements for agents selling the plans, each state has customized its own legislation. DRA, however, requires that each state include reciprocity provisions whereby both the policies sold and the CE required by agents in each state is accepted in all other states. There’s one exception: the original four states—California, New York, Connecticut, and Indiana—are grandfathered from the reciprocity provision.

Understand The Provisions Of Partnership Policies

Medicaid is a cooperative program between the federal and state governments that helps citizens who cannot pay for the cost of their own medical care. It is a form of public assistance, or welfare.

To qualify for Medicaid, an individual must have limited resources and income. Some resources, such as the home, are excluded from the process of qualifying. (There is a limit, however, to the home value that may be excluded: either $500,000 or $750,000, depending upon the state of residence.) In addition, modest amounts of assets may be retained, such as $2,000 in a bank account. Any assets not specifically excluded must be spent on the cost of care before applying for Medicaid. This activity is referred to as “spending down” and, once accomplished, a certain time period must pass (now 60 months) before an individual can become eligible for Medicaid.

Because the government cannot fund for the total cost of long term care for our aging population, the concept of partnership plans arose to stem the rising tide of spending. A qualified partnership plan allows the insured to exclude an amount of assets equal to the value of the benefits purchased in a long-term care partnership policy from Medicaid qualification. If, for example, the total value of the benefits purchased in a qualified partnership policy was $300,000, then the insured would be able to set aside $300,000 of assets for family or heirs. According to the old model, the insured would have had to spend those assets down to nothing before qualifying for Medicaid. This new program shifts the initial risk for the cost of care to the individual and not the Medicaid system. Individuals who take action are rewarded by being able to preserve some assets for heirs.

Most states have already adopted legislation to introduce partnership plans. Each state requires Partnership CE certification for agents offering the partnership plan. Most states now require that agents have this certification to sell any form of long term care insurance, including hybrid annuity and life insurance contracts with long-term care benefits.

The Partnership LTCI policy offered by an insurance company is no different than the policies currently being offered. The hallmark of a partnership policy is that it contains the necessary benefit structure that the particular state requires. For example, if a 55-year-old male wants a simple inflation benefit but the state requires that the policy contain a compound inflation benefit, this man’s policy would not be considered a partnership policy.

Rules About Annuities Have Also Changed

PPA will be fully implemented on January 1, 2010. Many aspects of the act are already in effect addressing the rights and protections of those receiving pensions. However, the impact of one aspect of this legislation is very dramatic for a certain segment of the population.

Prior to the effective date of DRA, the non-qualified deferred annuity with a long-term care rider allowed the annuitant to make withdrawals without incurring any surrender charges or penalties. These withdrawals, however, were still subject to the normal rules of income taxation that applied to non-qualified annuities, which meant that a certain portion of the withdrawals could be taxable. (A non-qualified annuity is one that was established with after-tax dollars.)

As of 1/1/10, these hybrid annuities with LTCI riders will be treated as tax-qualified LTCI plans. This means that all of the withdrawals will now be income tax free. For example, if an annuitant originally deposited $100,000 in a non-qualified annuity that has grown to $300,000, he would be able to withdraw the entire amount for qualified long-term care on a non-taxable basis. In this case, he would pay no income tax on the $200,000 gain in the annuity.

The bill also allows individuals to make withdrawals for LTCI premiums without penalty, and adds LTCI to 1035 exchange rules. The real opportunity is for individuals who purchased a non-qualified annuity several years ago that has grown significantly. By exercising the 1035 exchange provision, these people may exchange the older annuity for a newer one that contains an LTC rider. This would not change the character of the annuity. It would, however, allow the withdrawal of the entire value of the annuity for qualified long term care expenses on a completely tax-free and penalty free basis.

As always, long-term care planning should be addressed by a qualified professional, one who has the experience and depth of knowledge to guide clients through the potential mine fields. There’s no one-size-fits-all solution, and having choices is always a wonderful thing.

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Research conducted by the American Association for Long-Term Care Insurance (AALTCI), the national professional trade organization, examined data from ten leading insurers. The study focused on two primary areas: the percentage of long-term care insurance applicants who qualified for preferred health discounts that would allow them to pay lower premiums, and the percentage who did not qualify for insurance as a result of an existing health condition and therefore were unable to purchase the coverage.

According to the study, policy costs generally increased slightly compared to the prior year. “The cost of long-term care insurance is directly linked to interest rates, the anticipated likelihood of claims as well as care costs,” explains Jesse Slome, Executive Director of AALTCI. “When interest rates decline as they have in recent years, insurers need to increase premium costs. And as our society ages, more people will require long-term care that becomes more costly each year.”

While insurers can decline individuals who apply for coverage with existing health conditions, most reward those who apply while in relatively good health. “Just over half (51.5%) of individuals who applied and were accepted for coverage last year between ages 50 and 59 qualified for ‘preferred health’ discounts,” Slome explained. These discounts can reduce the cost of long-term care insurance by ten to twenty percent each year. “The savings can amount to hundreds of dollars a year for a couple,” Slome adds, “and they won’t be taken away in the future should their health change.”

More than eight million Americans currently have long-term care insurance protection either individually or through their employer, according to the Association’s 2008 Sourcebook data. “Some 400,000 people obtained coverage in 2007,” Slome states, “and 83% of individuals purchased it before age 65. But clearly, many people still wait too long to start the planning process only to discover they can’t qualify for the coverage no matter how much they are willing to pay.”

The number of individual applicants who qualified for good health discounts in 2007 rose for most age-bands compared to the Association’s 2005 study. Just over two-thirds (66.8%) of applicants between 40 and 49 qualified for the discount in 2007 compared to 53.7% in 2005.

Insuring Health Is Part Of Retirement Planning

Planning for long-term care is similar to retirement planning. The sooner the process begins, the less costly it is each year to reach the destination. The younger you are, the lower your premiums. The other significant advantage is that individuals are healthier and when it comes to qualifying for insurance, health matters more than money.

Each insurer establishes its own criteria for acceptable health conditions. In a similar manner, discounts and insurance rates can vary significantly based upon your age, marital status, and health. “It pays to speak with a knowledgeable long-term care insurance professional who can offer coverage from more than one carrier,” Slome advises. “The difference in cost can be as much as 30% or more annually and since it rarely is advantageous to change policies, it pays to get the best coverage for the best price from the onset.”

For smokers or those individuals whose health is less than perfect, begin the planning process with a long-term care specialist who understands which specific health conditions various insurers will accept. You’ll need the names and dosages for all prescription medications, current medical conditions, height, weight, and a brief health history. You also need to be truthful so that the professional can match your health conditions with the best company. “No one wants to hear they are declined,” says Slome, “especially because once you are declined by one insurer, you may find it impossible to get coverage from anyone.”

Percentage of Applicants Who Qualify for Good Health Discounts

Age 40 to 49 63.2%

Age 50 to 59 51.5%

Age 60 to 69 42.2%

Over age 70 less than 24%

Percentage of Applicants Declined Individual Policy Coverage

Age 50 to 59 13.9%

Age 60 to 69 22.9%

Source: American Association for Long-Term Care Insurance, June 2008 Study of 250,000 individual LTCI policy applicants (2007 and 2008 data)

Compare The Costs Of Insurance At Different Ages

According to AALTCI data reflecting the 2008 Long-Term Care Insurance Price Index, a 55-year-old individual (note that rates are based upon age and not gender) considering long-term care insurance can expect to pay $709-per-year for a base level of protection if he or she is married or $1,095 if single. These costs increased about four percent compared to the prior year’s report.

The index measures current costs for the top-selling long-term care insurance policies that offer consumers approximately $115,000 in current benefits. The value of that coverage grows to over $305,000 of protection in 20 years. This is for a very basic level of coverage and is not intended to provide comprehensive benefits.

Many consumers mistakenly believe that long-term care insurance protection is costly; available discounts, however, can significantly reduce the cost of coverage. Many individuals who apply for long-term care insurance qualify for good-health discounts that will reduce the annual cost by ten percent or more. The savings are locked in even if the health of the individual changes in the future.

Other discounts are offered to people who are married; some companies even give the discount when two people are living under the same roof, or when only one party of a couple applies or when only one is approved when both apply. The total savings can be as much as 40% each year.

The study revealed the following average prices in the 2008 report (all figures include a provision for an inflation benefit that increases the coverage by five percent compounded annually):

Age 55 Married

$709-per year for a 3-year policy; $115,000 immediate benefit value ($305,000 value in 20 years) when the individual qualifies for both preferred health and spousal discounts.

Age 55 Single

$1,095-per year for identical coverage without the spousal discount.

Age 65 Married

$2013-per year for a 3-year policy, $172,600 immediate benefit value ($458,000 value in 20 years) when the individual qualifies for both preferred health and spousal discounts.

Age 65 Single

$2999-per year for identical coverage without the spousal discount.

For additional information about this study and other information, see American Association for Long-Term Care Insurance.

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Pop quiz: how many “down” years (measured by the S&P500TM) did the U.S. stock market experience from 1982 to the end of 1999? Answer: just one—in 1991 when the market dropped a modest 3.17%. What about the heart-stopping “crash” on October 19, 1987? Despite that 25% drop on a single day (measured by many indices of the market), the year’s markets ended “up.”

If you were a little slow to realize the market had turned “bull” in the early 80s and didn’t begin investing until early 1985, and if you hadn’t time to consult your financial crystal ball about the bear market of 2000-2002, $10,000 invested in the S&P500TM at the beginning of 1985 would have grown to more than $150,000 by the end of 2007 for an annual, compound return of +12.1%. During this specific 23-year period, there were just four “down” years and 19 “up” years. Twelve of those 19 “up” returns were in the “double digits.” Two of the four “down” returns were similarly “double digits.”

Let’s make the financial statistics a little more relevant. Suppose you retired in 1985 during the early stages of a long-term bull market with $1 million of capital invested in the S&P 500TM and that you planned to pull out $75,000 a year. After eight years, your portfolio would be worth almost $2.5, more than $8.7 million on 12/31/99 and $9.2 million on 12/31/07. In fact, during the 1985-2007 period, you could have regularly pulled out $155,000 a year and still have more than $1.3 million at the end of 2007.

On the other hand, if you had retired at the beginning of 2000 with the same capital and yearly withdrawal plan, eight years later, on 12/31/07, your portfolio would be worth just $337,000. Even without the current slump in the stock market (as of July 2008), it’s virtually certain that you would outlive your money. In retrospect, to end up those eight years with your original principal intact, you could only have withdrawn $15,000 a year toward your retirement needs. Timing really is everything!

Even if we could “time” the market (and there’s substantial evidence that timing does not work), most of us envision a specific time during which we’ll transition to living off our capital rather than relying on our billable hours. If we could somehow know the market will soon peak (or trough), we might be willing to adjust our retirement date to accommodate our remarkable prescience. Most likely, however, we’re going to have to take our chances with market undulations and cycles. Therefore, we need distribution strategies that can increase the chances that we will have sufficient income throughout our retirement years.

Stratify Investments Into “Buckets”

One strategy involves first sorting out the various categories of investments in the $1 million retirement portfolio. For most, funds will span the traditional asset classes of equity and fixed investments, including cash, money market, certificates of deposit, short/medium/long-term bonds, mutual fund, ETFs, individual stocks, REITs, real estate, etc. Each of these investments has historic characteristics of risk (as measured by volatility) and return, and these critical factors tend to be inversely proportional.1

From these categories, create a series of three or more conceptual “buckets.” Bucket One holds cash and near-cash investments with durations of less than one year. Ideally, this should be planned two to three years before retiring. If necessary, existing assets can be re-positioned to assure that Bucket One holds sufficient resources to meet at least one year’s retirement income requirement, and possibly as much as three years’ income. This helps assure that volatile investments such as stocks, mutual funds, and even intermediate/long-term bonds will not have to be cashed in during market periods that depress liquidity values. Bucket One is also used—at least conceptually—to receive all sources of income including social security, other retirement income resources such as monthly annuity payments, as well as interest, dividends and gains from the other buckets.

Bucket Two holds investment categories that are typically associated with medium-term holding periods (three to five years), such as bond mutual funds and balanced mutual funds. The income this bucket produces is poured into Bucket One. Similarly, as these medium-term investments are sold and reinvested, gains will also revert to Bucket One until sufficient reserves are re-established (again, one to three years’ worth of income needs).

Bucket Three holds the longer-term investments that have the highest volatility of all portfolio assets, but also have the highest potential for long-term gains. Dividends and gains will flow back to Bucket One, once again subject to the reserve needs of that bucket.

Additional buckets can be used according to the type and diversity of portfolio investments. As you can see, this approach does not dictate the nature of your investments; that depends on your risk tolerance and preference to manage (or not manage) a portfolio. Rather, the “bucket” strategy is about stratifying your investments along the risk/reward continuum, allowing you to consume income from those investments with the least likelihood to lose principal while giving higher risk/higher return investments sufficient time to perform on their return expectation. In essence, the bucket method describes a process for organizing your investments for maximum lifetime sufficiency, whatever those investments might be. Note that the need for ongoing investment management and occasional reallocation still applies.

Assess Your Risk Tolerance

A second strategy involves a little less discipline and organizational skill. Recognizing that a typical 65-year old has a 20-year life expectancy, you would take 80-85% of your current $1 million portfolio and invest according to your risk tolerance for maximum income, living on investment return and principal over those 20 years. The 15-20% portion not already allocated is specifically invested with a 20-year time horizon, presumably with greater risk tolerance than that which will be applied to the larger segment of the $1 million portfolio. While most of us would not employ an all-equity allocation to our entire portfolio, it’s entirely possible that such a strategy could be reasonably applied to this 15-20% segment invested for the long-term.

At age 85, only two conditions prevail: either you succumbed to life expectancy statistics, or you survived them. If you are still alive, you have—by the formula suggested below—completely exhausted your 20-year income portfolio and now look to your “I beat my life expectancy” portfolio to take care of your income needs for the rest of your life. For example, a $150,000 initial allocation of the original $1 million could grow to $400,000 at an average 5% return; grow to $700,000 at an average 8% return; and grow to $1 million at an average 10% return. If then converted to an immediate annuity at age 85, the monthly income could range from $5,300/month based on $400,000 to as much as $13,250/month based on $1 million on a single 85 year old male. A joint annuity (with the monthly payment for as long as either spouse is alive) for the lives of spouses (both age 85) range from $3,950 based on $400,000 and $9,875 based on $1 million.[2]

As for the first 20 years in which you are distributing income and principal, here’s the recommended formula, assuming a constant 5% return:

Year 1: distribute 1/20 of the initial value (1/20 of $850,000 = $42,500)

Year 2: distribute 1/19 of remaining value (1/19 of $847,875 = $44,625)

Year 3: distribute 1/18 of remaining value (1/18 of $843,413 = $46,856)

etc. until…

Year 20: distribute remaining value (1/1 of $107,395 = $107,395)

If your long-term investment skill (and a cooperative market) results in an average 8% return, the annual income ranges from the same initial $42,500 up to a 20th year portfolio liquidation value of $183,417. Needless to say, however, the market does not increase in smooth increments of return! Volatility will have a significant effect on each year’s balance for which the applicable distribution percentage will be paid. Thus, average returns are used here to illustrate the methodology, but investment professionals should be consulted for “volatility studies” that can suggest probabilities of success based on different investment strategies within the 20-year timeframe.

Que Sera, Sera?

These two distribution models do not take into account considerations for income taxes, or the possibility that you may have testamentary intentions that work against the concept of “spending” principal.

But they do exemplify the types of strategies that can help us have sufficient income for the much longer life expectancies than, on average, our parents experienced. Unless we’re fortunate enough to start with a substantial amount of retirement capital relative to our income needs, those needs cannot be satisfied with conventional thinking such as “buy bonds and live off the interest.” Similarly, “Whatever will be, will be” is not an investment strategy. We will need to more actively explore retirement solutions that can produce adequate income for the 30 or 40 years of thriving through and beyond mid-life to which we’re all entitled.

__________________

FOOTNOTES

1. Money market accounts and short-term bonds tend to assure safety of principal in exchange for nominally low rates of return. The July 1, 2008 90-day T-Bill yield of ~1.8% can today be considered a “safe” rate of return with no risk and very short duration. To achieve a rate of return much higher than this, a certain amount of risk (either volatility and/or liquidity risk or penalty-for-early-withdrawal risk) will need to be taken. While risk is a key factor in our investment decisions, exposure to risk is directly proportional to time: the quicker you need your money back, the greater the risk you won’t achieve your objective. On the other hand, it is interesting to note that no rolling 20-year period since 1926 (i.e. 1926-1945, 1927-1946 etc) has produced a negative return when underlying investments were in the broad equity market.

2. These suggested immediate annuity monthly income value are calculated by insurers based on mortality tables in effect in 2008 and are not necessarily indicative of rates that might prevail 20 years from now.

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My answer is almost always the same—“They need to start out correctly to finish well.” I’m referring to the first laps around the professional track, which are crucial. Running a race, you need to be able to sustain the pace you set at the beginning; otherwise, you may run out of stamina later on and face devastating consequences. The same is true for newly-minted associates.

Understand The History Of Associate Compensation

Over the last 15 years, the lives of associates have changed drastically. In the 1990s, salaries began to soar, first in high-tech firms, and then everywhere else. I remember several conversations I had with managing partners at three of the largest law firms in the southeast. Everyone was talking about soaring associate salaries. “We’re going to have to pay starting associates $115,000-$135,000 just to stay competitive,” these partners told me. “This is going to have a serious effect on the profitability of our firm. It will affect our ability to attract and retain talented associates.” This salary shift was eventually passed on to clients in the form of increased billing rates.

Although the speculative technology bubble burst a few years later and associate salaries moderated, the die was cast. Associates expected more than their predecessors had. They began to feel that they could “have it all now”—which was in stark contrast to previous generations of lawyers who waited until they “made partner” to make major financial commitments.

These changed expectations caused many problems—which you can avoid by following these five strategies.

Set Written Financial And Life Goals

To succeed in law school, you had to map out your goals; designing a successful law career requires the same planning. All business owners use goal-setting methodology to chart their vision of their business. As a licensed professional, you are in business for yourself. Create realistic expectations with care, remembering that it’s easiest to make personal sacrifices early in your career. At the same time, keep all your other goals in balance so that you attain the best quality of life. In other words, make sure you’re running in the correct lane of the track. To change lanes later on is both time-consuming and expensive.

A Spending Plan Sets Your Pace

Once you develop written goals and determine that you are running in the correct lane, you need to check your pace. Create a written spending plan that outlines
short-, intermediate- and long-term saving/investing goals to help you see how much disposable income you have available for discretionary purchases. If you set capital and cash flow goals first, you’ll avert the common pitfall of not having enough to save for long-term goals because you’ve spent all of your income on short-term needs and wants. Review your status each month. Define your progress towards your goals, and change your pace accordingly. If you can’t defer gratification now, you won’t reach your goals later.

Put Time On Your Side—Maximize Your 401K

As part of your written spending plan, defer as much as possible ($15,500 for 2008) into a defined benefit plan. This will enable you to take advantage of the tax deferral on the income contributed into the plan, and allow you to compound your investments. In addition, if you are making under $160,000 joint income, you should also contribute to a ROTH IRA. Then as income increases, start saving money outside of these vehicles in addition to—not instead of—the plans already mentioned.

Do Not Over Spend On Homes And Cars

Homes have become this generation’s status symbol. It is not unusual for an associate’s first home to cost between $450,000 and $700,000. However, new home buyers bite off more than they can chew, much less swallow, because they don’t factor in the operating costs of a home. Just ask any of the partners at your firm how much it costs to replace a roof or finish a basement, especially in a large home. Distinguish between how much a bank is willing to lend you and how much you can afford: Often, these amounts are very different. In short, do not over spend on homes and cars (most people do not realize that over their lifetime they will often spend more on vehicles than they do on a primary residence). Buy what you need, not what you want. Ego can be very expensive.

Avoid Consumer Debt

Many people who grow up during prosperous times feel as if they should be entitled to the same standard of living as their parents. Rather than follow the time-honored sequence of amassing wealth—Earn, Save, Buy—they Earn, Buy and then Save. But true prosperity is based on the gradual sustainability of consumption. Sustainable by its definition means that you do not ever have to “back up.” The Earn, Save, Buy equation has a self-limiting factor that promotes sustainable consumption; it keeps us from getting ahead of ourselves. To do this, avoid credit card debt.

Keep in mind that the first seven years of your professional career will have a disproportionate effect on your long term wealth. By following these five simple strategies, associates will be following in the footsteps of their wealthier elders, and will be helping to ensure that their lives are not only prosperous but also sustainable.

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Those on Main Street, downwind from Wall Street, are stunned at how quickly our 401Ks became 201Ks then 101Ks. At some point, we worry, that “K” will be demoted to an “X.” One day in September, short-term treasury bills were sold for a price greater than the redemption value 30 days hence. My retirement plan? I’ll just keep working, of course!

If you’re contemplating retirement within the next few years, this has to be pretty frightening. Well-respected economists have likened our situation to The Great Depression, while several others suggest that the events leading to the 1929 economic disaster were benign compared to today’s scenario. But remember, economics is also referred to as the “dismal science.”

Markets Always Recover

Before panic takes hold, let’s provide a little perspective. To date, we’ve recovered from every single market “crash.” “The market” is simply the place where the publicly held capital wealth of America’s businesses is reflected in an exchange in which anyone can buy or sell shares in those companies. Stock values are often based on current and anticipated business income, which is what the often-watched “price to earnings” ratio reflects. If we’re heading into a recession, it stands to reason that corporate income will be negatively affected for a few quarters, which in turn will result in lower stock values until things improve.

Until things improve. That’s the catch-phrase on which we need to focus. If you believe in the fundamental vitality of the American economy, then what we’re going through will ultimately be behind us. I’m not nearly as confident predicting when this will happen, but I am confident that it will.

As a leading edge Baby Boomer, my only experience with stock market crashes occurred on October 19, 1987 when the Dow Jones Industrial Average (DJIA) dropped more than 500 points for a 25% decline in a single day. People were stunned; we didn’t know what to do. Our parents were thrown back to their emotions and experiences of events almost 60 years earlier, and economic historians made specific references to 1929 and “double top” markets. A number of scared investors cashed out that day, locking in that 25% loss. By December 31 of that same year, the market had fully recovered—and then some. In fact, in the 20 years from 1980 through 1999, the S&P500ä—a broad-based index of large public companies—experienced only two years of negative returns (1981 and 1990, with market returns of -4.9% and -3.17% respectively, both relatively benign drops).

But timing is everything. If you start counting back 20 years from late 2008, you’ll see 5 years of negative returns. In 1990 the Dow dropped 3.17%; and from 2000 to 2003 the S&P500ä dropped 9.1%, 11.88%, and 22.11% respectively. This doesn’t include 2008’s yet-to-be-determined losses.

Don’t Panic: Take Stock

While corporate earnings outside the financial sector still appear reasonably positive, and for the moment obviating against a stock market crash, “the market” certainly induces heart palpitations and a sudden urge to call your stockbroker and scream, “SELL, I tell you, SELL.” But here’s the important follow-up question: where will you put what’s left? Will you sideline your reduced net worth to wait for a better day? How will you know when that day arrives? (In fact, you’ll need to know that vital information several days before that day arrives!).

While I don’t give investment advice, I’ll share with you my own reaction to the current crisis. After my “Sell, I tell you, Sell” panic subsides, I look at all my resources for retirement and begin to settle down. My house is nowhere near “paid off,” but the monthly mortgage payment is within my budget and its intrinsic value is still more than the mortgage principal. I have sufficient life, health, and disability insurance to protect our family from the economic damage those kinds of disasters can create. I have a year’s living expenses in cash (and yes, I’ve checked to make sure that FDIC insurance covers those accounts). More important than all of these resources, however, I realize that I have marketable skills, a number of clients who value those skills and actually pay me, and no particular desire to retire next week to “go fishing.” So my investment account statements remain unopened in a desk drawer, I only glance at the bad news at the top of the Business Section of my daily newspaper, and I get back to the task at hand: taking pride in my work and applying myself to it as diligently as I know how.

The American economy is made strong by its growing population. More than 100 million of us go to work every day and bring home a paycheck. Those checks aren’t stretching as far as we’d like right now, but the pain of gasoline prices, low interest on our savings accounts, and negative returns on our investment accounts is temporary. The very economic adversity we’re currently experiencing is what America excels at conquering. Our energy crisis is already spawning the next Big Thing for the economy: the transition from fossil fuels to renewable energy sources. Unlike the stock market Big Thing and the real estate Big Thing, this one is people—and therefore job-intensive.

As to current economic conditions, my advice is to try not to panic. Stay the course of your investment strategy. If you don’t have a long-term investment strategy, take time to create one before changing your current portfolio. Count your other resources. And remember that age 75 is the new and improved 65. We Baby Boomers are going to live, on average, twice as long in retirement as our parents. We can afford to work a few more years, with plenty of time for retirement-focused activities after that.

My retirement plan?

I enjoy what I do and want to keep doing it. I plan to invest for my long life expectancy and in the meantime, keep working…

FOOTNOTE

1. According to The Dirksen Center: “A gentleman who called The Center with a reference question relayed that he sat by Dirksen on a flight once and asked him about the famous quote. Dirksen replied, “Oh, I never said that. A newspaper fella misquoted me once, and I thought it sounded so good that I never bothered to deny it.”

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