Afford Anything - Ask Paula: Is Mom Getting Ripped Off by Her Investment Advisor?!

Episode Date: December 27, 2023

#479: Nicole’s 78-year-old mom is paying huge fees for low returns. How can Nicole help her mom make better investments? Paul is a single dad, worried about paying his daughter’s college costs. He’s trying to figure out how to report lower income on the FAFSA, so that his daughter can get better financial aid. Nick is in his 40’s. His long-term care insurance rate is nearly doubling. Should he stop spending on this type of insurance? Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode479 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, when you were a financial advisor, did you ever have clients who had multiple financial advisors, you and other financial advisors? Yes. And that was always a struggle. Well, we are going to kick off today's episode with a question from someone whose retired 78-year-old mom has two financial advisors, done, done, and some questions that come along with it. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice you make carries a trade-off. And that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, to any limited resource that you need to manage. So that opens up two questions. What matters most? And how do you make decisions accordingly? Answering those questions is a lifetime practice. That's

what we are here to explore and facilitate. My name is Paula Pant. I am the host of the Afford Anything Podcast every other week. We answer questions that come from you alongside my buddy, the former financial advisor, Joe Sal Cah. What's up, Joe? What's up, Paula? How are you? I am great.

How are you doing? I'm good. So I went to a local farm, which has all kinds of local produce. I'm actually taking one of the masterclass, Michael Pollan's master class, I'm better eating. And one of the things, one of the, one of the lessons there was to find a regenerative farm in your area. I'm like, I live in northeast conservative Arkansas. There ain't going to be any, there is. There's this really cool farm.

And this woman has all these wonderful products. And so I am drinking locally roasted coffee. And tonight I'm having locally made Browwurst. Wow. Where's my invitation, Joe? Come on, let's go, Paula. I actually will be crashing at your place for the eclipse. I heard, and guess who won't be here?

You. It'll be just me. Because I am trying to visit your sister in Nepal, and Paula, where's your sister going to be while I'm in Nepal at her house? So you will be visiting my sister in Nepal. Meanwhile, my sister is going to be here in the United States. I get the feeling I need to shower more. Like there's something going on.

There's some conspiracy. I'm coming to your house when you're not there. Everywhere you go, people flee. You know, a bunch of my neighbors are renting their houses out for big sums of money because the eclipse is coming right over our house. But I, in a spirit of altruism, am just loaning my house to my buddy, Paula Pant. Oh, that's amazing. For the low, low price of, no, I'm...

For the low, low price of my eternal friend. And taking care of Cooper, feeding Cooper. Yes, your cat. You're your adorable cat. Well, let's kick off today with this question that comes from Nicole, whose mom, as I mentioned, has two financial advisors. Wow. Hi, Paula. Thanks for the fun and engaging show. I have learned a lot listening to the Afford Anything podcast. I'm calling with a question about required minimum distributions and asset allocation for someone who is already retired and drawing down on their retirement accounts. My mom is 78, a retired teacher, and has several retirement accounts with two different financial advisors. I am in the process of helping her roll over one of these accounts to Schwab, since she currently does not understand her managed investments, and they seem needlessly complex, have high percentage fees at 1.65% and have yielded very low returns. Her return since inception with this advisor is 1.45% over 10 years or more. Since she is actively retired, I wouldn't expect these accounts to have large returns, but they also don't seem to be preserving her wealth or keeping up with inflation. The other accounts are in a total value annuity, which has surrender charges until 2026.

There's also a REIT that lost about 50% of its value when it listed its common shares on the New York Stock Exchange in April of 2023. My question has to do with how we should approach shaking her RMDs and what asset allocation. she should be considering for her money that we are moving into Schwab. I'm familiar with the concept that money needed in the next one to three years should be invested in something very stable like CDs, and investing in a total stock index fund should be reserved for the money she won't need for seven to 10 or more years. With that in mind, I was thinking we could put the anticipated required minimum distribution amount

in a series of CDs for the next several years, but I am unsure how to approach figuring out what to do with the money she will need to take as RMDs in three to seven years. Furthermore, how should I think about calculating how much of the RMD should be taken from this rollover account versus her annuity account? Since her annuity and REATR accounts, I would like her to move away from, due to the high fees, limited annuity investment options, and overall poor performance,

should I see if we can take the full amount of her 2024 RMD from these accounts and not the Schwab rollover? Previously, her RMDs were calculated and taken from each, account separately by her advisors. Since she was a teacher, I believe all of her accounts were originally 403Bs and not employer-sponsored plans. So this should be possible to take the full amount from one account rather than each separately. Fortunately, I don't have many records of what kind of accounts these were before they were actively managed by her current financial advisors. And my mom doesn't know either. Thank you so much for your time. I'm in my mid-30s

and still in the wealth accumulation phase. So retirement distributions are fairly new to me, but I'm looking forward to understanding how to think about RMDs by helping my mom and down the line being even more prepared for my own future retirement. Thank you. Nicole, thank you for the question. There is a ton, a ton here to unpack. And actually, Paula, there's a bunch of stuff I want to comment on that Nicole didn't ask for commentary on. But that's, you know, when you call into the Ford Anything show. Right.

Exactly. But I want to applaud you because a lot of the time, People don't think about how do we take the money out. And even a lot of people taking the money out, don't think about how should I be best taking the money out. I love, as you know, Paul, Stephen Covey. And what I'd love is one of his analogies is when you pick up one end of the stick, the other end of the stick comes with it. And we spend a lot of time thinking about the put money in part of the stick. Nicole is in the acid accumulation phase.

We don't spend a lot of time thinking about the taking money out part of the stick. So you, Nicole, helping your mom with this is a huge win for her. And I think that's, that's fantastic. And Stephen Covey, for those who don't know, is the author of the book Seven Habits of Highly Effective People. Which is a book that I didn't think I like that much when I first read it back when it came out in the, what, early 90s. And I thought, yeah, this is okay. And I quote that book nonstop, nonstop. I went through a phase when I was in my early 30s where I read that, reread that book once a year on an annual basis.

I probably did that for about three or four years. And it was enlightening. Yeah. Yeah, that's your Covey phase right after like your got. You had your goth phase. Exactly. And then the cubby. The Emo phase.

Yeah, the preppy phase, the goth phase. The emo phase. The whole, yeah. I love your idea, Nicole, of laddering CDs and having the CD, the money available. You know that's when you're going to take the money out of the account. So you know exactly what the due. date should be on these CDs. It's a wonderful opportunity to spike up returns without having any risk of principal of your mom's money. So I like that. I think that's great. I do think that strategy

starts to fall apart right at the place that you're asking about, which is three to seven years. Now, three to seven years, most CFPs will tell you that is your bond area where you go into bond funds. And if you know anything about bonds, and I'm going to circle back to, bonds in a little bit. We talk about evaluating your mom's portfolio. But when it comes to bonds, bonds normally perform really well over that time frame. You and I know, Paula, and some of your afford anything community knows bonds have been destroyed, just absolutely hammered to the point that even if you'd held bonds for the past five years, you might have lost money. And some pretty conservative investments you may have lost money. Now, for me, sitting where we are right now, Paula,

that says safety all over it to me. It doesn't guarantee safety. But when a market has been just obliterated and it's lost money and bonds, the cool thing about bonds, you make money two ways, right? Capital appreciation, number one, those bonds raising up in value. And then second, any payments out on the coupon it's called, which you can think of as the dividend payment or the interest payment on the bond to just use colloquial terms, makes money two ways. Bonds really rely heavier on that interest payment, on that dividend payment. So even if the bond market does nothing and stays flat, I am fairly, fairly certain that given three to seven years, the bond market is in a spot now, which is much less dangerous than it was two years ago. It is in a way,

a healthier spot for an investor. So going into bonds three to seven years, which has been a CFP maximum for the last bajillion years, is something I could 100% espouse put together a bond portfolio. I want to jump in here and say a couple of things about bonds. Number one, what we have seen with bonds getting decimated is that the old, assumptions that many people made that stocks and bonds moved in inverse correlation with one another is not true. Stocks and bonds are not inverse to one another. Historically, sometimes they have been, right? Sometimes when stocks are very volatile, investors will flee into the safety of bonds, but stocks and bonds are not necessarily always inverse. And what we have seen in the recent

past is stocks and bonds both dropping in tandem at certain points. And what's 100% true, Paula, people don't think about a lot of investors, especially, you know, newer investors or investors that aren't nerding out all the time over how these things work, which is the best majority people, you've got better things to do, is that it's actually bonds and interest rates that are inverse. And look at how quickly interest rates rose over the past year. Would interest rates go up that fast? Bond values go down that fast. So bonds and interest rates are really what we're So the question is, this is the question. And this is why when you hear these asset managers talk about, what's the Fed going to do?

Why are they so obsessed with the Fed? Specifically, what we're talking about now. If you think interest rates are going to go further, that's dangerous for bond prices. If you don't think interest rates are going to continue to climb, then bonds probably have more safety built in. Most experts think at this juncture that at least over the short run, the Fed's done. If they're not done, they're very close to done. So you've got a little level of safety on the price that you're going to pay for the bond and then that dividend, which is really, but it really isn't a dividend. People are screaming at their device right now. That yield off

of the bond, right? The interest payments off the bond, those payments are really going to be able to work their magic. So I don't know that you'll expect big returns, but Nicole, I really like the fact that you're not expecting big returns. You're just looking for some safety and some decent, consistent return. So I think bond ETF, bond mutual funds, a collection of on one end a government bond fund, on the other end, maybe a nice intermediate corporate bond fund, I think that's what I do. Right, right. And speaking of returns, I do want to comment on something that Nicole said. Nicole, when you talked about the performance of your mom's portfolio over the last decade. You said her investments gained 1.45% over 10 plus years. The first question that came to mind

is what types of underlying assets was she invested in? And how does that compare to the benchmark proportionately? So I don't know what kind of asset allocation she had, what underlying assets she had. And I don't know how the specific selection of whatever funds she was in, how did the performance of those funds compared to the benchmark for that asset class in proportion to how they were allocated in her portfolio. That's the piece of information that I want to know. Because ultimately, when we have a time period in which certain underlying benchmarks perform in certain ways, there's no, I think, realistic expectation of super overperforming the benchmarks. But what you at a minimum want to make sure is that you don't,

really underperform those benchmarks. You are incredibly underperforming the benchmarks. That's a big red flag. But if you're performing kind of near where those benchmarks are, then that is not a red flag. That's simply what the economy is doing at the time. This is the commentary that Nicole didn't ask for, which is, I think it's a horrible time to be evaluating mom's portfolio. We can talk about whether they're actually advisors or not. If these advisors are truly doing their job correctly, she probably, Paula, has a lot of bonds. Bonds have had a meltdown that hasn't been this big in 15 years.

So it's a rotten time to look at bonds where they're at the bottom. And at the same time, she mentioned she is a reet that went from unlisted to listed, which cut that value in half. I don't know what percentage of her portfolio that is. But that also has an effect. and knowing how that actually works is probably going to be a part of the game too. Like what the hell happened there? Like why?

So that 1.45 percent, she says over a long period of time, she's looking at an average. Mom's portfolio may have been destroyed in the past year after clicking along at maybe a four or five percent rate. Who knows? On the RMDs from the account separately, the IRS generally doesn't look at it that closely, right? You're supposed to take it out of the, individual spots.

Yeah, but the penalty for doing it wrong is so severe. You may as well dot every eye and cross every T. Maybe. I don't think it's that big a deal. I am, I am, I know, I'm, no, I'm completely with, I'm completely with Nicole. If you have the same type of account that is the same, it's the same registration, but at different places, you can go ahead and just take it out of one account. We did that all the time when I was an advisor.

I think it makes a total sense. If you have separate types of accounts, that's when you run into problems. So if your mom has a 403B in an IRA, well, then we have to take RMDs from each of those. If she has IRAs at two different companies, which is what it sounds like, not a big deal. Check with your text person. Don't take my word for it. Yeah, I would want to quadruple check that, given how severe. the penalties are for not perfectly hewing to the letter of the law when it comes to RMDs.

They are the most severe penalties in like the history of finance. I mean, I haven't seen any penalties that the IRS levies that are worse than the penalties that they levy for processing RMDs incorrectly. So it's just not an area where you want to take any kind of risk. No, I agree. But I'm also with Nicole, who insinuated that she thinks there is no risk here. I totally agree with you, Nicole. There is, there's no risk.

Check with your financial people. And by the way, those penalties, Paula, those penalties, when those penalties get levied, are against people that are not taking the correct amount, that are taking less than, less than what the amount should be, that are like, oops, my bad, forgot to take money out. Let's say I'm wrong, right? let's say that I'm wrong. I've gone through our IRS negotiations. If it's, I took the right amount, I took it out of the wrong account, it's still,

I paid the same tax. I didn't cheat the tax code. I didn't cheat the tax system. In that case, every time that I've been up against the IRS on behalf of somebody who had just came to me and they had some type of a situation with the IRS, the IRS, the IRS has been easy to work with. That said, I would do exactly, Paula, what you said. I'm wondering where this 1.65% fee comes from.

It sounds like the 1.65 is in the annuity. Right. So part of that high annuity fee, I think it's probably wrong. I think it's probably bad. I think it probably is something that should be moved. but that said, annuities often come with a bunch of features which your mom may be paying for. So annuities immediately have something called a mortality and expense fee. That is a fee for the life insurance features around the annuity.

That's a whole different episode of this show. But there are also add-ons where if there's volatility in your product, you can pay additional fees to eliminate some of that volatility. This is where Nicole, your mom not understanding it and you being new to this game might be that you're getting out of a product without knowing what you're getting out of. And I want to go back to my first thing, Paula. I think you're biased or getting out of it. It's probably good. And it probably doesn't matter. But before I push that button, I want to know what that 1.65% is paying for.

Because often these high fees and annuities are paying for things. And when you see, pundits talk about how bad annuities are, it is that we are, these annuities are sold on fear and they're giving you lots of life insurance features that the average person thinks you can take off to lower the fees because over long periods of time, markets tend to go up. I want to know what those are. I want to know why that fees 1.65. Now, the other thing is, is that you have this, you have the surrender charge. I do like the idea, by the way, of taking the RMD from this product. as often, you can get around those surrender charges by taking it as an RMD. The insurance company isn't going to charge you a surrender charge on an RMD.

You're required by law to take it. Imagine if the insurance company on that annuity goes, nope. So RMD is generally not subject to surrender charge. We'll see. In some cases, they might be. I mean, some of these products are just absolutely horrible. So I would take it out of there. I love you wanting to do that.

also surrender charges though over time also go down the percentage of the charge in many products they'll start really high paula like an 8% fee when you take the money out and then they go down and down and down and down and then at the last year or two it might be 1% or 2% fee i like i like doing a crossover point analysis if you put this in the place where you want to put it with a much lower fee let's say you go into an exchange trade of fund that has a third of a percent right It's just maybe even lower than that. But let's just go with a third of a percent fee. You're already saving 1.3% per year.

If this fee is only a 2 or 3% fee, I might go ahead and surrender it, accept that fee, get a little bit behind, put it in the place you know is the better place more appropriate for mom's goal. And just on the fee within a fairly short time, you make up that money. So I want to know how much the surrender charge is, how the surrender charge works. Sometimes in some products, too, the money that the product has made is not subject to that surrender. If the money you made is not subject to surrender, another question to ask is, can I move the money that I made over and just leave the money that's there? All these products, the surrender charges, which are baloney, they work so many different ways. You really want to dig in more on how that surrender charge is going. to affect your account. The next one, the REIT. A REIT is a real estate investment trust. Now,

why would somebody recommend a REIT? Well, what's cool is over long periods of time, the North American Real Estate Index, the Nearyd Index, and the S&P 500 have landed about similar places, just over 10% over long periods. So, which is why I'm always a fan of diversified real estate. and I'm also a fan of the stock market for long, long term stuff. If your mom's going to live for a long time, the more consistent of those two is real estate. So I'm not against the advisor saying, hey, let's buy into real estate because it's going to give you an equity like return over a long period. A, it's return of principle. B, it is rent payments.

It's money coming back to you. It looks again like a dividend check. It's more convoluted than that. But in a lot of ways, it feels like a bond almost, some of this money coming back to you. So in that way, you get a return on your money a little bit faster than stocks. So some advisors will make the point that, you know what, putting money in a reet might be somewhat safer than putting money in the stock market, even though they land in the same place over time. So I don't mind that piece of advice. Here's what kills me, Paula.

The advisor went into a non-traded reet. And what a non-traded reet is, and again, there's going to be people scream at their device. This isn't everything, but this is a great way to think about it for newbies. A non-traded breed is like a baby reed. Paul and Joe are going to start a real estate investment trust. We're going to buy a bunch of nursing homes, right? We're going to buy a collection of nursing homes. We're going to buy the facilities.

We're going to find managers to manage those. We're going to do a triple net lease. We're not going to be involved in the management of them. We're just going to own the property. That's what our reet is going to do. There's a contract that tells us. people exactly what the reed's going to do so everybody knows exactly what you're buying. And then we go and we find money.

We haven't bought very many of the properties yet. That's a non-traded reet. A non-traded reet is often a reed that's trying to get off the ground that's trying to get moving. And they need these seed investors. Once the reet gets big enough, it gets fully developed. Then what they do is they take it and they move it to the open market. Moving them reet to the open market makes it so that you can easily sell.

it so people can easily sell their shares so new investors can get in. Now you have a fully developed adolescent reet that's moving along and is open to the public. Non-traded reits often have fairly high fees because it cost a lot of money to get these things moving. I mean, think about the cost of finding the investors, the cost of finding the properties, all of these exploratory costs that go into creating this thing. A lot of front-end stuff, which is why this part, I think, was horrible. I think getting your mom into a non-traded reet where the money is locked up.

They give you some provisions to maybe get some money out once or twice a year, but it's really rough. The fees are through the roof on those things. The commissions are incredibly high because your advisor is not an advisor. Your advisor is one of those people that is helping get this reet off. the ground. They really are a salesman for the reet, frankly. Don't get me wrong, the reet has a salesman on their end, but your advisor is affiliated with them and gets a pretty high commission to sell this thing. And then when it goes public, it depends on how the public views that reet and what the

sediment is toward real estate. So, Paula, if most reits are commercial, maybe office space kind of reeds, you know exactly where I'm going. I know precisely where you're going with this. This re-probably started before COVID, right? It was probably, it was a baby, probably before COVID. Probably, if it just went public, it was probably six or seven years ago they started this thing because it generally takes that long for this to happen. So seven years ago, nobody predicted COVID. What do you think people feel like about office base right now? Well, I mean, forget what people feel like.

Look at what the actual data says regarding commercial occupancy, commercial vacancy. And subsequently, the cost. per square foot for a lot of commercial spaces. And that's why the reet went through the floor. Yep. I obviously don't have enough information about this whole thing, but I'm betting that's exactly what happened. And the frustrating thing about these private reeds, Paula, is that they have these

covenants because the first thing you ask, if you're going to get into it, you're like an angel investor, right? You're like, hey, this sounds good. I like nursing homes. Hey, getting in early on the nursing homes. Some of these things, by the way, even with the fees, pop huge returns. Sometimes just pop huge returns. Another reason, by the way, that it's not probably great for Nicole's mom is that, you know, huge return on one side equals huge risk on the other.

These baby reits may have looked really good seven years ago. Now, not so much. Beyond that, putting an investor who is in her 70s into a situation. where she becomes a seed investor or an angel analogous to an angel. Horrible. Right? Horrible. When she's not, not only is she not an accredited investor because, okay, we can debate the specific terms of accreditation and whether or not that's a great idea.

Sufficient or, yeah. But forget about the fact that she's not an accredited investor. She is not a sophisticated or knowledgeable enough investor to understand. that she is an early stage investor in this enterprise. And if that condition is not present, then why is she being invested as an early stage investor in this unlisted reet? You would never put somebody into any type of unlisted private company. You would never go to Angel List, for example, which is a website that lists private companies, companies that are not publicly listed,

but that are trying to fundraise, you would never take the money of an inexperienced 70-year-old and go to Angel List and make a bunch of angel investments. So why would you do the same for a REIT? Unfortunately, that's not the way they're sold. The way they're sold is Paula for the next seven years. This is not going to be listed on an exchange. So you will have security of principle.

On your statement, it literally says, if you put $50,000 in this thing, a lot of money, if you have $50,000 in this thing, your statement will show $50,000 until we take it public. And then, because we got this crack management team, you know, that when it goes public, you've heard of IPOs, Paula.

You know what happens during an IPO? I mean, anything can happen. Either the stock can pop or it can plummet. But what does the average person think when they hear IPO? Right. Cha-ching. And so, hey, for the next seven years, we have complete security. This is the perfect place for your mom because of the fact that you've got security of principle. We're going to have increasing payments coming from the tenants as we get tenants. They're going to start off small and they're going to get bigger. And so your mom's going to have this increasing cash flow coming over the next seven years. Then we'll have the IPO. Then we can dump it and we can do this again. We can do it. We can just keep the cycle going. It's amazing. That's the sales pitch. That's awful. It's awful.

If somebody leads with product run, if they lead with process, that's who I probably want. With these advisors, what I'm hearing is she's moving money from these product people and their products because those products didn't work. I think to me, Paula, we're product salespeople. Right. You know, the analogy that I often use, people who lead with product. And sometimes these are salespeople. Sometimes these are. ordinary individuals who, based on what they read, they are thinking in terms of leading with product. So, for example, I'll get emails from people who are brand new to personal finance who say, what kind of budgeting software should I use or what apps should I be downloading, right?

So ordinary people sometimes have questions that lead with product. And I think a big part of the reason for that, the analogy that I use is if you imagine a tree, right, the leaf canopy of a tree is the most visible part of it. the tree. That's what products are. Products are that leaf canopy. It's the most visible, but it's also the last part of the tree to form and the most ephemeral and frankly, in many ways, the least important because the leaves can fall off of a tree. And as long as the underlying tree is healthy, the root structure is healthy, the trunk is healthy, the branches are healthy, new leaves will grow back.

That is quite literally a seasonal cycle. So where you want to start in growing a tree is you start with the root structure. The roots are your values. From those values give rise to the trunk of the tree, and that is your philosophy of life, your vision for life, in other words, your goals, which are rooted in your values. And then from there, you go to the branches of the tree, the main branches, and that's your strategy.

And then from that strategy, you then go into the thinner branches, which are your tactics, and then the leaf canopy, which are products and tools. Mint, the popular budgeting software. Yep. They are going by-bye. As of January 10th. Look at how mint is a leaf. Right. Look at how many other leaf providers are stepping up going, you can automatically export all your mint stuff safely and confidently and pick right back up with our XYZ leaf.

leaf versus the mint leaf, you know? It's super easy to change. It's the end of the process. If you like mint, we can easily replace it. You can't replace your values. Right. Yeah. Maybe you can. Exactly. Exactly. Your values can change over time, but you can't just swap one out for the other because one of your values is expiring on January 1st. Right. One of your values has. happens to be going out of credit karma. Or monarch money. Right. Right.

Precisely. So I see a strong case for dumping these so-called advisors. I do. While at the same time, Paula, I think that this is also a cautionary tale. I think cautioning Nicole that this might not be the best time to evaluate that 1.45%. I'm not sure it's indicative. of what's really happened over long periods of time. Second, also looking at those surrender charges before she moves money out.

And maybe, by the way, accepting a surrender charge. And that's an aha for some of the people in the community. I know if they encounter surrender charges like, oh, I got to wait. Well, let's actually look at what the place is that we're going to move it to and see what the crossover point is. I definitely always have a bent to let's do it now. Right. You know, if we can do it now and make it right now and just accept the past,

Don't think about the sunk cost. Just rip off the Band-Aid and do it now. But certainly, Paul, if it's an 8% surrender charge, she wants to wait. But, man, if it's gone down to 1% or 2% or she can take out some of the principal that's not subject to it, let's do it. Yeah, absolutely. And then I think the final thing is working with a tax professional, particularly around RMDs. Make sure you're working with a tax professional there. So, Nicole, that is our answer to your question.

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your donation will be doubled. That means every dollar goes twice as far to help build a future where no one's seeking help is left behind. Donate today at camh.ca.ca.givings Tuesday. Joe, in your answer, you talked about the hypothetical of buying nursing homes in Arete. Our next question comes from a caller who is worried about possibly needing to be in a nursing home, possibly needing to be able to afford long-term care. So our next question comes from Nick. And nobody knew I was foreshadowing. Hi, Paula.

This is Nick. And I have a question about long-term care insurance. I'm a federal employee, and I signed up for long-term care insurance in my mid-20s when it was very inexpensive. I'm now in my mid-40s, and my wife is also in her mid-40s, about three years younger than me. And we both have very similar long-term care insurance policies. And the rates have been increasing fairly significantly every several years since we got the plan. and I'm going to all the details about the increase, but it's affecting all federal employees who have signed up to pay into this long-term care insurance plan. And I'm just wondering how to deal with the potential options that I have. The current plan that I have provides a daily benefit of about $278 with an annual inflation protection of 5% with an unlimited benefit period. However, the rates are going up dramatically and they're giving us three options. one option is to keep the plan that I have and the rates will go up from $150 a month to $278 a month. Option two would keep the same level premiums of about $150 a month, but instead of the

inflation of protection increasing by 5% a year, it will only increase 2% a year. And the third option is considered a paid up limited benefit with no future premiums do. So all that I would get is the $278. a day benefit up to that amount, up to a total lifetime of $22,000, which is what I paid into the plan over all these years. And my wife has a very similar plan as well. Our family income is about $200,000 a year. And we have a fairly good pension coming up when I retire, plus the TSP. There's significant savings in there, plus some other income from rental properties. And I'm just trying to think about the best way to get my mind around this, whether to keep the long-term care insurance plan,

whether to stop using it or something else. Thank you very much. I appreciate your thoughts and Joe's perspectives. Nick, thank you for the question. And first of all, I want to commend you for thinking about long-term care when you're in your 20s. That kind of forward thinking is precisely what I want to encourage more of. So I want to commend you. you for doing that. And to everyone else who's listening, I want to encourage that level of future focus, that level of taking care of the future version of yourself. Let's go through these three options. Joe, the one that I like the least, and I'm curious to hear what your thoughts are on this, but honestly, you know, option three is essentially giving up the plan,

right? The paid up limited benefit with no future premiums due is essentially exiting out of long-term care entirely. And so the great news is there, though, different than term insurance, he is, Paul, going to get a benefit, which is pretty cool. If he does give it up, like he doesn't give up all that money, usually, you know, most insurances, you throw your money into a barrel and the second you get rid of the policy, you're out of the game. The fact that he can exit the game and still have some money is, it makes that a much better option than I thought it was going to be. Right. Exactly. If he wants to keep the policy, he could either, option one, pay a bunch more money, almost double what he's paying right now, or option two, maintain his same premium payment, but decrease the inflation protection. between the two, given the fact that inflation historically over the long term has been around 3% annually,

and given the fact that the Fed's target rate is 2%. That's the option that I like the most. And the option that I like the least is getting rid of this entirely. And then meanwhile, option number one, which is keeping the plan but paying twice the premiums, that one's sort of in the middle. I think to understand where I'm going to come from on this, it's important to understand why the hell are these premiums going up so fast? Because there's a big portion of the audience, Paula, right now that's going, this stuff's a rip off. If they can raise it from $150 to $278 in a single year, they're clearly ripping you off.

I hate to say this, they aren't. the expectation on long-term care has changed so much over the past 20 years. We've seen the field of long-term care benefits just decimated. Companies trying to cover this have lost their ass as the actuaries have been so far off. These people that are paid and have so much schooling to get this work done, Paula, and they missed it. Like, you know, way worse than like, my bad. Yeah.

It was really bad. That's the reason why getting it. rid of the plan is the option that I like the least. Option number three, which is fundamentally just getting rid of it. I don't like that option because long-term care is so expensive and only becoming more so. Well, and for me to back up, because I have a little bit of a different opinion, it's, it is that this is definitely with, when premiums go up that fast and there's actuaries involved and insurance companies that do like to make money involved and state regulator, that are overseeing this.

So when a company goes from $150 to $278, state regulators across the board had to be okay with it. So knowing all that, that shows you how important this issue is. And by the way, I'm not here to plug my book. You and I have fun doing this, Paula.

But I will tell you in stacked, this is a chapter that we do very, very well, is we talk about how this insurance actually works. Because when you understand this, you understand that long-term care is a huge issue and ignoring it still is a plan, right? It's a horrible plan, but ignoring it's a plan. But knowing that someday I might have a catastrophic illness in doing what Nick is doing

and planning ahead to your point is so important to be able to do that. Joe, Joe, we'll link to your book in the show notes then. Well, thank you. Thanks. Makes a great holiday gift. Stocking stuff. Buy them for all your friends. What's that? Talking stuffer. It's a little big. It's a little wide for the stock. Well, get a wider stocking. For those watching on YouTube, you just happen to have a copy in your hand. Isn't that weird? Suddenly appear in your hand. I'm not like all those mentors, though, you and I have on our shows where they put it like right back behind us.

You know, just happens to be on the shelf sitting right behind us. I think you need to just realize that the more expensive insurances are generally expensive because those are the issues that the insurance company is worried about. If insurance is pretty cheap, like as an example, one that I think a lot of people, people might have in their flex benefits that the vast majority people don't need is accidental death and dismemberment insurance, incredibly inexpensive. And the reason is it's almost pure profit to the insurance company. And then Paula, the first thing I'd also like to say is, I wouldn't do this in your 20s. This is a change that I would make for anybody else listening.

If you have this option available, and I know that Nick already bought it, and now he's got this sunk cost that he's thinking about. I wouldn't think about this until your 40s. And some long-term care experts are going to yell at me and go, no, no, no, no, no, you should do this early. Luckily, Nick has this paid up option because he did think about it early. But I think that life throws so many other things at you that worrying about this in your 20s. Worrying about it your 20s is fine. Buying the insurance in your 20s wouldn't do.

My problem with the current one, the $150 to $278, is that. the unlimited benefit. I think buying the unlimited benefit doesn't take into account enough the statistics around long-term care. The average person stays in a long-term care facility for just less than three years. So if you buy a three-year or a four-year policy, you're going to cover the vast majority of instances. We can't cover everything in our risk management plan, but we can certainly cover a lot of them. So my problem, he doesn't give us that option, but I would say, if that option exists to change it from unlimited benefit to a three year or a four year benefit and keep the 5% cap.

And I'll talk about why I think the 5% cap is important, Paula. I would do that. So we gave you those, if there's any option at all that changes unlimited down to a three or four year policy, I'd take that one. Second thing is the reason why the policy inflation riders much higher than that 2% you're talking about, which is what global inflation is, is the same mechanism why this insurance is more expensive. The cost of care is going up way faster than global inflation is. So keeping that higher cap for me where the daily maximum can go up is something I also want to protect, which means that the 2% option is going to fall further and further behind.

And people like, okay, what does this even mean? It doesn't matter how much money Nick has in the pot. I mean, it does if he runs out. The key number on a long-term care policy, Paula, is the daily maximum benefit. If he stays in it for two and a half years, this policy will only pay out X amount of money per year based on that daily maximum. He's got this pool of money, but you can only scoop out $278 or whatever the number, you know, whatever the number is per day. You can only scoop out that number. That is the most important number in this entire thing.

Because of that, I don't like any of these options. which is why I think he needs to rethink the plan. My bias is toward the one you like the least, which is take the number that he has available now, and it's just this annuity that sits there. It's paid up. It's good. And look at his benefits and see if he can find a three-year or a four-year benefit.

It's going to be way less expensive than the unlimited benefit. And it's going to cover the vast majority of instances. also try to find a benefit that has maybe a one year or two year period where he actually is in the facility and he doesn't pay, that will also drive down the cost of this coverage. Because he does have assets to cover maybe a year or maybe two years. The longer he makes that waiting period until he gets it, also less likely is to use it, which means much, much less expensive for the policy. It's such a tough thing, Paula. there is no, there is no good answer. Right.

That delay in benefit, so, you know, if he covers the first one or two years in a facility out of pocket, that's essentially analogous to, obviously, these are different types of insurances, but I'm just making an analogy here, right? It's analogous to foregoing short-term disability insurance and only getting long-term disability insurance. You can save so much of a premium by virtue of doing that. another potential analogy is it's analogous to getting the homeowners insurance policy that has the highest deductible, right? You can save a bunch, not enough.

I would love it if you could bump the deductible to 100,000 personally. Right, yeah. But the higher you can bump that deductible, the cheaper your homeowner's insurance gets. And what you're suggesting, Joe, is the analog of that. You're essentially giving yourself a quote-unquote deductible of the first couple of years that you're at a facility. And by virtue of making that a really big deductible, you can get the ongoing coverage at a much cheaper price. Because the actuaries know you're most likely to file that claim at the onset, right? The same thing with health insurance, frankly.

The bigger your deductible, the smaller your premium. There's another side. And by the way, right on, 100% right on. There's another facet to this, which is that some Uber nerds fight you and I on the efficacy of an emergency fund or a cash reserve, right? Why do I sit money in cash when it's earning nothing? It isn't earning nothing. Don't just associate that crappy interest rate you're getting on your savings account with what you're getting. you're avoiding he's avoiding tons of premiums if he can make that deductible longer because he's going to pay out of pocket the premiums that he doesn't have to buy from an insurance company to cover his assets can be a huge number so that that emergency fund is not just getting what he's getting at the bank he's saving so much money and insurance cost it's incredible right so i know nick i didn't answer your question uh paula i love

I love your thinking on it. I just wish we could get rid of unlimited benefit. Well, I mean, I think that does answer the question then. So I'd say that he's got two options. If he's going to keep the unlimited benefit plan, then option number two, which is the 2% inflation option, which keeps his premiums fixed at $150 a month. That's, if he keeps the unlimited benefit plan, that's the one that you and I both like the best. Yeah, that's a definite middle ground. It's going to hurt his amount he can get at per day. If inflation continues to outpace what global inflation is, it will erode the amount of money that he can get. But overall, you're right. Right. Right. So in his current plan, that's the one that we both like. Or alternatively exit and choose an alternative form of insurance. All right. I think we've given him two good choices.

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All right, we have one more question today, and we are shifting our focus from the end of life towards the beginning of life. You like that transition, Joe? Look at that transition. Ninja. Yes. Absolutely. This is professional podcasting 101. So we've just been talking about long-term care.

We've been talking about some of the things that affect you at the end of life. But what happens at the start of your adult life? Well, for most of us, that's when we go to college. And that is the subject of our final question today, which comes from Paul. Hey, Paula and Joe, this is Paul. My question is about strategies to pre-fund lifestyle and expenses leading up to FAFSA application years. I'm a single parent and Fala's head of household. my daughter's junior year of high school will be 2025, and as I understand it, that will be her first fast-facplication year.

Also, as I understand it, I have 2023 this year and 2024 next year's tax years to show whatever income I want. But in order to maximize financial aid, I will want to take my 2025, 2025, 2025, and 2027 income down to a very low level. My understanding also is that you can have up to $50,000 of cash on hand, and it won't impact the FASFA aid qualification. I have the ability to hoard enough cash this year and next year, enabled to cash flow 2025, 2025, 26, and 27. The hack I need help with is how to somehow prepay my expenses that I will have in those years, the FASFA application years, 2025, 2025, 26, and 2027 so that I don't have more than 50,000 cash on hand, while still being able to spend at a higher level in those years from prepaid or pre-funded accounts that FAFSA doesn't consider.

I can pay those ahead of time. But while the aforementioned payments are helpful, it doesn't really get me to where I need from a spending perspective, nor does it let me prepay far enough in advance to get me into the second and third years. I'm really looking for a way to pre-fund about $200,000 for those years and get it off my books from a fast foot perspective. I've thought about things like prepaying credit cards up front with large amounts, but my experience has been that they actually will refund large credit balances at some point. I don't really like the idea of buying gift cards in bulk because I have concerns that something could go wrong with their ability,

or validity, I should say. That's my dilemma. How do I figure out how to pre-fund lifestyle? and expenses for about three years and keep it off the books from my fast-up perspective. Paul, first of all, thank you for your question. And kudos to you for thinking ahead about how to pay for your daughter's college. Joe and I discussed this behind the scenes. And we've got two pretty different answers.

So you're going to hear from both of us. I'll start. And I'm going to start by answering the question that you asked, which is how, do you prepay as many expenses as possible so that you can live on 50 grand per year? Now, what we know is that for the average American household, the three biggest, other than taxes, the three biggest expenses are housing, transportation, and food. So, number one, you can prepay your mortgage in advance, and there are a couple of different ways that you can do this.

If you have enough money to do so, you can just pay the mortgage. off, wipe that clean, or if you don't have the money to do so, you can send in additional principal payments and many lenders, and every lender is different, so check the terms of your own personal home loan, but many lenders will allow you to send in advance payments and then mark that you want this to be applied towards a given payment. So you can send in a particular payment and say, I want you to put this towards principal for next month's payment. Well, that's our principal. You wanted to be prepaying next month's payment because the frustrating thing is, Paula,

a lot of people try to pay principal and the bank will, quote, accidentally, call it next month's payment instead of principle only, which is why my app at my bank now says, do you want this to be next month's payment or do you want it to be principal only. Right. So in his, in Paul's case, we're going the exact opposite way. We usually go. Exactly. Exactly. So prepaying your mortgage, that's going to take care of the single, that's the

single biggest payment that most Americans have outside of taxes. On the subject of taxes, you can also prepay that. The IRS never minds when you send them a giant check. And you can prepay your taxes ahead of time, at least for the upcoming year. and the IRS will hold it and they will actually pay you interest on that money. If you have a car loan, prepay that, and ideally with a car loan, since most car loans are about five years, some are six years, but most are five, prepaying the next three years of your car loan means likely your car will be paid off.

So what we know is that the biggest expenses for the average American household, housing, transportation, and food, we've talked about prepaying your mortgage. We've talked about prepaying your car loan. The third category that's left is food. And if that's going to be the largest expense over the next three years that is difficult to prepay without the use of gift cards, then that's quite doable, right? On $50,000 per year, it is not unrealistic to use $50,000 per year to cover your grocery tab. Now, in terms of what other expenses you have, there's going to be clothing, and you can pre-purchase a lot of that. You know, buy several years of clothing in advance.

You can buy, you know, Sunblock typically when it's sold, has a three-year expiration date. So you can buy items like sunblock, toothbrushes, toothpaste, those types of basic toiletries, paper towels, toilet paper, depending on how much storage your home has, you can pre-buy a lot of those items. advance. I was thinking about pre-paying the clothing expenses, like pre-buying my clothing for the next three years. Nothing helps me stay on the diet better, Paula. Right. Pre-buying my clothes. I can't buy any different clothing. I better weigh the same as I do now. Right. It might not work for everybody, but for me, for me, that's a motivator. Exactly. That gets me out working out. Speaking of working out, you know, let's say you need new running shoes, right? And you know that based on the amount that you run, on average, you need to

replace your running shoes once every three months. Well, then it becomes obvious that you'll need four pairs of running shoes per year times three years. You need a pre-buy-buyers of running shoes. Your foot size is not going to change. Buy them now. Assuming your home has sufficient storage, then food is the only consumable, major consumable, that you purchase that expires, that expires, and therefore you can't buy a lot of it in advance. But almost everything else, some moisturizers expire. Sunblock, like I said, has a shelf life of about three years. Sunblock will always have an expiration date on the back.

But a lot of these things you can pre-purchase in advance and then store. Think like a prepper. I was wondering about things like subscriptions, you know. Can I go three years out of my subscriptions? Whatever those might be? That's not going to be a ton of money, but maybe I can. I know I get a deal whenever I do one year or two year for a lot of my subscriptions. So might not bring in the big cash, but as we're picking through the things on the bottom

to just make pennies that turn into dollars, maybe. Exactly. And, you know, Paul, I know you don't like the idea of hoarding a bunch of gift cards, but if you're going to use gift cards from just one merchant, just one. then I would suggest getting Amazon gift cards or getting a lot of credit on Amazon. And I suggest that for a couple of reasons. Number one, Amazon is large enough and has enough versatility that you can use it as your primary supplier for a lot of those random items that you end up buying over the span of a given year. Number two, Amazon is a large enough and therefore solvent enough company that you don't run the risk of, buying a bunch of gift cards for a company that may go out of business, the way Bedbath and Beyond did.

And number three, Amazon, given the fact that it is a digital business, it is not in the brick and mortar business, the way that Target, for example, is, Amazon has some of the strongest internet security of any business. And so, yes, if you have gift cards from Target, those might get hacked. That actually has happened to me specifically with a Target gift card where I bought, you know, one of those discounted Target gift cards from a website like Gift Card Granny, one of those third party reseller websites. I bought one of those. And after a couple of months, I went to check the balance and somebody had stolen that balance. And so I contacted Target and said, hey, there was an unauthorized user who used this Target gift card. And they said, well, there's nothing that you can do about it. That money's just gone.

Well, I actually, Paula went back to gift card granny and they gave me the money back when it happened to me. Wow. They did. Yeah. Yeah. So, okay, a couple of lessons there. If you are going to purchase gift cards, ideally do not purchase it from a third party reseller. Right.

Agreed. That means that the security of that gift card is already compromised because that gift card has already been out on the market. So if you do purchase gift cards, buy it from the retailer directly, not from a third-party reseller. And also, if you do purchase gift cards only from one entity, I think Amazon is the way to go because of their incredibly high level of Internet security. And they're the Everything Store.

Yeah, exactly. Exactly. Yeah. I mean, but so is Target. Your Target is also in Everything Store. But I, you know, Amazon feels. more secure than Target does. I would also, you know, I don't even know your mortgage situation.

So for all I know, there's a chance that your mortgage is already paid off, in which case you only have to cover homeowners insurance and property taxes. I would check with your county to see if you can prepay your property taxes ahead of time if that's an option. I don't think for year two and year three, that'll be an option because you're going to get a reassessment. Right. Right.

but for year one, that should at least be available. Of course, that's a moot point if he has a mortgage. Yeah. Joe, do you want to jump in with your take? Well, it isn't so much my take, Paula, as it is when I heard the question, I'll tell you, my first thought is there's going to be a number of people in the community that are going to have some righteous indignation that this question is being asked at all, which is the ethics behind this question.

There are people who need this money and who are trying to on very little money get through school. And Paul is asking, how do I game this system? Right. So I don't know that it's my take as much as it might be a bunch of people's take. But I want to defend Paul at first in that, which is that FAFSA is a game. The whole system is a game. and every game has rules. And just because one person knows the rules, Paul clearly knows the rules of the game and is asking

a question about how do I play within the rules, I don't break any of the rules, might make you mad. Ethically, you might not like it. But that is the game. Somebody is getting this money. Paul's like, why not me? I will say this, though, there's always two sides to the equation, which side number one is how do I get more money out of the government, which is what Paul's asking. The second side of that,

and the FAFSA still is going to be, is going to be the base form that everybody fills out first. 99.9% of the institutions in the United States go through the system where the system is the college has money they might give you. They will not give you money until the state gives you money. And the state goes, we're not giving you any money until the federal government gives you money. So everybody defaults the federal government. And over time, everybody agreed, hey, let's just do the federal government first. And then we'll go to the state and then we'll go. So your average run of the mill system of getting financial aid, need-based financial aid is feds are going to give you money first.

Yes, no. State's going to give you money. Second, yes, no. Institutions get to give you money. Yes, no. Then private institutions might give you money. Yes, no. But that'll be more merit-based.

but also I think in some ways easier to get private institutions that give money to individuals, scholarships, opportunities. I don't know what his child's academic prowess is. I've been blown away, though, by some kids that just have mediocre results but spent a lot of time working in this area as hard as Paul is on this, finding stuff that maybe a big part of the community he might not find as ethically challenging as trying to fit his round high income peg, normally high income peg, into a square. I'm going to be very low income for a while, so I qualify for these benefits whole.

There are a lot of scholarships out there. And it used to be that you would go to Barnes & Noble and buy this big book of scholarships, right? And go through and page through and apply. And now there are, of course, many, many websites. that serve as portals to all of these different scholarships. And what your daughter can do is develop a system where she has a selection of about six to eight different base essays because there are some common recurring prompts. And then she can modify each one based on the prompts required by a given scholarship application. And from that point forward, it becomes largely a numbers game.

And to win at that numbers game, her job, and this is something that you can assist her with, is developing a system for applying for scholarships in an efficient manner. All of that said, one thing that I think is a little counterintuitive about college is that sometimes the most competitive schools are the ones that give you the most money. They're the ones with the biggest endowments. And they may have high sticker prices, but they also have the most amount of help, the most amount of alumni support, the biggest selection of scholarships and financial aid. There's another game going on there, Paula, which is financial aid gets distributed differently throughout. So I'll give you an example. My daughter, Autumn, did not get any financial aid in her first year, gotten on. We knew that most people don't apply again, their second year, their second year, third year, fourth year.

But what happens is the game changes over time. And what I mean by that is in the beginning, corporations don't really care about your freshman kid because they're going to change their major three times, right? They're going to have any idea when they go into college and that maybe they do, but they probably don't. As they get closer to graduation, they're much more honed in and focused on what they want to do. So corporations increasingly give money to sophomores and then more to juniors and much, much more to seniors because they're using money as a recruiting tool. So for those people that have children or themselves or freshmen in college and they didn't get anything or they got very little and they're about to give up, do not give up, double down. My daughter got more money her second year.

She got even more money her third year. She got the most financial aid, her senior year, Paula. And it was all based on her scores in school were really good. And she went to the meeting and greets with these different companies. So they got to know who she was. And they started throwing money at her by her senior year trying to get her to go work for those companies. That's fantastic advice. We could do an entire episode just on paying for college.

Well, Paul, I hope that was helpful. And thank you for your question. Joe, we've done it again. I can't believe it's over already. These recording sessions go faster and faster. Bye, bye. All right. Joe, where can people find you if they'd like to hear more?

Well, you know what's funny, Paula, that I wanted to shine a light on today was the fact that you and I, as podcasters, we have some amazing discussions with these very smart people that are on our show. Tiffany Aliche, the budget needs to when she came on our show. Our interviews are normally 25 minutes long. Paula, we get to about the 22 minute mark. And Tiffany's budget niece demoniker kind of comes off and we get just raw Tiffany, who goes into detail about her husband dying at age 41 and about the estate planning mess, even for someone like Tiffany Aliche who knows her stuff and has 95% of it buttoned down. And she goes from Tiffany, the teacher, to Tiffany, this human being.

And we have this extended interview with Tiffany Aliche that's like 45 minutes long, which we never do on stacking Benjamin's. And it's so raw and it's so real and it's so heartbreaking. And it's such a cautionary tale. And I love the fact that Tiffany brought that. So I'll just point to people should go back and listen to Tiffany. And I was so surprised. Wow. Do you know the episode number?

We'll put it in the show notes. Yes. It's just after a Thanksgiving weekend. It's Stacky Benjamin's 1441. Tiffany Aliche shares a big money hack and a sad money truth. We will link to that in the show notes. So those of you who are subscribed to the show notes, you can go directly to the show notes for the links to Joe's book Stacked

and to that episode with Tiffany Aliche. Thank you. Of course. Of course. Well, thank you. all for tuning in and for being part of this community. As I mentioned, you can find those links in our show notes, and you can subscribe to the show notes by going to afford anything.com slash show notes.

You can also chat about this episode with members of the community at afford anything.com slash community. Thank you so much for tuning in. My name is Paula Pan. I'm Joe Sol C-Hi. And we will catch you in the next episode.