Toothfairy economics: Plan for the future

“The cost of liv­ing is going up and the chance of liv­ing is going down.”

— Flip Wilson

He was beam­ing with obvi­ous pride as he put the fin­ish­ing touches on one of his last remain­ing sources of den­tal income. My youngest son had just lost one of his last remain­ing baby teeth and clearly wanted to make this one count. I watched him pol­ish it to a near glow, remem­ber­ing the days when I, too, would care­fully pre­pare my newly plun­dered trea­sure for the hopes of find­ing a shiny new quar­ter under my pil­low as a reward for my efforts the next morn­ing. “What do you think she’s worth?” I asked play­fully. With an opti­mistic grin and with­out hes­i­ta­tion, he proudly pro­claimed, “Five bucks!” Five bucks for a tooth? As it turns out, he must have extra­or­di­nary teeth, as the going rate in 2012 for an “aver­age” tooth is now a lit­tle more than two dol­lars. Hello infla­tion. Unfor­tu­nately, the Tooth Fairy is not the only one whose dol­lar buys less today than it did the day before. Most peo­ple deal with infla­tion by mov­ing sav­ings dol­lars from low yield­ing accounts into invest­ments that are expected to grow at least as much as infla­tion. While this is a good start, it is impor­tant to under­stand that not all things inflate the same way and our spend­ing habits change as we age. As we age, we tend to spend less on con­sum­able items and more on ser­vice related items like health­care, which has a long term infla­tion rate of nearly 6 per­cent com­pared to infla­tion on con­sum­ables which cur­rently aver­age around 3 per­cent. Cre­at­ing a finan­cial plan that accounts for only a 3 per­cent infla­tion rate will vir­tu­ally guar­an­tee a finan­cial short­fall in your later years of retirement. 

Real­ity Check: More seri­ous than a loose tooth, a lack of plan­ning to deal with the ris­ing cost of health­care is the pri­mary rea­son for most finan­cial plan fail­ures. There are few peo­ple that can afford to self-insure an aver­age stay in a long term care facil­ity. The aver­age cost today for one year in a full-service nurs­ing home sce­nario is around $80,000. In 15 years, because of infla­tion, that same stay of one year will cost more than $201,000. To com­pound the prob­lem, the aver­age stay at such a facil­ity is a three-year term. In order to self-insure this highly prob­a­ble risk, you must be able to live your life in a way that will allow you to leave $603,000 of future sav­ings untouched in the event you may need it for health­care expenses. Most are not will­ing to reduce their qual­ity of life to the level required to accom­plish this goal.

Real Advice for Real Peo­ple: Be sure to under­stand the real impact that infla­tion will have on your finan­cial future. Unless you are in a posi­tion to self insure, con­sider shift­ing the risk of ris­ing health­care costs to an insur­ance com­pany through the pur­chase of Long Term Care insur­ance. The best time to pur­chase this type of cov­er­age is between the ages of 55–60 for most peo­ple. While it may “feel” expen­sive at first glance, it can be a cor­ner­stone for pre­serv­ing your qual­ity of life in the con­text of your over­all finan­cial plan. Addi­tion­ally, you might con­sider using life insur­ance that allows you to spend your death ben­e­fit while you are still liv­ing for the pur­poses of cov­er­ing a long-term care need. This not only pro­vides a long term care ben­e­fit, but can also pro­vide a ben­e­fit to your loved ones upon your death. In either instance, work with an inde­pen­dent finan­cial or insur­ance pro­fes­sional that is able to work with many com­pa­nies to find the best ben­e­fit for you. Visit longtermcare.gov to learn more about plan­ning for the future costs of health­care in your finan­cial plan.

RC Arse­neau is a Cer­ti­fied Finan­cial Plan­ner and lives with his fam­ily in Delaware. Please sub­mit any ques­tions or topic requests to AskRc@mail.com.

The infor­ma­tion and opin­ions in this col­umn are pro­vided only for edu­ca­tional and enter­tain­ment pur­poses. Any ref­er­ence to a finan­cial prod­uct or strat­egy is not to be con­sid­ered an endorse­ment or rec­om­men­da­tion. The infor­ma­tion is of a gen­eral nature only and does not take into account your indi­vid­ual objec­tives, finan­cial sit­u­a­tion or needs. It should not be used, relied upon, or treated as a sub­sti­tute for spe­cific pro­fes­sional finan­cial, legal or tax advice. Invest­ment Per­for­mance may vary due to tim­ing and expenses. Rc rec­om­mends that you obtain your own inde­pen­dent pro­fes­sional advice before mak­ing any deci­sion in rela­tion to your par­tic­u­lar require­ments or circumstances.

Posted by RC Arseneau on Jun 26 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.