The Money Class Part 11

Some of us may need nursing home care. The median daily rate for a private room in a skilled nursing home in 2010 was $206, according to Genworth Financial's comprehensive survey of long-term care costs. A semiprivate room at a private nursing home carried a median daily rate of $185. And that's just today's cost. Like most of our healthcare system, long-term care costs have been rising more than the general inflation rate, about 5% a year. At that pace, the cost in 20 years could easily be $470 a day for a private room, or more than $170,000 a year.

What's really eye-opening, though, is the cost of at-home care, something that many more of us will likely require. At some point we may well need to hire people to come into our homes to help us manage the daily rhythms of life as we age. And that can end up being even more expensive than nursing home care. The median hourly salary in 2010 for a home health-care aide, according to Genworth, was $19; that adds up to more than $450 a day for round-the-clock care. Moreover, a.s.sisted living facilities carry a median monthly rate of about $3,200. Even adult day care is around $60 a day. It's all expensive and something you must plan for if you are going to live a long life without outliving your money.

HEALTH INSURANCE, MEDICARE, AND MEDICAID.

Please know that your current health insurance policies and Medicare do not cover your long-term care needs. Medicare offers limited financial a.s.sistance for short-term recovery periods of less than three months. If you have been hospitalized (for at least three days) and then move to a Medicare-approved skilled nursing home facility, Medicare will only pick up the full tab for 20 days. For days 21100 you must contribute to the cost of your care-called a copay. Beyond 100 days there is no coverage. Medicare coverage for at-home care is also limited. The bottom line is that Medicare will provide limited help in covering your long-term care needs. At Medicare.gov you can download a free booklet that explains Medicare coverage.

A Promising Development: A Partners.h.i.+p Between LTC Insurance and MedicaidIn the past, Medicaid (MediCal in California) has paid for long-term care only after people have spent down most of their own money. As I have said many times, if you think choices where you can receive care when you are on Medicaid are as good as when you are a private-pay patient, I am here to tell you that you are wrong.But a promising program called the Partners.h.i.+p for Long-Term Care makes it possible to hold on to more of your a.s.sets if you were to ever need to apply for long-term care coverage that is provided within the Medicaid program. Under partners.h.i.+p plans, states allow consumers who purchase a state-approved LTC policy to be able to keep a.s.sets equal to the benefits paid out by your policy. The idea is that you buy as much private insurance as you can afford from an insurance company that partic.i.p.ates in the Partners.h.i.+p program and if it isn't enough, you can then use Medicaid as a safety net to help pay for your care for the rest of your life without spending most of your hard-earned money first.You can learn more about these programs-including whether your state has a program in place-at the website of the Long-Term Care Partners.h.i.+p, www.dehpg.net, or in The Cla.s.sroom at my website.

Clearly, planning for how you will be able to cover later-life care expenses is a big piece of your retirement puzzle. It is also of extreme importance for your children as well. In the Family Cla.s.s I discuss how to stand in the truth while raising your kids-instilling good money values and helping them establish a firm financial foothold in their young adult years. Well, Mom and Dad, one of the most incredible gifts you can bestow on your grown children is to do your very best to plan ahead so you can cover your care costs later in life. That will help your kids reach their retirement dreams by reducing the likelihood-or the cost-of helping you out down the line. That is not just a financial gift; it carries tremendous emotional power as well. Releasing your adult children from the worry of how they might have to simultaneously care for you and their own family gives them more breathing s.p.a.ce to live their lives to their fullest. That's part of your legacy as well.

And that is why I think everyone who can truly afford a solid LTC insurance policy should have one. Please read that carefully; the point I am going to stress here again is affordability. I am not just talking about the cost of a policy you buy today. The biggest challenge is to make sure that you will be able to afford paying an LTC premium year after year. You should antic.i.p.ate an increase of 50% in that premium cost, too, over time. The LTC insurance industry is still in its early growth stages and insurers have yet to figure out how to properly price the policies to cover their claims. What has been happening is that many LTC insurers have raised their rates on existing policies by double digits. And some insurers have recently decided to stop selling new policies, period (don't worry; they are still honoring existing policies). I do not think that is a reason to avoid LTC insurance. But it does make it very important to shop wisely and make sure the policy you buy today is a policy you will still be able to afford if it incurs a price hike.

You can learn more about LTC policies at the website www.longtermcareinsurance.gov. The consumer section of the American a.s.sociation for Long-Term Care Insurance (www.aaltci.org) is also a good resource for learning about LTC insurance as is the Life and Health Insurance Foundation for Education (www.lifehappens.org). Below I walk through the ins and outs of LTC; after you read what I have to say I encourage you to explore these websites and learn more.

LONG-TERM CARE BASICS.

Long-term care insurance is a lot like car or home insurance. You choose the parameters of your coverage and pay an annual premium to keep the policy in force year after year. Eventually, if your physical or mental capacities decline and a doctor deems you need care, you then file a claim on your LTC policy that will give you money you can use to pay for your care. During any period when you are receiving an LTC insurance benefit you are not required to pay the premium. The challenge is that you must carefully think through exactly what coverage you want; unlike car or auto insurance, there are no mandated guidelines. You are in charge of building your own custom policy that fits your family's needs and, most important, your budget.

I highly recommend you work with a qualified insurance broker who specializes in long-term care insurance. An LTC specialist can help you build the right policy for your situation and will get you quotes from multiple LTC insurance companies. Ask friends for leads, or refer to the websites I mentioned above for more information on how to locate qualified LTC insurance agents.

Here are the key points you want to discuss with an LTC insurance agent: * The daily or monthly benefit amount The daily or monthly benefit amount. This is one of the most important decisions you will have to make. How much will your policy pay you per day, or monthly, to cover you if you need care in an a.s.sisted living facility or a nursing home?

* Find out what care costs in your area Find out what care costs in your area. The cost of care-be it home care, a.s.sisted living, or nursing home care-varies widely depending on where you live. Genworth Financial publishes a comprehensive annual cost survey that breaks down costs by state and metro region. You can get a free copy of the report at www.genworth.com.

* Buy only what you can afford Buy only what you can afford. One of the biggest mistakes people make when evaluating LTC insurance policies is to think that they must buy a policy that covers 100% of the cost in their area for a certain number of years. A 100% policy is a nice goal, but it may not be realistic for many of you. Please do not be discouraged. And please do not stretch your finances to buy a policy that is not really affordable. That makes no sense.

I want you to focus on what is possible and realistic. Focus on what you can do, not what you can't. Every penny in LTC benefits you can realistically afford today is a penny that you-and your children-will not need to pull out of your own savings if you indeed require care at a later age.

* How your benefits will be paid How your benefits will be paid. There are four basic ways you can receive payment.

1. Reimburs.e.m.e.nt. You are paid back for daily or monthly costs you incur.

2. Indemnity. You receive a set daily or monthly benefit regardless of your expenses for that period.

3. Cash. You receive a check each month and can use the money as needed. This means you can use it to pay informal care-givers like family, friends, neighbors, or sitters, as well as companions provided by a caregiving agency. Be aware, though, that if you choose this method you will likely be responsible for the Social Security, Medicare, and unemployment tax of people you pay for care.

4. Hybrid. This is a new offering that allows you to take up to 40% of your home healthcare benefit in cash to use in any way you choose. A qualified LTC insurance agent will help you sort through the best choice for your circ.u.mstances.

* The type of care that is covered The type of care that is covered. You can choose a policy that will only pay a benefit if you are in an a.s.sisted living facility or a nursing home, or you can opt for a plan that offers coverage for at-home care in addition to coverage for care in an a.s.sisted living facility or nursing home. I highly recommend you consider as broad a policy as possible that covers not just nursing home care, but all types of care. Nearly 70% of current LTC claims are made for at-home or a.s.sisted living care. Flexibility here is so important.

* The elimination period The elimination period. Sounds awful, doesn't it? This is simply the number of days you must pay out of your own pocket before your policy begins to make payments. It is the LTC version of an insurance deductible. You can typically choose a 30-day, 60-day, or 90-day elimination period. The longer the period, the lower your premium will be. But please be very careful here and make sure that if you choose a longer elimination period you can afford to cover those costs on your own. Ask your agent to calculate the expected daily cost at age 75 and age 85 and then multiply those costs by 30, 60, and 90 days. That is what you must have in savings to pay for your own care during the elimination period.

* An inflation rider An inflation rider. We all know that healthcare expenses in our country keep going up and up, far more than the general inflation rate. And long-term care is no exception. That is why I absolutely insist that you purchase only an LTC policy that includes an annual inflation adjustment that increases the value of your benefit each year. I recommend you lock in a 5% annual inflation adjustment and make sure that the inflation is calculated using "compounding" rather than simple interest. Compounding will give you the largest benefit increase over the years if you start in your 50s.

Note: State-approved partners.h.i.+p policies require some type of inflation benefit if you are under age 76 when you buy, and compound if you are under age 61. State-approved partners.h.i.+p policies require some type of inflation benefit if you are under age 76 when you buy, and compound if you are under age 61.

Go to The Cla.s.sroom at www.suzeorman.com:You will find more information there about the various inflation choices you have when purchasing an LTC policy.

* Spousal/partner policies Spousal/partner policies. Couples have some LTC options that can reduce their total costs, including having access to each other's benefit pool if one needs more care or to inherit unused benefits when one dies. Another option is to buy one policy that either person can use. Make sure your agent explains how a combined policy could work for you and your spouse. Also, if you are in a same-s.e.x relations.h.i.+p many policies will also give you a discount if you and your partner both apply. In most cases you just need to be living together and be able to prove that you are in fact a true partners.h.i.+p.

* How long you want benefits to be paid How long you want benefits to be paid. The average claim period for an LTC policy is about three years. Common choices are 2, 3, 4, 5, or 6 years, and unlimited. A policy that pays benefits no matter how long you need care can be very expensive; a policy that will pay for three years of care will be far less expensive. Ask your agent to explain the difference in premium costs if you were to purchase a policy with a three-year, five-year, or unlimited benefit pool.

Note that this is where the Long-Term Care Partners.h.i.+p plans I mentioned earlier can be especially helpful. With a partners.h.i.+p plan you buy the amount of time you can afford and if you wind up needing care longer, the state will let you apply for Medicaid's help while keeping a.s.sets equal to what your policy has paid out in benefits. But please also think about more than money here. If your family has a history of dementia or Alzheimer's or other long-term debilitating illnesses, you will want to weigh the possibility of needing care for more years, not fewer.

As you can see, there are many variables that will impact the cost of your premium. You want to work with an LTC agent who will get you quotes for a variety of scenarios, and then you can sit down together and carefully a.s.sess what makes the most sense. If you do not have access to a local LTC insurance specialist, or cannot find good references, contact LTC insurance consumer advocate and educator Phyllis Shelton at GotLTCi.com for advice. Phyllis is a tremendous resource; she helped me purchase my own LTC insurance policy. And just to antic.i.p.ate a question: I have no business arrangement with Phyllis and do not receive a penny from any policy you might purchase. for advice. Phyllis is a tremendous resource; she helped me purchase my own LTC insurance policy. And just to antic.i.p.ate a question: I have no business arrangement with Phyllis and do not receive a penny from any policy you might purchase.

Employer-Sponsored LTC Insurance Policies Can Be a Great DealBe sure to check and see if your employer offers access to a long-term care insurance policy. This can be a great way to get coverage, as there is typically a more lenient process for a.s.sessing your health status.If your employer does sponsor an LTC insurance benefit you can purchase, other family members-parents, grandparents, siblings, and adult children-may be eligible to apply and will have access to the same premiums as you. The same idea works in reverse as well: Ask your adult kids if their employer offers an LTC insurance benefit that is extended to family members.

As you narrow your choices, please make sure you follow these two steps: 1. Add 50% to the quoted premium. When you buy an LTC insurance policy in your 50s, you could pay the premium for decades before you ever make a claim. And the reality is that over those years there is a very real possibility your premium will rise. Insurance companies are not allowed to raise premiums on an individual-by-individual basis; they must apply to the state insurance commission for an across-the-board hike that is applied to all policyholders in that state, or within a group policy. But I need to be up front here: We are seeing some insurers win very large premium increases of 25% to 40% as the insurers are learning that their claims are running much higher than antic.i.p.ated.

So that's why I want you to compute what a premium quote you receive today would cost you if it were to rise as much as 50%. Let's hope you aren't hit with such a big premium increase. But I need you to decide if you could in fact afford the premium if it were to rise that much. Please face up to this possibility, because it is so important. It makes no sense to buy a policy today if you cannot handle an increase. I am so saddened by the many people who have been hit with a large increase and then abandon their policy after having paid thousands of dollars in premiums. That is such a tragic waste of money.

So what do you do if you already own an LTC policy and your premium has increased to a point where you can't afford it? The worst possible outcome is that you walk away from the policy entirely. Talk to your LTC insurance agent about how you may be able to keep the cost affordable, possibly by reducing your benefits. I also encourage all parents to talk to their adult children about what is happening. If you drop the coverage entirely it raises the likelihood that you and your children may one day need to pay all the costs for care. I would recommend you ask your children if they could help you pay for the increase in the premium. I know how hard that is to contemplate, but please think through what a gift this may be for them. By contributing $1,000 or $2,000 or so a year now to help you pay your premium, they are buying insurance for themselves as well: the insurance that they will not need to pay what could be tens of thousands of dollars a year if down the line you need care and you do not have the LTC policy.

Now, if after adding 50% to the current cost you decide the policy is unaffordable, that doesn't mean you shouldn't buy LTC insurance. What you want to do is rethink the level of coverage so you can reduce the premium enough today that it will still be affordable if in the future you face a premium increase.

2. Consider policies from financially strong insurers that have been in the LTC business at least 10 years. When you purchase an LTC policy it is with the expectation that the insurance company will still be alive and well 10, 20, 30 years from now when you might make a claim. I want you to focus on insurers who have strong financial strength ratings from one of the major rating agencies-Standard & Poor's, Moody's, or A.M. Best. Each firm uses a slightly different rating scale. Here's a guideline for what const.i.tutes a very strong rating for each insurer: - Standard & Poor's: AA or better - Moody's: AA or better - A.M. Best: A or better I also recommend you only work with an insurer that has a good track record in the LTC market, and that has not run into complaints with your state insurance commissions for unjustly denying LTC benefits claims. You can find a list of companies selling LTC insurance in your state at www.naic.org/state_web_map.htm. You can research complaints at https://eapps.naic.org/cis.

Some good companies currently writing new LTC policies as of late 2010 are Berks.h.i.+re Life (part of Guardian Life), Country Life, Genworth, Ma.s.s Mutual, Mutual of Omaha, New York Life, Northwestern Mutual, Prudential, State Farm, and Transamerica.

Being able to qualify for long-term care insurance is a precious gift. If you can get it, I encourage you to do so and not allow anyone to talk you out of it. LTC coverage, in my opinion, offers more than financial protection for you. If your children don't have the money to pay for your care, they may wind up making really difficult lifestyle choices in order to care for you themselves. They may have to give up a promising career that could affect their ability to pay for your grandchild's college education. Or they may have trouble maintaining a committed relations.h.i.+p because your care becomes their first priority. This is why I want to leave you with the thought that long-term care insurance is really about taking care of your family and preserving your dignity.

LESSON RECAP.

We should have a special graduation exercise for making it to the end of this cla.s.s. It feels more like you've earned a degree, given all the topics we have covered, than having taken a cla.s.s.

I want you to know that I understand just how easy it can be to read through this cla.s.s and be overcome with anxiety. It's a huge amount of information to process-and it's not just facts and figures; every fact carries an emotional component. There is no way that the subject of retirement finances can be discussed in a lab, devoid of the human cost of every calculation. Add to that the anxious economic news of the past several years and it creates a cauldron of worry. I get it. But I also know that misinformation and ignorance are what anxiety thrives on, and the only way to combat it is through knowledge and action. That is why the information imparted in this cla.s.s is so dense and so comprehensive. Now that we've reached the end, I hope I've at least been able to alleviate your concerns about not knowing what to expect. The emotional impact of the information I cannot dismiss so easily, but I can tell you what you need to know and what you need to do to face down that vast unknown territory just over the hilltop of your working life. I've been down that road with many of you before. It's where I started when I wrote my first book.

When I wrote You've Earned It, Don't Lose It You've Earned It, Don't Lose It in 1994, I thought the retirement planning process was complicated enough. But in retrospect, retirement in those days could still well be called the golden years. The majority of my private clients had old-fas.h.i.+oned pensions to look forward to; our work was to figure out what the best payout method for them was. Today the issues are so much more complex; you must set aside your own money in retirement accounts, you must figure out how to invest that money, and then in retirement it's up to you to figure out how to withdraw that money without risking that the well runs dry before you die. And fifteen years ago far fewer people within a decade or so of retiring were still staring at huge mortgages and ma.s.sive bills for their children's college education. Nowadays, you may have earned it, but the ways in which you can lose it are much more varied and in many ways more treacherous. in 1994, I thought the retirement planning process was complicated enough. But in retrospect, retirement in those days could still well be called the golden years. The majority of my private clients had old-fas.h.i.+oned pensions to look forward to; our work was to figure out what the best payout method for them was. Today the issues are so much more complex; you must set aside your own money in retirement accounts, you must figure out how to invest that money, and then in retirement it's up to you to figure out how to withdraw that money without risking that the well runs dry before you die. And fifteen years ago far fewer people within a decade or so of retiring were still staring at huge mortgages and ma.s.sive bills for their children's college education. Nowadays, you may have earned it, but the ways in which you can lose it are much more varied and in many ways more treacherous.

I've been asked numerous times over the years to update my first book or to write a new book about retirement. I resisted, until now. As you can see from this chapter, the subject is a complex one in so many ways: from the changes in legislation to the seismic economic jolts to the way we see ourselves aging in society...this is one tough subject to tackle. Maybe the toughest. But there was no way to write a book about the New American Dream without a top-to-bottom reconsideration of retirement. The image our grandchildren will have of us in our golden years will no doubt be radically different than the way we viewed our grandparents in their dotage. And so our Act III will shape their notion of the American Dream. It's just one more reason-not that you needed another!-why it is so important to make the most of these decades that precede retirement. Reimagining the American Dream is the legacy you will hand down to future generations. I urge you to face this challenge with all the courage you can muster and a generous amount of hope. Here's to a better tomorrow, and the best possible retirement in a decade or two.

Once more, let's run down the major points of this cla.s.s: - Consider paying off your mortgage before you retire.

- Start planning for how you will be able to keep working well into your 60s.

- Save more today so you will be okay if you can't afford to save in your 60s.

- Make it a goal to delay when you start drawing Social Security, so you can earn a benefit that could be 80% bigger than if you start early.

- Make sure all your retirement accounts are invested to complement one another.

- Decide no later than age 59 if long-term care insurance should be part of your retirement plan.

CLa.s.s.

LIVING IN RETIREMENT.

THE TRUTH OF THE MATTER.

The impact of the recent financial crisis has made life anything but easy for today's retirees. Believe me, I know: Those of you who are living off your savings and Social Security have been among the hardest hit these past few years.

Ever since the downturn took hold in 2008, the Federal Reserve has aggressively reduced the federal funds interest rate in an effort to encourage businesses to borrow and lend more. That may have helped our economy avoid an all-out depression, but as every retiree knows only too well, the Federal Reserve policy means that all short-term interest rates are now at near record lows. In early 2011, a six-month certificate of deposit (CD) has a yield of less than 1%. In 2008, before the crisis, that same CD was yielding 5%. Let's say you had $250,000 that you kept safe and sound in CDs. Three years ago that portfolio might have generated $12,500 annually in interest. In early 2011 the same account would be earning just $2,000. How are you supposed to make ends meet on a fixed income, when your income just fell by nearly 85%?

And then there is the frustration with Social Security. For two straight years there has been no cost of living increase added to your benefit even though many of your daily expenses cost more today than they did in 2009. And even if you had the energy and determination to go back to work part-time to bring in some extra cash, it's not exactly an easy time for anyone, especially retirees, to find work.

It is indeed a very tough time for retirees. Tough, but not insurmountable. Even if you are living on a fixed income, there are steps you can take today that can help. The core of this cla.s.s is instruction on how to maximize your savings so they earn as much as possible for you. That entails a lesson in knowing what to do-invest in dividend-paying stocks-as well as what not to do: Avoid long-term bonds and bond funds.

I look back to 1995, when I published my first book, You've Earned It, Don't Lose It You've Earned It, Don't Lose It, and the temptation is to see it as a much simpler time. True, we tend to view times past with that kind of nostalgia, but in this case, the description fits. My advice back then was focused on how soon-to-be-retirees and retirees should handle their retirement income. Most of my clients back then came to me with a fairly simple task: how best to take their pension from their employer. Those ample pensions along with Social Security were a solid foundation for being able to live comfortably.

But for so many of you today, you may not have a pension, or your benefit was frozen years ago. Another interesting trend is that many of you may have opted to take a lump sum from your pension, and now you are struggling with how to make that lump sum last, and generate income for you.

In 1994 investing for income was relatively easy. Back then we could earn more than 4% in a 12-month Treasury bill. As I write this in early 2011 the current rate is 0.29%. And back then, if we chose to lock in higher yields in longer-term bonds, the risk was far less than what you face today. In the mid-1990s we were still in the early stages of a cyclical decline in interest rates from a high that had peaked in the early 1980s. As you may know, when interest rates fall, the price of bonds rises, so even though the yield we could earn on bonds was falling, the value of those bonds was climbing. Today we face the exact opposite scenario. We are now at the end of that long cyclical decline, and in the coming years we will see interest rates climb. When that transpires bond prices will drop. That makes it an especially dangerous time for retirees today; if you are venturing into long-term bonds and bond funds because of their higher yields, you may well find your portfolio stung by falling bond prices going forward when rates rise.

And we have to be honest: Some of your income may still be going toward paying down debt. Unlike the majority of my clients from 15 and 20 years ago, today's retirees tend to have more debt than retirees of generations past. The prevalence of retirees still with mortgages or home equity lines of credit is higher today than it was 15 and 20 years ago. Nor have retirees been able to steer clear of credit card debt. At the same time, medical costs above and beyond what is covered by Medicare keep growing at a rate that exceeds the general rate of inflation.

There is no question that living in retirement today is more challenging for more of us than it has been at any point in the past 75 years-probably since the Great Depression. That may sound like cold comfort, but some hard-to-find perspective could be your greatest a.s.set right now. I have heard from so many of you how devastated you are that your sizable retirement portfolio lost $100,000 or more during the recent bear market. You are right to be upset; a loss of any magnitude is hard to swallow. But let's think through how that loss impacts your month-to-month living. As I explain later in this cla.s.s, you probably don't want to withdraw more than 4% of your retirement fund each year. So let's say your $500,000 portfolio fell to $400,000. At a 4% annual withdrawal rate that means you might need to reduce your withdrawal from $20,000 a year to $16,000. That's $333 a month. I realize that is not an inconsequential sum. But in practical terms that is easier to manage than a onetime $100,000 hit. Convert it into its tangible impact on your life today-$333 a month-and it becomes a little easier to cope with. The challenge then becomes how you might rein in your spending until your portfolio recovers.

Because everyone could use help in navigating this pa.s.sage, I have organized this Retirement Cla.s.s into six lessons: - Home Finances: Stand in the Truth of What Is Affordable for You - Coping with the High Cost of Healthcare in Retirement - Stick to a Sustainable Withdrawal Rate - Avoid Long-Term Bonds and Bond Funds - Earn Higher Yields by Investing in Dividend-Paying ETFs and Stocks - Double-Check Your Beneficiaries and Must-Have Doc.u.ments LESSON 1. HOME FINANCES: STAND IN THE TRUTH OF WHAT IS AFFORDABLE FOR YOU HOME FINANCES: STAND IN THE TRUTH OF WHAT IS AFFORDABLE FOR YOU.

If you are already retired and you're feeling the pinch of a mortgage that is yet to be paid off, I must ask you to consider if you can truly afford to stay in that home. I recognize the weight of that consideration and how upsetting an idea it can be when you first confront it; after all, having to leave your home was probably not a part of a retirement forecast made years before. But I am making a few a.s.sumptions here: First, if you are reading this chapter you are likely in your late 60s or your early 70s. Your income-earning days are probably behind you, yet there is a very good chance you have at least another 1520 full and rich years ahead of you. If a mortgage payment is already weighing you down each month and causing anxiety, then that stress will not get better with time, as you grapple with other rising costs, such as healthcare not covered by Medicare; it will only get worse.

If you recognize yourself in the paragraph above, then I encourage you to read the advice I give in the prior cla.s.s about paying off your mortgage on an accelerated schedule. Beginning on this page this page you will find a detailed strategy for how to tap retirement savings to pay off the mortgage. you will find a detailed strategy for how to tap retirement savings to pay off the mortgage.

The first crucial question you must address, of course, is whether you can indeed afford to pay off your mortgage. That is, if you were to use a portion of your savings today to pay off the mortgage, would you still have enough in your retirement accounts to support you for years to come?

This is your stand-in-the-truth moment. I need you to summon a lifetime's worth of courage and honesty. For if the truth is that paying off your mortgage would deplete your retirement savings to a level that could impact your ability to live comfortably, then we need to face the fact that perhaps it is time to consider moving to a less expensive home, perhaps in a less expensive neighborhood or region of the country.

What about a reverse mortgage? Yes, this is indeed an option. But as I explain in the Home Cla.s.s, if you feel the need to do a reverse mortgage in your 60s and early 70s, that is a signal to me that your finances are already too stretched. The costs and trade-offs of a reverse mortgage are indeed steep. Please read that section of the Home Cla.s.s and then ask yourself if it makes sense to stay in your home or if it is the unspoken root of your anxiety.

I have to tell you that as hard as the decision may be for you today, it will be a gift for you and your family if you can summon the strength to make that decision sooner rather than later. What I see so often is retirees refusing to contemplate the affordability issue, and then in their 80s it falls to their kids to make that most difficult of calls. And if you need to move at that juncture, the upheaval will be so much more taxing emotionally and physically.

I encourage you to make this a family discussion. Let's all be realistic here: In the coming years your adult children may need to step in with some financial a.s.sistance-just as you may have done for your parents. That is part of the rhythm of life across the generations. My suggestion here is that you ask your grown children for their input. It may be that your children have the ability to help you get the mortgage paid off today; and if you and they believe that staying in your home is the best course for all parties concerned, then that could be a wonderful option. But perhaps in having this conversation you get your children to open up about their financial situation as well. And the fact is, many of them may already be stressed over how to make their own household's finances work. The prospect of needing to help you as well-now or later-could be something that is already of concern to them. It's not that they don't want to help; it's that they don't know how they will be able to help, given their own retirement concerns, lower home equity, and financial commitments to their own children.

So I ask you to please start talking, so you can decide together and examine how these financial decisions will impact other generations. And if you haven't yet read the Family Cla.s.s, please make it your next stop. As I suggest in that cla.s.s, in some families it might be worth considering combining households, be it with your children, siblings, or cousins. I know, I know-that will strike many of you as a horrendous idea that compromises your fundamental independence. But I take issue with the stigma that seems to be attached to this idea. Not only can it be a great financial move, it can also provide companions.h.i.+p for all. Countless studies have shown the health and psychological benefits of elderly people staying engaged with family and community; and we know in our hearts that grandparents can enrich the lives of their grandchildren in so many meaningful ways. In my opinion, it's certainly something worth considering.

LESSON 2. COPING WITH THE HIGH COST OF HEALTHCARE IN RETIREMENT COPING WITH THE HIGH COST OF HEALTHCARE IN RETIREMENT.

If you are already enrolled in Medicare you no doubt have come to realize something important: It doesn't cover everything. Now, one bright spot for many of today's retirees is that your former employer may be subsidizing your healthcare expenses that aren't covered by Medicare. But that benefit too could be heading toward extinction for those not in public-sector jobs. The percentage of large firms (500+ employees) that offer retiree health coverage has fallen from 40% in 1993 to 21% today. The percentage is far lower for employees of smaller firms. In most instances the retiree is wholly responsible for paying his or her premium cost.

A reality we must all accept is that the price of medical care is rising at a pace that far outpaces the general inflation rate. And to date, Was.h.i.+ngton has yet to address ways to bring costs down to a more manageable growth rate. So the likelihood is that your out-of-pocket medical costs will keep eating up a greater percentage of your annual income. I mention that not to scare you, but to focus you on reality. Any extra saving you can do today means more money you will have to cover those costs.

If you don't yet have long-term care insurance and you are still in relatively good health, I also want you to carefully read through the LTC lesson in the previous cla.s.s. As I explain, the ideal time to purchase LTC insurance is before age 59, but that does not mean you cannot or should not purchase a policy if you are older. Yes, the premium will be more expensive. And that may mean you will need to consider a policy with less coverage than you might have been able to afford if you had purchased a policy in your 50s. But there is still so much security to be gained from purchasing a policy today, if in fact you can afford to do so.

And I would urge you to include any grown children in this decision. I think a family strategy for LTC insurance is something that can have a huge benefit for both generations. Let's say you get a quote for an LTC insurance policy that is for $4,000 a year. You crunch the numbers and know that all you can truthfully afford is $2,500 a year. Before you walk away from the idea, or ask for a new premium quote with lower benefits, please talk to your children. If you have two grown children who can each pitch in $750 a year (less than $63 a month), they can help you afford the $4,000 premium. And I have news for you: They are not doing you a favor; you are doing them the favor. I can't overstate this fact: While your kids will do anything and everything to take care of you in your later years, many of them are in a slow panic over how they will be able to afford helping you while also supporting their own family. By asking them to help you purchase an LTC insurance policy, you have just given them an incredibly affordable means to protect themselves from much of those future costs. Please do not get trapped in misplaced pride. Asking your children to share in this insurance cost is ultimately an act of caring.

What to Do If Your Current LTC Policy Has a Huge Premium IncreaseIn recent years, many people who already own an LTC insurance policy have been hit with budget-busting premium increases of as much as 40%. I can imagine how unsettling that is for households that were so careful and responsible to buy LTC insurance, only to struggle with whether they can afford to keep the policy. And as I explain in the LTC lesson in the previous cla.s.s, the trend toward higher premiums could be here to stay for many years.If you ever are hit with a steep premium increase, please promise me that you will do everything possible to keep some level of insurance. For starters, please reread the advice I just gave: Your kids may be very eager to step in and help with the added cost. If that is not practical, then talk to your agent about how you can adjust the level of coverage-maybe shorten the lifetime benefit or increase the elimination period-to bring down the cost of the new premium.

LESSON 3. STICK TO A SUSTAINABLE WITHDRAWAL RATE STICK TO A SUSTAINABLE WITHDRAWAL RATE.

I have stated this elsewhere in the book, but I want to make sure retirees have heard this: If you have made it to retirement age, there is a very good chance that you will live two or three decades in retirement.

A 65-year-old man today has an average life expectancy of age 82 and a 65-year-old woman has an average life expectancy of age 85. Understanding what average average means is important: If you are 65 years old with a life expectancy of age 85 you have a 50-50 chance that you will still be alive at 85. Life expectancy is not a statistical estimate of when you will die; it is a measure of the age at which 50% of an age group will still be alive. And if you in fact make it to those life expectancy milestones, your life expectancy resets again-about five years or so. My mom, G.o.d bless her, is still alive at the age of 95. means is important: If you are 65 years old with a life expectancy of age 85 you have a 50-50 chance that you will still be alive at 85. Life expectancy is not a statistical estimate of when you will die; it is a measure of the age at which 50% of an age group will still be alive. And if you in fact make it to those life expectancy milestones, your life expectancy resets again-about five years or so. My mom, G.o.d bless her, is still alive at the age of 95.

So that is why I want those of you retiring today to follow the 4% withdrawal rule in the first year of retirement if you are going to begin making those withdrawals in your 60s. That is, you should aim to withdraw no more than 4% or so of your savings in the first year of retirement. You can then adjust that amount upward each year for inflation, but try to keep your early withdrawal rate at 4%. If you have an age-appropriate mix of stocks and bonds, at a 4% withdrawal rate you minimize the chances your money will run out too quickly. An a.n.a.lysis by T. Rowe Price estimates that a retiree with a portfolio that is invested 40% in stocks and 60% in bonds would have a 90% probability of his money lasting 30 years if he chose a 4% initial withdrawal rate that was then increased each year to keep pace with inflation.

Now pay attention here: If that retiree instead chose a 6% withdrawal rate the probability he would still have any money left after 30 years falls to 24%. This person went from a 90% chance of having his retirement money last 30 years to a 24% chance because of a 2% increase in withdrawals. Wow-take a minute to process that. Let's say you have a $500,000 retirement portfolio that you are going to start making withdrawals from this year. A 6% annual withdrawal this year comes to $30,000, or $2,500 a month. (Remember, though: Withdrawals from traditional 401(k)s and IRAs will be taxed as ordinary income, and you may owe a capital gains tax on withdrawals from regular taxable accounts as well.) But that $2,500 a month comes with a big risk that you might run out of money. To have a 90% probability your money will outlast you requires that you make do with a 4% initial withdrawal rate. That's $20,000 a year, or $1,667 a month-nearly $1,000 less each month, in this example. It's a significant difference, but then again, is there anything more important than the certainty that your money will last you throughout your retirement? In that two-percentage-point variance lies a world of difference.

Now, if you are many years into retirement, you may well be able to pull out more each year. If you manage to wait until your 70s to begin to make withdrawals, you can consider starting with a 5% withdrawal rate. And of course, if you have other reliable income sources such as a bountiful pension, you may indeed be fine with a higher withdrawal rate. But again I would caution you to be careful. I appreciate that with interest rates so low, the yield you can earn on your bond and cash investments has made it hard, if not impossible, to generate enough income to pay your bills. But the answer is not to withdraw big sums from your account. If you eat into that princ.i.p.al too much and you are fortunate enough to enjoy a long life, I am sorry to tell you that you very well may run out of money.

In the next two lessons I explain how to invest in today's environment so that you can earn 4% to 5% interest on your retirement money. Can it be done? You bet, but it is not as easy as just walking into a bank or credit union and asking for a CD or leaving your money in a money market fund. To create your New American Dream you are going to have to be involved with your money, to know what to do and what not to do. And believe it or not, we are going back to the future. We just may have to do it the way our grandparents did, years ago.

HOW TO MAKE TAX-SMART WITHDRAWALS.

When you make withdrawals from your retirement accounts, the tax you owe will be based on the type of account. In these times when you want to maximize every penny of your retirement income, you need to devise a withdrawal strategy that allows you to keep your tax bill as low as possible.

* Traditional 401(k)s and traditional IRAs Traditional 401(k)s and traditional IRAs are subject to a required minimum distribution (RMD) by April 1 of the year after you turn 70. The firm that holds your retirement accounts can tell you what your RMD must be, or you can use the online calculator at are subject to a required minimum distribution (RMD) by April 1 of the year after you turn 70. The firm that holds your retirement accounts can tell you what your RMD must be, or you can use the online calculator at apps.finra.org/Calcs/1/RMD. (If your spouse is the beneficiary of your accounts and is 10 years younger than you, your RMD will be lower than the amount shown in the calculator. I recommend you consult with your tax advisor.) The tax you owe on RMDs is based on your individual income tax rate.

It is very important to follow the RMD rules; there is a 50% penalty (of the amount that should have been withdrawn) if you fail to make your annual withdrawal. That 50% is in addition to the income tax you owe on all withdrawals.

RMD Tip: If you have multiple tax-deferred accounts, you do not have to take an RMD from each one. You can calculate the total amount due across all the accounts, but then make your withdrawal from just one account. That can cut down on administrative headaches. It also gives you more control over which a.s.sets you want to sell. If you have multiple tax-deferred accounts, you do not have to take an RMD from each one. You can calculate the total amount due across all the accounts, but then make your withdrawal from just one account. That can cut down on administrative headaches. It also gives you more control over which a.s.sets you want to sell.

While you must take your annual RMD from your traditional 401(k) and IRA, I recommend you do not take out more than the RMD if you have other money you can access first. It is always smart to leave money that is sheltered from tax growing for as long as possible. If you have other savings you can tap, that is preferable, especially when those other accounts will bring a less painful tax bill.

* Roth IRAs: Roth IRAs: Withdrawals of money you contributed to a Roth IRA are always tax-free. To withdraw earnings from your account tax-free you must be at least 59 or have had the account for at least five years. Withdrawals of money you contributed to a Roth IRA are always tax-free. To withdraw earnings from your account tax-free you must be at least 59 or have had the account for at least five years.

* Regular taxable accounts: Regular taxable accounts: Money you withdraw from regular accounts will be taxed only if you have a gain, that is, if you are selling the a.s.set for more than you paid. If you have owned that a.s.set for less than one year, you pay the tax at your ordinary income tax rate. But if you have owned the a.s.set for at least one year it is eligible for the long-term capital gains tax rate. The long-term capital gains rate is either 10% or 15%, depending on your income. Those rates are in effect through 2012. A maximum long-term capital gains tax rate of 15% is a lot better than what you might pay on ordinary income; the top income tax rate is 35%. Money you withdraw from regular accounts will be taxed only if you have a gain, that is, if you are selling the a.s.set for more than you paid. If you have owned that a.s.set for less than one year, you pay the tax at your ordinary income tax rate. But if you have owned the a.s.set for at least one year it is eligible for the long-term capital gains tax rate. The long-term capital gains rate is either 10% or 15%, depending on your income. Those rates are in effect through 2012. A maximum long-term capital gains tax rate of 15% is a lot better than what you might pay on ordinary income; the top income tax rate is 35%.

Another important consideration is that any loss you have in a taxable investment can be used to reduce your tax bill. (You cannot claim losses from 401(k) and IRA investments.) You can use any loss to offset any capital gains for a given tax year. If you don't have any tax gains, you can claim up to $3,000 of your losses as a deduction. If your loss is more than $3,000 you can keep claiming more losses in subsequent years-either to offset gains in those years, or as a deduction.

Here is how I want you to think strategically about which accounts you withdraw money from to support yourself in retirement: 1. If you are at least 70: If you are at least 70: Fulfill your RMD on traditional IRA and 401(k)s but do not withdraw more than the RMD. Fulfill your RMD on traditional IRA and 401(k)s but do not withdraw more than the RMD.

2. If you are under 70 or you need more income than is generated by your RMDs: If you are under 70 or you need more income than is generated by your RMDs: Withdraw money tax-free from a Roth IRA. Withdraw money tax-free from a Roth IRA.

3. If you don't have a Roth IRA: If you don't have a Roth IRA: Withdraw money from taxable accounts. Withdraw money from taxable accounts.

4. If you don't have a taxable account: If you don't have a taxable account: Make additional withdrawals from your traditional 401(k) and IRA accounts. Make additional withdrawals from your traditional 401(k) and IRA accounts.

LESSON 4. AVOID LONG-TERM BONDS AND BOND FUNDS AVOID LONG-TERM BONDS AND BOND FUNDS.

One of the biggest mistakes I see retirees making today is investing in long-term bonds (and bond funds) because they offer the highest current yields. That is an especially risky move to be making right now. Going forward it is likely we will see interest rates begin to rise and when that happens, the value of long-term bonds will fall. This hasn't really been an issue for nearly 25 years, as we have been living in an extended period where interest rates have been falling. That cycle is coming to an end, and I fear that an entire generation of retirees is about to get a very costly lesson in how rising interest rates can hurt them.

Please read the next section carefully. If your retirement dream relies on income from long-term bonds that you are purchasing today, you may in fact be putting your dream at great risk.