December 4, 2012

Long-Term Care Policies Unpacked

The typical, elderly couple spends about $260,000 on health care and long-term care services during retirement – for the unlucky ones, the amount can be double. No wonder sales of long-term care policies this year will increase nearly 10 percent, according to the American Association for Long Term Care Insurance. At the same time, major insurers are pulling out of the market in droves, and premiums are surging due to higher demand by aging baby boomers, record-low interest rates, and rising medical costs.

To help navigate this increasingly treacherous market, Squared Away interviewed Larry Minnix Jr., chief executive of LeadingAge, a non-profit consumer organization in Washington.

Q: Is there anyone for whom long-term care insurance does not make sense?

A: Not many. I’ve seen too much of the consequences for too many age groups and too many families – long-term care just needs to be insured for. A majority of the American public is going to face the need for some kind of long-term care in their family. The only people it doesn’t make sense for are poor people – they have Medicaid coverage, mostly for nursing homes. And for people who are independently wealthy, if they face a problem of disabling conditions they can pay for it themselves. You find out at age 75 you have Parkinson’s or Alzheimer’s, but it’s too late to insure for it. Think about it like fire insurance. I don’t want my house to burn down, and very few houses do. But if mine burns down, I do have insurance.

Q: The Wall Street Journal reported that GenWorth Financial next year will charge 40 percent more to women who buy individual policies. Why?

A: Among the major carriers, private long-term care insurers have either limited what they’re doing or backed out of the market entirely. You’d have to get GenWorth’s actuarial people [to explain], but let me venture a guess. I’ve had private long-term care insurance for 12 to 15 years, but my wife couldn’t get it. She’s got some kind of flaw in the gene pool, and she was denied coverage. She may be the bigger risk, because I’m more likely to stroke out and die, but she’s more likely to live with two to three conditions for a long period of time.

Q: Your wife wasn’t healthy enough to get coverage? …
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November 29, 2012

13% Haven’t Paid Off Christmas 2011

Consumer Reports says 13 percent of Americans are still paying off credit cards that they ran up to buy 2011’s holiday gifts.

That may be one reason more Americans plan to budget this holiday season – 52 percent – compared with last year’s 41 percent, according to Consumer Reports’ national survey. Among those who bought their 2011 gifts with credit cards, 58 percent paid them off by the end of January and another 13 percent in February – hats off to them. But the rest waited. Some are still waiting.

I can relate.

In the interest of encouraging Squared Away readers to reveal their financial failings in the comments area below, here’s one of mine: a credit card balance averaging $2,500 for more than 20 years. It’s embarrassing, and yes, this personal finance blogger knows why it’s important to pay off a credit card charging nearly 15 percent interest – what a waste of a few thousand dollars I could’ve put in my 401(k), for instance…Learn More

November 27, 2012

Overconfidence Linked to Senior Fraud

The seniors who are most confident of their knowledge about money and investments are also the most likely to fall victim to fraud.

That conclusion, by Chicago researchers at DePaul University and the Rush University Medical Center, is among the first to explain the underlying reason for an alarming trend being detected by law enforcement and financial experts: a rise in fraud committed against an enormous and rapidly aging baby boom generation.

Fraud against the elderly can arise from “that combination of not knowing but thinking you know,” Keith Gamble, an assistant finance professor in DePaul’s Driehaus College of Business, said in an interview in which he explained his new study. “That’s what we call overconfidence,” which he and his co-authors determined was “a risk factor for being victimized by fraud.”

The U.S. incidence of fraud has exploded in recent years. Complaints of financial fraud compiled by the Federal Trade Commission surged more than 60 percent in just three years, to 1.5 million last year.

There is growing concern nationwide that boomers, due to what can be a dangerous combination of cognitive decline and having some money socked away for retirement, are extremely vulnerable to con men peddling financial products that make big promises and deliver nothing – or, worse, rob retirees of money they need to live comfortably or even survive.

Declining cognition is associated with lower financial literacy – that’s nothing new. The concern is that seniors do not recognize the problem, Gamble said. “They are actually more confident in their financial decision-making capabilities. The problem is they don’t have the decision-making ability they once had.”

The Chicago researchers focused on seniors who have not acquired actual dementia or Alzheimer’s disease. Rather, they examined whether fraud could be linked to the cognitive decline that is a natural part of aging. …Learn More

November 20, 2012

Financial Education Strategies Need Work

In a September paper distributed by the National Bureau of Economic Research, Professor Brigitte Madrian and her co-authors reviewed the current state of U.S. financial education. In an interview, Madrian, a professor in Harvard University’s John F. Kennedy School of Government, provided some fresh insights into education, regulation, and the role of the financial industry.

Q: Besides low financial literacy, why do people make bad financial decisions?

A: Procrastination. Inattention – one reason people accrue credit card late fees is that they forget to pay their bills on time. Advertising – people are swayed by the marketing of financial services and products. Not all products pushed by financial advisers or financial-services companies are appropriate for everyone, and sometimes people are swayed into purchasing products that may be right for someone else but aren’t right for them.

Q: Does financial education even work?

A: I believe the jury is out. We do not have a lot of compelling evidence on the impact of financial literacy programs. There have been lots of studies on programs, but many of them are of dubious scientific validity. Of the ones that are more credible in terms of methodology, some find very little impact on financial education and a handful find financially positive effects. …

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October 16, 2012

20-Somethings Buck Pressure to Spend

Michael and Erin Gallagher are just 26 years old but have made a strong start financially, socking away $50,000 by maxing out their 401(k)s while honoring a $20,000 budget for their October 5 wedding in downstate Illinois.

Jennifer and John Lucido, both 32 years old, now have $250,000 in the bank and have built a 2,500-square-foot home near Detroit.

By comparison, the typical U.S. household had saved $42,000 for retirement in 2010, according to the Center for Retirement Research, which funds this blog.

Both couples are members of that rare species of 20-something super savers, spurning intense peer pressure to spend money on consumer items, go out for dinner a lot, and run up their credit cards. Neither couple got where they did the easy way either. They worked hard, but they were also quick to catch on to important lessons about being frugal and saving – from their parents or from each other.

“I have clients in their 30s and 40s who don’t even have $200,000 in their 401k,” said Naomi Myhaver, a financial planner at Baystate Financial Services in Worcester, Massachusetts.

An August article in The Journal of Consumer Affairs suggests one reason people like them are so hard to find. Young adults are extremely vulnerable to peer pressure to run up credit card debt so they can support a high lifestyle and social life.

In the study, 225 college students were asked questions such as whether they have “very strong” connections to their friends or “feel the need to spend as much as [friends] do on activities we do together.” College students have an average of 4.6 credit cards and $4,100 in debt…
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October 9, 2012

401(k) Education Missing A Target

Dennis Ackley says he doesn’t get a lot of holiday cards from the mutual fund industry.

The Kansas City, Missouri, consultant has become a well-known critic of the 401(k) materials that funds provide to employers, which usually leave the complex job of retirement planning to the workers to figure out. When speaking to a room full of 401(k) plan sponsors, he has a unique way of getting his point across. Ackley hands out sheets of paper similar to what’s shown here and asks them to wad them up and throw them at the target.

The problem – for the plan sponsors in the audience – is that Ackley doesn’t give them a target.

“Most of them are just kind of befuddled by the whole thing.” Befuddlement, he tells is audience, “is what young employees experience sitting in a 401(k) meeting.” …Learn More

October 4, 2012

The Long-Term Care Insurance Gamble

A good friend in Houston recently emailed me to ask whether she should buy long-term care insurance. Let me be very clear about my answer: I have no idea.

This writer is like baby boomers everywhere trying to get a grip on this long-term care stuff. Where to start?

First, let’s look at the prices for long-term care. Squared Away used data from Genworth, one of the nation’s largest insurers in this market, to generate a U.S. map with the median cost in each state of a semi-private room in a nursing care facility.

Genworth’s goal is obviously to sell insurance. But I ran its data by a few people, and it held up well, with a few observations and caveats discussed later…Learn More