Inflation Impacts and Financial Clawback Strategies

Unless you’ve been living under a rock during the past three years, you know that inflation- i.e., an increase in the cost of goods and services- has been a major concern of U.S. households as their dollars purchase less than they did prior to the pandemic. While virtually no household purchase has been exempt, areas of highest recent concern are food, vehicles, insurance, and housing.

As a result of inflation, Americans have faced a number of challenges including the following:

 

¨   Eroded Savings- Cash accounts lose value if interest earned is less than the inflation rate

¨   Increased Cost of Living- Essential expenses are more expensive, straining household budgets

¨   Retirement Challenges- People with fixed incomes find it especially hard to cover expenses

¨   Debt Burden- Mortgage and credit card interest rates have risen in an effort to fight inflation

¨   Wage-Price Spiral- Workers get higher wages, increasing prices and perpetuating inflation

 

What to do? Try to claw back the extra money that inflation is costing you so you don’t feel like you are falling behind. Below are ten specific strategies:

 

No Nonsense Budgeting- Create and stick to a detailed spending plan that includes realistic numbers for income and expenses and puts a priority on essential needs.

 

Reduce Discretionary Spending- Cut back on non-essential expenses such as dining out, beverages (except water) for restaurant meals, paid entertainment, and luxury items.

 

Cut Utility Use- Enact energy-saving actions to reduce electric, gas, and water bills. Example:  turn the thermostat up 1-2 more degrees (summer) and down 1-2 more degrees (winter).

 

Shop Secondhand- Visit thrift and consignment shops, flea markets, and/or online sales websites (e.g., Facebook Marketplace, Craigslist, eBay) to save money versus new purchases.

 

Food Shop Carefully- Take advantage of sales, coupons, and reward/discount programs to lower food costs and consider bulk buying at warehouse stores if the math works to save money.

 

Increase Savings Rate- Save a higher percentage of income, by freeing up cash through reduced spending, to build a financial buffer against rising expenses.

 

Diversify Investments- Purchase investments in different asset classes (e.g., stocks, bonds, cash equivalents, real estate) to hedge against both inflation and investment risk.

 

Raise Your Income- Request a meeting with your boss to discuss a salary increase based on your productivity and value to the company. Another option: a “side hustle” income source.

 

Shop Secondhand- Visit thrift and consignment shops, flea markets, and/or online sales websites (e.g., Facebook Marketplace, Craigslist, eBay) to save money vs. new purchases.

 

Negotiate Bills- Contact service providers to negotiate lower costs on utilities, a cell phone plan, insurance premiums, credit card interest rates, and more.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Strategies to Reduce Homeowners Insurance Premiums

The last three years have not been kind to U. S. homeowners renewing their homeowners insurance policies.

As noted in a Wall Street Journal article, “For many Americans, getting insurance has gone from a routine, generally manageable expense to a do-or-die ordeal that can strain household budgets” amid sharply rising premiums and fewer choices of insurers. Another WSJ article said home insurers are using drones to check the life expectancy of roofs and spot yard debris and undeclared pools.

 

There is a “perfect storm” of reasons for premium hikes including an increased cost of building materials and labor, fraudulent claims, fewer insurance companies writing policies, and climate change effects (e.g., wildfires, coastal flooding, hurricanes, and tornadoes) resulting in increased claims payouts.

 

What to do? Below are nine strategies that may save money on homeowners insurance without sacrificing robust protection for your home:

 

Obtain Multiple Quotes- Get quotes from at least three different insurance companies using online comparison tools to facilitate this process.

 

Use an Independent Agent- Consider working with an independent insurance agent who can provide quotes from various insurers to help identify the best deal.

 

Do an Annual Review- Reassess your insurance needs and compare rates annually to ensure that you are still being charged a fair premium.

 

Consider a Higher Deductible- Ask your insurance agent to provide premium quotes for different deductible amounts and “do the math” to decide if a higher deductible makes sense.

 

Bundle Your Property Insurance- Ask about available discounts if you bundle your homeowners insurance with other insurance such as auto, umbrella, and life insurance.

 

Install an Impact-Resistant Roof- Make your home less of a risk for an insurance company. Insurers look favorably on homes with new, impact-resistant, and well-maintained roofs.

 

Take Advantage of Discounts- Inquire about discounts for bundling, loyalty (i.e., long-term customers), age (e.g., age 55 or 60+), and a claims-free record. It never hurts to ask.

 

Pay Premiums Less Frequently- Find out how much paying your premium annually or semi-annually will save versus making more frequent payments (e.g., monthly or quarterly).

 

Maintain Your Home- Keep your HVAC, plumbing, and electrical systems in good working order to reduce the risk of fire or water damage. In some areas (e.g.,  parts of Florida) with intense heat, humidity, and storms, insurance companies are starting to require 4-point inspections (HVAC, electrical, plumbing, and roof) to better assess the risk of insuring a home.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

ABCs of CCRCs: Choosing a Life Care Community

 

My husband and I recently took a big step in planning our future. We paid a $1,500 refundable deposit to get on the waiting list for a continuing care retirement community (CCRC) with a target move-in date of 2033. Why the long timeline? We are healthy, active, and not ready to leave our beautiful single family home. At the same time, we don’t want to wait until our 80s and find 200 people ahead of us. The waiting list is about 200 with annual turnover of about 20-25 units.

Also known as Life Care or Life Plan communities, CCRCs provide housing for older adults on a continuum beginning with independent living and including assisted living, memory care, and/or skilled nursing care services, if needed. Below are seven things to know about CCRCs:

 

Rationale for CCRC Selection- Three common reasons why people select CCRCs are 1. to have a “forever home” in later life, 2. to not burden their family with end-of-life housing and health care decisions, and 3. they do not have family members to assist with end-of-life decisions.

 

CCRC Ownership- Approximately 80% of CCRCs are non-profit organizations. Some are faith-based, some have affiliations with educational institutions, and some are independent non-profits.

 

Entry Fees- There are different payment models. Many CCRCs charge a substantial six-figure entry fee and some offer rental contracts. Entry fees increase with the square footage of the independent living unit that an individual or couple selects. Entry fees at the CCRC that I selected ranged from $237,000 (488 sq. ft.)  to $863,100 (2,350 sq. ft.) with an extra $59,000 for a second person. Part of the entry fee is used to pre-pay residents’ future health care services.

 

Monthly Fees- Like entry fees, monthly fees increase with the square footage of units and the number of occupants. For the units noted above, the monthly fees are $3,190 and $9,455, respectively, with an extra $1,850 charged for a second person.

 

Health Evaluation- Prospective residents must generally complete a health questionnaire and undergo a cognitive assessment to be offered entry into a CCRC. This is done when they reach the top of the waiting list and are near the time that they plan to move in. It is a standard risk management practice to reduce the risk of a high number of residents needing nursing care.

 

Financial Evaluation- Prospective residents must also prove that they have the financial resources necessary to live at a CCRC. A net worth statement and supporting documentation is generally required. Common metrics used by CCRCs are that prospective residents should have assets totaling at least twice the entry fee and income totaling at least twice the monthly fee.

 

CCRC Contracts- Most CCRCs have several contract options. The difference boils down to how much care is prepaid. Lifecare contacts prepay unlimited care with a level inflation-adjusted monthly fee for predictability of housing and health care costs. A disadvantage is pre-paying for care that may not be needed. Some people opt to pay less up front and more later, if necessary.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Financial Planning for Longevity

 

Longevity risk is the possibility of living longer than expected and having adequate income/assets for an extended period of retirement. I recently attended a webinar that predicted future life expectancy will increase due to medical technology advances such as CRISPR (modifying DNA).

The webinar also noted that many older adults no longer follow a linear lifeline (birth-school-work-retire-die) but, rather, a cyclical lifeline. They reinvent themselves in later life, often with additional education and new jobs or other meaningful pursuits. Lifelong learning is a key factor.

 

The webinar further explained that the 3-legged stool of retirement income sources (pension, Social Security, investment earnings) is very wobbly. Fewer than 20% of employers provide pensions and the Social Security trust fund is estimated to run out of money in 2033. At the point that reserves are depleted, FICA tax income will be able to pay only about 77% of scheduled benefits.

 

What to do? Below are seven financial planning strategies for “the age of longevity”:

 

¨   Develop a Long-Term Care (LTC) Plan- Consider various options including self-funding LTC expenses, moving to a continuing care retirement community, and LTC insurance. Buy a LTC policy with comprehensive coverage (in-home, assisted living, and nursing home).

 

¨   Optimize Social Security Benefits- Learn about various claiming strategies for Social Security. Consider delaying benefits up through age 70 to increase monthly payments if you are in good health, are financially secure, and expect to live a longer life span.

 

¨   Plan for Health Care Costs- Estimate health care expenses in retirement and work them into your budget. Costs include Medicare premiums, deductibles, copayments and other out-of-pocket expenses. Shop around for coverage during annual open enrollment season.

 

¨   Stay Healthy- Invest time and money in maintaining good health through proper nutrition, regular exercise, and preventive care (e.g., screening exams). Healthy habits can reduce health care costs and improve quality of life in “old old” years (age 85+).

 

¨   Consider a Reverse Mortgage- Evaluate the option of a reverse mortgage to tap into home equity for living expenses without having to move. Be sure to understand the terms of the loan and downsides (e.g., relatively high fees and smaller inheritance for heirs) before proceeding.

 

¨   Explore Annuities- Consider purchasing low-expense annuities to provide a steady stream of income in retirement. Compare different types (fixed, variable, or indexed) to find the best fit for your financial needs and investment risk tolerance.

 

¨   Get Advice as Needed- Consult with a financial planner, tax professional, or estate planning attorney for guidance on investing and tax-efficient asset withdrawal strategies.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Financial Transitions in Later Life

 I recently presented a webinar for financial practitioners called Important Financial Transitions in Later Life. Based on content of my book, Flipping a Switch, “flipped switches” are a metaphor for later life transitions. Below is a brief summary of 11 financial transitions:

Spending Down Retirement Savings- It can be difficult psychologically for “super savers” to spend down accumulated wealth because it feels like a loss. Two good questions to ask yourself are “If you don’t spend your money, who will?” and “What are you waiting for?”

 

Deciding When You Have “Enough”- A good way to determine whether you have saved enough money is to try at least three retirement savings calculators and compare the results.

 

Creating a Retirement “Paycheck”- To create a regular stream of income, options include bond or CD ladders, low-expense annuities, and personalized modifications of the “4% Rule.”

 

Required Minimum Distributions- This is a mandatory “flipped switch.” Make a plan for the use of money that is withdrawn. It can be spent (for living expenses or fun), gifted, or resaved.

 

Later Life Investing- Investors generally get more conservative as they age and guidelines like 100 (or 110,120) minus age are a useful start. Asset classes should be rebalanced regularly.

 

Adjusting to Changed Income- Income changes vs. working years. To adjust to living on less, people can work longer, spend less, move to a less costly home or area, and/or tap home equity.

 

Changed Tax Withholding- Many older adults have multiple streams of income and must make sure that tax withholding/estimated payments are adequate to avoid underwithholding.

 

Becoming a Social Security Beneficiary- Key factors are full retirement age, the annual earnings limit, benefit planning for couples, and a possible higher benefit if you keep working.

 

Health Care Transitions- Older adults have more time for exercise and healthy eating and should earmark a portion of their household budget for out-of-pocket health care expenses.

 

Transitioning to Medicare- A good resource to “get up to speed” is the annually updated Medicare and You handbook. Higher-income beneficiaries need to understand IRMAA, which is the higher monthly Medicare premium that they must pay. There are five tiers of IRMAA.

 

Setting New Financial Goals- Once people get “to retirement,” subsequent financial goals are “through retirement.” Like all SMART goals, they need a projected cost and time deadline.

 

More information about financial transitions in later life can be found in Part 1 of my book.

 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.