RETIREMENT


What Retirees Need to Know About 3 High-Cost Financial Products

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Because of the cost and complexity of reverse mortgages, the Department of Housing and Urban Development requires that you obtain counseling from a government-approved agency. You can find a counselor in your area by calling 800-569-4287 or visiting www.hud.gov/counseling.

Even seniors who are happy with their reverse mortgages say the application process is a lot more complicated than the ads let on. David Bishop, 69, of Mystic, Conn., says his application was rejected by three banks after their appraisers found minor problems with his waterfront property. The third bank referred Bishop to a reverse-mortgage specialist, who helped him qualify. Bishop plans to downsize to a smaller home eventually, but the line of credit he received from his reverse mortgage will allow him to stay in his current home a few more years. "I'm glad I'm not a frail senior in my seventies or eighties, as this experience would have probably given me a heart attack," he says.

Long-term-care insurance

To hear some insurance agents tell it, everyone older than 55 should have long-term-care insurance. The argument they make is compelling: The median cost for a private room in a nursing home is more than $81,000 a year. Medicare doesn't cover most nursing-home care, and Medicaid won't kick in until you've exhausted most of your assets.

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A comprehensive long-term-care policy is the best defense against the cost of a catastrophic illness and will preserve assets you want to leave to your children. But you won't enjoy those benefits if you can't afford the premiums. The average annual long-term-care insurance premium for a 60-year-old couple in good health is $3,335 for $340,000 in coverage, according to the American Association for Long-Term Care Insurance. What your agent may not tell you:

The cost of premiums could jump. Faced with a higher-than-expected number of claims, several major insurers have asked state regulators for permission to increase rates by 40% or more. Additional rate hikes are likely as thousands of baby-boomers who already have policies start filing claims, says Steve Robbins, a certified financial planner in St. Louis.

If a premium hike forces you to let the policy lapse, you'll lose your entire investment. There are ways to avoid that, says Jesse Slome, executive director of the AALTCI. If your policy provides unlimited coverage, you can avoid a rate hike by reducing the coverage to three or four years, which Slome says is sufficient for the majority of seniors. Reducing the annual inflation adjustment from 5% to 3% will also lower your premium.

You may not need long-term care. You're less likely to end up in a nursing home if you're married. Even if you do need long-term care, the cost is likely to be contained: The median stay in a long-term-care facility is 463 days, according to the Centers for Disease Control and Prevention.

If you invested the annual premium for a 60-year-old couple of $3,335 for 25 years and earned a 4% annual rate of return, you'd have about $153,000. If you don't need long-term care, the money can be used for other purposes.

The drawback to self-insurance is that your savings may not be sufficient to cover the cost of a chronic illness. In 2011, 10% of long-term-care insurance claims were for individuals under age 70, according to the AALTCI. Some of those individuals will require nursing-home care for a decade or more.

There's a huge variation in price for the same level of coverage. If you decide to buy long-term-care insurance, make sure you work with an experienced agent who is authorized to sell policies from more than one insurer. Otherwise, "depending on your age, you could pay almost double for basically the exact same coverage," Slome says. (To find an agent, contact the AALTCI at 818-597-3227 or www.aaltci.org.)

In addition, someone who only occasionally sells long-term-care insurance may be unfamiliar with features developed in the past three or four years to make coverage more affordable. For example, married couples can save money with a shared-care policy, which allows them to pool their benefits.

Annuities

Seniors are often bombarded with pitches for annuities, and there's a reason for that: Annuities can be extremely profitable for the agent who sells them. That's particularly true of variable and deferred annuities, which are often riddled with complex terms and high fees. In fact, variable and equity-indexed annuities are by far the most common products associated with unfair and deceptive sales practices targeted at seniors, the CFP Board of Standards says.

Immediate annuities are more straightforward, and thus less popular with shady operators. When compared with variable annuities, immediate annuities are "less prone to abuse and generally much more stripped of costs," says Michael Kitces, a certified financial planner in Columbia, Md. (see Real Money).

But even immediate annuities can be overhyped. Consider these caveats:

You give up control of your money. When you buy an immediate annuity, you hand over a lump sum to an insurance company in exchange for a monthly payment for the rest of your life (or in some instances, a specific period). For that reason, even the most outspoken supporters of immediate annuities advise against investing all -- or even most -- of your savings.

Inflation could erode your payouts. Henry "Bud" Hebeler, a former Boeing executive and author of the book Getting Started in a Financially Secure Retirement, retired from Boeing in 1989 with a pension that pays out the same amount every month. During the first ten years of Hebeler's retirement, his monthly payments lost 30% of their purchasing power, and those were years of relatively low inflation.

If you expect to take payments for more than ten years, Hebeler says, you should buy an annuity that's adjusted for inflation. Your initial payouts will be lower, but you'll protect yourself against a surge in prices. Some immediate annuities provide an annual increase in your payments of between 1% and 5%; others tie payments to annual increases in the consumer price index. In exchange for this protection, your initial payments will be 25% to 30% lower than you'd get from an annuity that doesn't adjust for inflation.

Low interest rates reduce your income. Insurers invest proceeds from annuity investors in the bond market. If interest rates -- and insurance company earnings -- are low when you buy an annuity (as they are now), the size of your promised payouts is stunted. That doesn't mean you should put off buying an annuity, because interest rates could remain low for a long time, says Roger Ferguson, chief executive officer of TIAA-CREF. A better strategy, says Ferguson, is to invest your money gradually. Laddering your annuity purchases will allow you to lock in higher payments if rates rise. Plus, as you get older, the amount of your payout will increase to reflect your shorter life expectancy.

Once you've decided how much you want to invest, you can go to a Web site such as www.immediateannuities.com and compare insurers' payouts.

If the insurance company goes under, your money may be lost. A lifetime payout is only as good as the company behind it, so make sure you buy from an insurer rated at least A+ by A.M. Best. You can check out an insurer's rating at www.ambest.com. (See more tips on buying an immediate annuity).

Haven’t yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger’s Social Security Solutions today.

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