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.