by Joe Hearn | May 22, 2011 | Pursuits, Travel
Note: I originally published this article in the AARP Bulletin.
Carla McDowell has always loved to travel. She’s toured the Soviet Union, Germany, the Netherlands, Switzerland, South Korea, Costa Rica, England and Alaska. And like a growing number of Americans, she always purchases travel insurance. “No one wants to get sick and cancel a trip,” says McDowell, 64, of Omaha, Nebraska, “but insurance gives me peace of mind that I won’t lose a lot of money if something unexpected happens.”
Travel insurance has been around for decades, but the industry has grown rapidly since the terrorist attacks of 2001, reaching sales of more than $1 billion. Before 9/11, only about 10 percent of Americans taking cruises, tours or international trips bought travel insurance. Today that number is around 30 percent, according to the U.S. Travel Insurance Association (USTIA).
About 80 percent of those policies are “per trip” policies that cover the three most common sources of trouble: canceled or postponed trips, medical emergencies, and lost or damaged baggage.
Should you buy travel insurance to protect your travel investment? Here are several points to consider before you decide.
What’s covered? Terrorism? How about hurricanes? The answer, of course, is maybe. Some policies may exclude terrorism or “acts of God” altogether; others offer broader coverage. For hurricanes, your policy may apply only if you purchased it before the storm was named and then only if your destination is under a mandatory evacuation order.
Bottom line: Read the fine print carefully before you buy, and make sure that the risks you want to cover are, in fact, covered.
Cost. A travel insurance policy can add anywhere from 4 to 8 percent to the cost of your trip, depending on your age and how much coverage you want. Websites such as www.insuremytrip.com can help you compare policies and prices. For McDowell, cancellation coverage for her $3,600 Alaskan cruise cost her an extra $280. “It was worth it,” she says. “Without the insurance, getting sick would have meant deciding between staying home and losing the money or going and being miserable.”
Is it worth it? Travel insurance often makes sense on very expensive trips or on trips that require large, non-refundable deposits or advance payments for hotel stays or special-event tickets. Cruises can fall into this category because most of the cost is paid upfront and canceling even 30 days in advance could mean no refund.
But there are also instances where insurance does not make sense—for example, if your trip doesn’t include high prepaid expenses or if your prepaids, such as airline tickets are changeable for a small fee. If you rarely get sick, cancellation coverage may not be worth the added expense. Most trips go off smoothly or with minor hassles that tend to affect your mood more than your pocketbook.
Credit card coverage. Some credit card companies provide certain travel assistance when you pay for your trip expenses using their card. While helpful, these extras are typically not as comprehensive as travel insurance.
For example, Mike Cimino of Southern Pines, N.C., was traveling in the Canary Islands when he fell and broke his kneecap. His credit card company connected him with medical personnel in the area, facilitated consultation with his doctors back in the United States, and arranged for him to be flown home on a stretcher after his surgery. While this logistical help was welcome, the medical bills were his to pay.
If your credit card company already provides certain coverage, you may be able to save some money by buying a policy to fill in the gaps.
Sources. If you book your trip through a travel agent or cruise line, you likely will have the option to add travel insurance at the time you purchase. In some cases, insurance may be included in your package. For example, Elderhostel includes certain kinds of coverage, including emergency medical evacuations, in each trip at no additional cost. You can also buy policies from a number of companies such as Access America or Travel Guard.
Medical Care. Medicare will not cover health care expenses outside the United States. Likewise, some private health plans limit coverage for those traveling outside the plan’s network. Travel insurance can bridge this gap but you should check with your plan provider to make sure you’re not paying twice for the same thing. Also, some travel policies may exclude pre-existing medical conditions unless you obtain a waiver or purchase the policy far in advance. If you have recently had a heart attack or have diabetes, for example, check with the provider to make sure you’re covered.
Medical evacuation. Travel insurance can pay for evacuation to your home or to the nearest suitable medical facility, important if you become injured in out-of-the-way places. Such evacuations can run into the tens of thousands of dollars, according to Clif Carothers, president of U.S. Air Ambulance.
“We once evacuated a couple whose vehicle had overturned while they were traveling in Africa,“ he says. “We arranged to have a bush pilot fly them from where the accident occurred to an airstrip where our jet could land. They were in pretty bad shape, so we then flew them to Frankfurt, Germany, for care and, eventually, back to their home. The total cost of the evacuation was about $115,000. To make matters worse, they had no travel insurance, so it was all out of pocket.
The odds. According to a recent survey, 17 percent of people who buy travel insurance actually wind up filing a claim. That’s fairly high compared with other types of insurance, considering that one of the fundamental tenets of insurance is that most people won’t use it—if they did, policies would be unaffordable. For some, however, travel insurance can turn out to be a wise investment.
Al and Jodie Goldberg were traveling to Australia from Washington, D.C., via Charlotte and Los Angeles. Because it was a trip with many connecting flights, they opted to pay $269 for insurance. Their policy covered trip cancellation up to $9,000 (the amount of their prepaids), medical expenses up to $10,000 per person and medical transportation up to $20,000 per person; it also had an assortment of coverages for delays or lost baggage.
The trip got off to a shaky start. The couple became stranded in Charlotte when their flight to Los Angeles was canceled due to heavy smoke from California forest fires. Their travel insurance paid for a hotel in Charlotte, meals during their delay and cab fare to and from the airport. It also reimbursed them for a prepaid hotel room in Sydney they were unable to use because of their late arrival. They eventually got another flight, but one of their bags didn’t make it, and the insurance paid to replace Jodie’s formal dress for their night out at the opera.
“I think Murphy’s Law was written with international travel in mind.” Says Al. “The travel insurance helped us to smooth out the rough spots and still have a great trip.”
by Joe Hearn | May 18, 2011 | Asset Allocation, Distribution Planning, Estate Planning, Insurance, Investing, Retirement, Risk
Retirement has a lot of moving parts and when you consider that it could last for thirty years or more, it should come as no surprise that it will have several distinct phases. Sixty-five will look different from seventy-five, which will look different than eighty-five. The world, your health, your finances, your responsibilities, and your priorities, will be dynamic and ever changing. Because of that, it’s important to review your planning and circumstances each year and make whatever course corrections are necessary to keep you on track. Below is a list of questions to ask yourself each year to help determine if any changes or adjustments are in order.
1) Is my withdrawal rate sustainable? The answer to that question depends on many things, including investment performance, inflation, how long you live, and, not surprisingly, luck. Running out of money is not a pleasant option, so you should periodically evaluate your distribution strategy to see if it is sustainable. A good rule of thumb is to keep withdrawals at 4 percent or less of your overall portfolio. Everyone’s circumstances are different, however, so meet with your adviser to make sure your income lasts.
2) Is my income still sufficient and keeping pace with inflation? Inflation is constantly eroding the purchasing power of your money. That means you will likely need to pay yourself more and more with each passing year simply to buy the very same goods and services. Consider a day in the hospital. In 1980 it cost $340. That same day in 2010 cost $5,310. To offset the impacts of inflation, most people need to continue to grow their portfolio, even after retiring. That means you can’t shun risk altogether. You’ll likely need a well-diversified portfolio of stocks and bonds in order to keep pace. That leads us to number three.
3) Is my asset allocation appropriate? Simply put, asset allocation is the process of spreading your investments among stocks, bonds, cash, real estate, commodities, and foreign securities. Research shows that asset allocation is extremely important. Not only does it help to minimize risk, but studies show that it is responsible for nearly 90 percent of your overall return. As markets fluctuate you will likely need to rebalance your portfolio to get your allocation back to your intended target. In the same way, if your goals and objectives change, you should adjust your allocation to match.
4) Is the amount of risk I’m taking still appropriate? Too often people discover their tolerance for risk only after they have exceeded it. This can be a painful lesson any time, but it is devastating to someone in retirement. This is easy to see when you consider the arithmetic of loss. Any investment loss you experience requires a considerably larger gain just to get back to even. For example, if your portfolio loses 50 percent, you would need a 100 percent return just to get back to where you started. Most people in retirement don’t have the luxury of waiting around for 100 percent returns. Better to avoid the loss in the first place.
5) Has the value of my assets changed significantly? Once you retire, you need to turn your assets into an income stream. The bigger the asset, the bigger the potential income stream. Big swings in net worth, like a large inheritance or a significant market loss, affect the amount of income your portfolio can generate. You don’t want to run out of money by taking too much or live miserly by taking too little. Any time the value of your assets changes significantly, reevaluate your withdrawal rate and your asset allocation to make sure they are still appropriate.
6) Are my beneficiary designations up to date? You might not realize that your beneficiary designations (like those on your IRA, 401(k), and life insurance policies) override your will. If your will leaves your life insurance to your kids, but you never updated the beneficiary designation on the insurance policy after your divorce, your ex is getting the money. As you can see, it’s important to periodically check your beneficiary designations to make sure that they reflect your current intentions.
7) Have any of my sources of income been impacted? Personal savings is only one source of income during retirement. You will likely also receive Social Security and possibly a pension. If your spouse dies, that might cause the pension to go away or be reduced. Worse, if the company you worked for goes bankrupt, your pension might get taken over by the Pension Benefit Guarantee Corporation and be significantly reduced. Social Security is on an unsustainable path and your benefits there might be altered as well. Any changes to these other sources of income will put more of the burden on your personal savings, so monitor them closely.
8) Has mine or my spouse’s health changed significantly? At some point, the desire to live close to the beach might give way to the desire to live close to a good medical facility. As you age, investigate assisted living areas and medical facilities in your area. You might eventually need to sell your home to move into a facility or even move to another state if you want to be closer to friends or family that will be involved in your care. Do as much of this planning as possible while you are still healthy so you can easily transition into the next phase.
9) Is my estate plan up to date? Your estate plan should not be a static document. As your life changes, your planning must change with it. Getting married or divorced would likely significantly change how you want to distribute your property. Likewise if there is a death in the family. Each year you should review your documents, including your will, trust, and powers of attorney to make sure that they still reflect your wishes and still have the correct people taking charge if you were to die or become incapacitated. Also, if you move to another state when you retire, meet with your attorney to make sure that your documents will be valid in your new state of residence. Make revisions as necessary.
10) Have my insurance needs changed? Not surprisingly, your insurance needs will change over time. It’s a good idea to periodically review your policies and make changes as necessary. Is Medicare adequate or do you need additional coverage to fill certain health care gaps? Do you anticipate that you or your spouse will need assistance with basic daily activities? If so, you might want to consider a long-term care policy. Does your pension go away when you die? Will your death burden your heirs with a large estate tax bill? If so, changes to your life insurance may be in order.
For a handy PDF of this document, visit the Resources page.
by Joe Hearn | May 10, 2011 | Retirement
Deciding when to retire is not always easy. Many people simply base the decision on their birthday, but there are a whole host of other factors that should weigh into your thinking as well. Here are seven signs it’s time to retire:
1. Your bank account
When you retire, your portfolio takes over the job that the payroll department handled while you were working. If you have to cut yourself a paycheck each month, it makes sense to be sure that your bank account is up to the task. A common rule of thumb puts a sustainable withdrawal rate at about 4 percent. Another way to look at that would be to shoot for retirement savings that are twenty-five times larger than your expected annual withdrawal. If you are not quite there yet, it might make sense to work a little longer (or work part-time), save more, or make cuts to your anticipated spending during retirement.
2. Your bucket list
Before retiring, you should know the answer to three key questions: What do I want to do? Where do I want to do it? Who do I want to do it with? Knowing answers to those questions will help give you purpose and a plan for how to spend your time. If your key reason for retiring is to escape your job, don’t pull the trigger just yet. Wait until you have a plan in place for meaningful pursuits. Doing so will likely help you avoid a bad case of retirement “buyer’s remorse.”
3. Your health
If you are in excellent health and have longevity in your family, working a little longer may not significantly cut into your plans. Not so if you or your spouse are in poor health. In that instance, delaying retirement could mean your chances to do certain things are gone for good. This is especially true if you are planning an active retirement. Take an honest look at your health and life expectancy and weigh that into your decision about when to retire.
4. The markets
Investment returns during the first decade of retirement are extremely important. Retire on the cusp of a bull market and your portfolio will likely build enough padding to withstand future downturns and withdrawals. Retire and begin taking withdrawals at the beginning of a bear market, however, and those early losses will greatly increase your odds of running out of money. Experts refer to this as sequence risk, but it could just as easily be referred to as luck. No one has a crystal ball, but if the economy appears poised for a downturn, you might want to delay retirement (and withdrawals) until things rebound. The same is true if your portfolio has significant losses in the years leading up to retirement. In that case it might make sense to keep working until your investments have a chance to recover.
5. Health care benefits
Recent studies by Fidelity and others estimate that a sixty-five year old couple retiring today will need between $200,000 and $400,000 to cover health care costs during retirement. That is in addition to what Medicare already covers. Having a plan to cover those costs—whether by savings, private insurance, or a Medicare supplement policy—is an important consideration when deciding when to retire.
6. Social Security benefits
Retiring at sixty-two would mean a permanent reduction of almost 30 percent to your Social Security benefits compared to what they would be if you waited until your full retirement age. Just like retiring early reduces benefits, retiring later increases them. Those born after 1943 can expect an 8 percent increase for each year they wait to claim benefits after full retirement age. This increase goes away at age seventy, so working until then will result in maximum benefits.
7. Your spouse
You would be surprised at the number of couples who are blindsided by differences over retirement dreams, plans, and expectations. One wants to keep working while the other is ready to be done. One wants to move to the beach and the other wants stay close to the kids. Are you on the same page with your spouse when it comes to retirement? Make sure you do your planning together so you can work through any differences early and enter retirement as a team.
As you can see, deciding when to retire is a complex decision with many moving parts. By giving it the time and attention it deserves, you can help ensure that your retirement gets off on the right foot.
~ Joe
