Seniors love ‘em—and lawyers hate ‘em:  annuities.

Based on ample experience with both senior citizens and lawyers, I am always amazed at the depths of both the affection and the rage that are evoked by the subject of annuities.  Mentioning the word “annuities’ at an attorney meeting is like yelling, “Attack!”  They immediately launch into a review of the sins of annuities.  Nonetheless, annuities remains one of the most frequent investments purchased in America.  In fact, since the most recent 40%-plus stock market slump, annuities have risen in popularity.  If annuities are so bad, how can it be that the majority of seniors own at least one annuity?

What is an annuity, anyway?  Annuities are an investment contract between a buyer and an insurance company.  The word “annuity” is like the words “ice cream.”  Ice cream comes in strawberry, vanilla, chocolate-marshmallow, moose-tracks, and many more.  Well, annuities come in more “flavors” than the combined ice cream choices of Baskin-Robbins, Ben & Jerry’s, and Cold Stone Creamery.  You really cannot tell a good annuity from a bad annuity without a very careful review.

Annuities are backed by insurance companies and their reserves.  Although annuities are not federally insured, it was interesting to see that our federal government chose to prop up AIG but let Lehman Brothers brokerage fail.  AIG is the major seller and reinsurer of a large portion of the annuities sold in this country.  Evidently, the government was unwilling to allow one of our largest insurance companies fail.

Immediate annuities are a contract wherein an insurance company promises to pay monthly payments for a term of years or based on one’s lifetime.  Lifetime payments are often very attractive to retirees, because nobody wants to be out of money before they are out of breath.  Lifetime immediate annuities start paying monthly checks in the first year of the investment.  They act like pensions.  In fact, almost all employer-sponsored pension plans purchase immediate annuities to pay the monthly checks to company plan retirees.

What makes an immediate annuity attractive to a retiree?  Usually, the insurance company offers an initial interest rate above Certificate of Deposit rates.  In addition, some insurance companies offer the purchaser a ‘bump’ in the imputed value of the money invested.  Although these incentives look very attractive, please have the annuity contract reviewed by an independent professional who can interpret the true value of the investment.  It’s also important to know what will happen after the initial ‘teaser interest rate’ has ended.  What does the annuity actually guarantee as the minimum future interest rate?

A good place to compare actual returns on annuities is at www.immediateannuities.com.  You can get a fast, free annuity quote online.  Immediateannuities.com is reputedly the number one website for evaluating immediate annuities.  There are lots of other resources available at their website to acquaint you with annuity language and insurance company ratings.  Don’t buy any investment without some research and/or independent advice.

It is a common human paradox that we often treat money from different sources as if it had different value.  For example, money from an inheritance or the lottery is almost always spent on luxuries and frivolous things—it’s typically gone within 18 months.  Money from a bonus is blown on those extras that you feel that you “deserve.”

One source of money seems to be treated as far more valuable than any other source—IRA funds.  In our practice we talk to senior after senior who would rather die than spend their IRA and/or 401(k) money.  When we do estate planning, gift planning, and long-term care planning, we often find that our clients are willing to use almost any other source of money except spending their IRA funds.  Why is that?

The answer is that they spent a lifetime accumulating those funds through their working years.  This money means much more to them than “phony-baloney” capital gains increases in the house that they bought for $30,000 which is now valued at $300,000.  To them, that’s not “real money.”  But there is no question in their minds that the money that’s in their IRA is something that they sweated to accumulate.  Now in their retirement years they don’t want to let that money go.

Like a legendary dragon who safeguards his hoard of treasure against all attackers, our senior citizen clients hoard their IRAs.  We have had many clients tell us with anger in their voices that “they [the IRS] make me take so much money out of my IRA every year!”  They have forgotten why they saved that money in the first place.

Kathy Motley, our Executive VP of Operations, often tells people, “You forgot why you got your IRA!”  She reminds them that they accumulated that money over their working years so that they could spend the money in their retirement years.  The reason to accumulate this money in a tax-deferred manner is so that when they reach their retirement years, they are able to use that money and pay income taxes at a lower rate of taxation.  She goes on to say that they have developed a habit over the years of thinking about this money as “untouchable.”  They have developed a habit of using all other sources of money except their IRAs.

We have to ask our clients what would actually benefit the IRS more—our seniors taking the money out and using it for the things they need?—or forcing their children to take the money out at higher tax rates?  Our clients have seldom considered the fact that if they don’t spend the dollars, it will be spent by their children after paying a higher tax rate.

Of course, there’s always the argument that if the client dies with the IRA, then the child could stretch the benefits of the IRA over a lifetime.  But most of our seniors say to us, “I know my kids could save the money, but they won’t…  They’ll spend it and spend it fast!”

So the question that we have to analyze with our senior citizen clients is this:  who should pay the taxes on the IRA?  Would it be better for them to use their taxable money now, or leave it for their children?  Many of the senior clients that we talk to are people who have already begun to incur sizeable out-of-pocket medical care costs.  There is a substantial deduction for our seniors who must incur large, unreimbursed health care costs.  We try to show them that they’re often much better off using taxable IRA dollars to pay for deductable medical care expenses.  It’s always a better idea to spend tax dollars when you have an offsetting deduction.

So as you think about that IRA—don’t forget why you got it!

Page Williams with her horse

When I started practicing elder law, the only people I saw as clients were of my parents’ generation.  But now my own boomer generation is also coming through the doors.  Some are afflicted with early onset Alzheimer’s or Parkinson’s, and they are surprised that they now need long term care.  In 1921 Charlie Chaplin and Mary Pickford dreamed that the movie industry folks would always “take care of our own” and started The Motion Picture & Television Fund, which in turn funded the Motion Picture & Television Country House & Hospital (commonly referred to as Motion Picture Home)—a home that is now closing due to bankruptcy.

My friend and fellow boomer Page Williams recently sent me an e-mail which expressed her anxiety about her own long term care prospects. She is a board member of a union representing theatrical, stage, movie, and TV show workers who are not actors, producers, or writers.  But what’s really bothering her is that “Like millions of boomers, I chose not to marry or have children.  But I don’t think that we unmarried boomers fully realize that there’s a lot more to worry about now than just long term care for our geriatric parents.”  As an entertainment worker, the closing of the Motion Picture Home has her scared. “I always used to joke with my friend Terry as we were riding along on our horses that some day we would be old and gray and sitting around the MP Home having a drink and remembering these days.  Now I wonder what’s going to happen to us.” 

Like other boomers, Page sees promises of retirement era benefits vanishing long before the boomers themselves even arrive at the gates.  Members of her union have paid into the Motion Picture & Television Fund for years with the expectation that if they needed it, that senior home would be there for them.  In great contrast to ordinary nursing homes, the Motion Picture Home has benefited from high profile pre-Oscar fundraising events generating up to $15 million in contributions per year.  Nonetheless, the hospital board says they just can’t carry the alleged $10 million per year nursing home deficit any longer.  They, like other facilities around the country, are receiving insufficient reimbursement from Medicare and Medicaid, the primary sources of governmental health care funding for North American seniors.  Jim Lott, executive director of the Hospital Association of Southern California, complained that Medicare provides reimbursement for only about 87 cents of each dollar that the hospital spends on care. Medicaid reimbursement is even worse, with the state only delivering about 78 cents for each dollar cost of care. 

All over the country, hospitals and nursing homes are closing due to inadequate and long-delayed reimbursement dollars owed to them by both the state and federal governments.  The closing of Motion Picture Home is one more warning that both seniors and boomers must work together to insist that our government provide health care reforms that ensure quality end-of-life care.  As we listen to government claims that they are going to provide universal coverage, it would be nice to see examples of our government actually providing excellent care.  Unfortunately, those examples do not exist. 

What this means for our readers is that it’s time to get serious about your own long term care security, especially if you’re a boomer. Do not delay investigating—and investing in—long term care insurance. There are some new “hybrid insurance products” that will pay out with either a life insurance death benefit or a long term care health policy. Call your trusted financial advisor today.

In a recent conversation with friend and financial advisor Rocky Greene, the subject turned to the lowered level of trust people are willing to extend to financial professionals in recent days, because so many people have lost their investments—sometimes their entire retirement or life savings—in the stock market.  After being betrayed by the heads of Fannie Mae, Freddie Mac, major investment houses, and even the governor of Illinois, people are afraid to trust, and afraid to invest again.  This fear of professionals is not making people safer—it is actually making individuals even more vulnerable to ongoing losses that can devastate their accounts.

At times like these, when people are in a state of fear, they put a complete stop on any forward movement because they’re afraid of the unknown.  According to Rocky, freezing up is the worst thing you can do.  He uses the following analogy, “if your child is sick, you don’t wait until your child turns blue to go to the doctor.  You take your child to the doctor right away!  If you’re not satisfied with the opinion of that doctor, then you get a second opinion.  But you need to do something.”  Investment management is not so different from child management. 

Despite the losses in today’s market, people are at much greater risk if they are paralyzed with fear.  Don’t freeze up; instead, use this time to take action!  If you don’t trust your financial advisor any more, find someone you DO like and trust, who can assist you in moving forward.  And whatever you do, do not pay attention to the pundits on TV.  Those “professionals” are promoting the flavor of the month, trying to push people’s hot buttons to get ratings.  This is absolutely  the opposite of working with a professional who will endeavor to understand your concerns and priorities and guide you accordingly.  Change is not nearly as fearsome as you might believe—provided you have a trustworthy guide. 

So I asked Rocky, “Well, how can people know who to call?  What should a client look for in an advisor?”  His advice was simple: ask around and interview until you find someone you feel you can trust.  I admit that this particular advice can be somewhat challenging, especially when you have the specter of someone like Bernie Madaff, who made off with over $50 billion entrusted to him by individuals who are far savvier than the typical senior citizen in America.  But Rocky’s advice makes sense.  In the end, we all have to trust our instincts and just keep moving.

(In case you are wondering, Rocky Greene is not a slick new kid on the block; he is one of the old guard.  He does not have a website; in fact, almost all of his business comes from referrals.  Rocky is educated about the particular concerns of senior citizens as well; he is quite aware that elderly clients need to be able to have access to their money in the event of an emergency, and he states that there are appropriate products that do provide seniors with liquidity in the event of a nursing home or long-term care emergency.  Rocky can be reached at Greene Financial Services in Naperville, IL, e-mail rockyg@wideopenwest.com)

 During the year we get referrals from a number of financial advisors.  During 2008 I had the pleasure of working with Rocky Greene as he held the hand of one of his clients who was beginning to slip into the early stages of dementia.  Because of his proactive concern for his clients and at great expense of time, he worked with his clients (a husband and wife in their 70’s) and their adult children in helping them to modify their existing estate plan into a long-term care plan with asset preservation for the healthy spouse and appropriate distributions for the children at the time of the death of both of the spouses.  I decided to give Rocky a call to ask him what was going on in the financial investment world from his perspective.  What follows are some of the things that he had to say.

There are four crucial areas of investment management, all of which need to be addressed to have a truly healthy financial plan for the future:

Level of Risk.  When someone asks Rocky about investment management, he counters by asking them a question right back: How you are going to manage your money, not only in an up market, but also in a down market, or in a sideways market?  The key to getting the most out of your investments is not by blindly following your financial advisor, but by doing what is right for you.  The key to good investment management is communication.  Individuals need to be able to share with their financial manager what level of risk they are willing to tolerate.  Some will be comfortable playing the market and hoping they’ll win big.  But for those who insist upon guarantees, an annuity may be the best choice available to them. 

Proper Insurance Planning.  No matter what your level of risk, investment management also includes the having proper insurance for any of life’s risks.  This includes not only the obvious, life insurance, but also the less obvious: long-term care insurance, and appropriate liability insurance in the event that you are sued. 

Estate Planning.  It is absolutely critical that you put together a proper estate plan so that your inheritance goals will be properly structured in writing, not only from a tax standpoint but also to determine who is in charge.  Every person, regardless of the size of his or her estate, needs to take the time to put together a plan with directions to loved ones, detailing not only what should be done, but what should not be done with the worldly assets that are left behind. 

Medicaid/Public Benefits Planning.  Lastly, Rocky believes that Medicaid/public benefits planning is essential!  In today’s environment, even a $2 million net worth individual or couple can have their life savings completely destroyed by failure to properly plan for long-term care.  These days, when you have the very real possibility of one or both individuals needing long-term care for 8 to 12 years, it is easy to take an estate from $2 million or more to absolute zero in that period of time.  To avoid this, you need more than basic planning—you need long-term care planning as well.

A healthy body isn’t achieved by fixing one aspect of your lifestyle and then stopping; it includes giving attention to diet, exercise, mental health, and environmental factors.  Neither does a healthy financial plan stop after making a change in just one area.  You must give attention to all the components of your body of investments to have a truly healthy financial portfolio.

**  Rocky Greene can be reached at Greene Financial Services in Naperville, IL, e-mail rockyg@wideopenwest.com.