4 Tips for Catastrophe Protection
Parenting never ends. My granddaughter bought her first car and asked me about insurance. She had two quotes: one with a $100 deductible and a second for $500 deductible. She was leaning toward the $100 deductible because “it was only $10 more per month”. So why not take that option?
I explained the higher premium policy buys an additional $400 in coverage and costs $120/year more. In a little less than 3.5 years and she would pay $400 in additional premium to the insurance company. Unless she planned to start wrecking a car every 3.5 years, it wasn’t a good investment. The lesson was simple, you self-insure for the small stuff, and buy insurance for the catastrophe.
Catastrophe preparation starts long before you retire
While that is a simple lesson in auto insurance, the black swan, catastrophic event is what can give retirees nightmares. While some are beyond our control, taking proper steps to minimize damage is a must.
When the bubble burst in 2007, the S&P dropped 57% from its high in October 2007 of 1576 to its low in March 2009 of 676. We had friends entering retirement who suffered 40%-50% losses. All their retirement projections were thrown out the window. Their stories are not uncommon, and some are now back at work – and not by choice.
Here are 4 major catastrophes you cannot prevent, but you can reduce the damage with proper planning:
1. The particular company or industry segment you invested in suffers significant losses. Diversification among asset classes, currencies and countries is where to start, the earlier the better. “All your eggs in one basket” can spell disaster.
A common trap is having too much money invested in your own company stock. “Caveat Emptor” was the warning from MarketWatch after the Enron debacle. Employees lost billions as over half of their retirement money was invested in company stock. Fraud does not have to be a factor, icons like Eastman Kodak also went bankrupt. Long before you take your lump sum payout, you should be diversifying your 401 (k) as though your long term retirement depended on it. Don’t wait until the day you cash out and roll it over into a self-directed IRA.
2. High inflation. Currently the interest rates on top quality bonds or Certificates of Deposit do not keep up with inflation. Holding your entire nest egg in any single currency is just as dangerous as being in one single industry. Fortunately there are now Exchange Traded Funds that are available for 401 (k) plans to allow for this currency diversification.
Don’t minimize the concern about inflation if it’s currently low. It can change overnight as people learned during the Jimmy Carter presidency. Chasing high yields but allocating too much of your portfolio to long term fixed income investments can damage your buying power considerably.
3. Confiscatory taxes. Consider the economic crisis in Greece, Cyprus and other bankrupt nations. Once the banks shut down, the government will confiscate as many tax dollars as they can get their hands on. Geographical diversification is another form of diversifying your portfolio and reducing your overall risk. You may not be able to move your 401 (k) offshore while working. Once it rolls into a self-directed IRA it’s perfectly legal to hold IRA money offshore as long as you follow the rules.
4. Long term health care costs. My wife and I were married in the chapel of a nursing home. Her father had Parkinson’s disease and was bedridden for several years. They had no long term health insurance. For several years grandma had to write a large check to the nursing home. Fortunately she had money to pay for it. I hear many horror stories about one uninsured spouse in a nursing home depleting the family nest egg. When they pass away the surviving spouse is penniless.
There are many new types of policies available with a myriad of options. You need to consult with a licensed professional who specializes in this area.
When Jo and I bought our Long Term Care insurance we applied the same philosophy as auto insurance. We took a longer waiting period and got a lot more total coverage. If one of us is in a home for six months, we could pay for it if we had to. Remember, you want to insure for the catastrophe, the stay that will be several years. Long term care insurance is like fire insurance. You hope you never have to file a claim; but if you do you are darn glad you have it.
Our retirement nest egg must last the rest of OUR lives. Investing conservatively, diversifying properly and buying insurance against real world catastrophes is prudent. Once the catastrophe happens, it is too late. Most retirees do not have the option of a do-over.
On the Lighter Side…
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Just because our biological clock shows we are moving into the fourth quarter, does not mean we shouldn’t enjoy the rest of the game.
Last weekend we went with the grandchildren to the Vanderburgh County Fair in Evansville, IN. What a refreshing experience. We loved walking through the various exhibits, seeing the young 4-H members and their accomplishments. Saturday night we enjoyed a good old-fashioned demolition derby.
My favorite was the 4-H group of young women on horseback that presented the colors while one young girl did a terrific job of the national anthem. Small town America is alive and well.
One display I enjoyed was the antique tractors. As we looked at the years of the various Massey-Ferguson, John Deere, Case and Farmall tractors, I realized if I was a tractor, I would be considered an antique. Most were in good shape, running well, and still working. That is a good thing!
Until next time…