Jen explores items 8 through 10 from her ‘Top 10 Easy Ways to Ruin a Federal Retirement’ series
Hello readers. Welcome back to the final article in the series, “Ten Easy Ways to Ruin a Federal Retirement.”
I still get it – Jen, you wrote a listicle with a glib name.
Guilty! But, I hope you agree by now that I have advanced some important ideas. (Reminder, I’ve written this list with FERS, FERS RAE, FERS FRAE, and CSRS Offset in mind. But the ideas also apply to CSRS.) Now I will dig into numbers eight, nine and ten.
My first two articles leaned into the ideas of habits and behaviors as well as addressing investment risk and how they interrelate. Our final three topics at a high level revolve around different kinds of risk. We will explore how inattention to these areas can leave you exposed to a financial blow to your planning. Here we go.
- Forget your Umbrella
- Ignore Long Term Care Risk
- Mishandle FEGLI
8. Forget your Umbrella
This has nothing to do with rain. I am referring to an insurance product known as personal excess liability policy, typically called an Umbrella Policy. These policies are issued by property and casualty insurers so you would secure yours through whomever provides your auto insurance.
Wait Jen, I have auto insurance and homeowners coverage for that matter. Are you telling me to buy another policy?
In short? Yes. Allow me to explain. Typically, auto and homeowners coverage includes liability protection. So, if you hurt someone in an auto accident or if they are injured on your property, the coverage provides financial protection. Generally speaking, the coverages are for a fixed dollar amount. For the sake of an example, let’s say your auto insurance has liability limits for personal injury of $250,000/$500,000. This means that you would have $250,000 protection per person and $500,000 per accident.
You may already see where I am going here. If you are involved in an accident that is determined to be your fault and a single occupant in the other car is in the other car is injured, your maximum liability protection is $250,000. If a court proceeding follows and the judgement is against you for say, $975,000. You are on the hook for $725,000. And where might they seek that money? After insurance payment there is a hierarchy that includes liquid assets, income, and retirement plans when you draw them. So, all the things we worked hard to build up in the 2 previous articles are now at risk.
No way Jen, I’m a great driver!
I know, I know. In fact, I recall a survey where 73% of American drivers consider themselves to be better than average. But mishaps still happen. An Umbrella policy rest atop your auto and homeowners policies and only kicks in if there is a large claim that exceeds the underlying coverage. Since that is the case and small claims never reach the Umbrella threshold, you may find the cost for an additional one to two million dollars of protection is surprisingly affordable. (Disclaimer: higher risk items or activities and colorful driving records will impact that cost.)
We live in a world of litigation risk. An Umbrella policy is a bit like a moat around a castle. A good moat is worth it. Seriously, if you don’t have one, call your insurance agent and at least request a quote. You are working hard to build a good financial life, don’t miss the step to protect it. This thinking also leads into my next topic.
9. Ignore Long Term Care Risk
According to data from the HHS ACL website. if you are a person turning 65 today, you have a 70% of needing some type of long term care in your lifetime. Would you buy a lottery ticket with a seven in ten chance of winning, probably. Yet I meet so many people who cling to the notion that it will not happen to them. Long term care needs are an equal opportunity provider. They can happen to everyone. And the average costs are not small. CNBC reports that this year the average cost for long term care at home is $50,000 and $100,000 in a facility. That can be an unexpected drain upon retirement assets!
Now to be clear, I am not advocating for any particular brand of long-term care insurance nor am I dismissing the possibility of funding it with assets and retirement income and savings. What I am urging is to have these discussions NOW. Look into FLTCIP (although applications are suspended until 2024), get quotes from private insurers, discuss LTC planning with your financial advisor or all of the above. The time to prepare is before the storm. This is another place where your future self will thank you.
Now let’s move on to number ten on my list.
10. Mishandle FEGLI
Jen, C’mon! Your big finish is Life insurance?
Absolutely! Because I don’t want you to have an unexpected finish that blows up your financial planning. In the Umbrella section I wrote about how a mishap can lead to damage to your retirement planning. Passing away is the worst mishap you could have. Simply put, premature passing can devastate a family’s planning and financial position.
So what does ”mishandling” mean. In short, it means not giving the topic adequate thought and planning.
But Jen, I signed up for Basic life, Option A and 5 multiples of Option B and Option C. So, I can’t do any more. I’m set right?
Not necessarily. Most people can identify the things they want paid off in the event of their untimely passing. Things like mortgages and debts immediately come to mind. However, there is another loss taking place here. And that is your ability to produce for yourself and your family. I like to call this your economic life value.
Do you hope to live a long time? Do you plan to do well in your career? Will you then expect higher and higher wages and all the things that may go with that? Hopefully you see my point.
From one perspective, signing up for FEGLI when first employed allows a new Fed to set up 6x salary in individual life insurance death benefits without any medical underwriting. At younger ages the optional coverages are much lower in cost. These are both positive things, but it is not “set it and forget it for life.”
A properly designed portfolio of life insurance should make a financial plan self-completing in the event of untimely death. What you have, what you owe, and what you want to accomplish should all come into play. If 6X salary does not do that, we have a mishandle.
Another way to mishandle FEGLI is to not comparison shop as you age. This is another way “set it and forget it” can hurt you. When life insurance becomes an employee benefit it falls under rules that do not allow the issuer to discriminate by risk class. Everyone must pay the same rate regardless of health (or smoking status). What this means to nonsmokers in average of better health is that their rates have been averaged together with folks who smoke or may be in poor health. In the open market, smokers pay as much as twice what nonsmokers pay.
Great info Jen, but what does that mean for me?
It means that it pays to shop around with regards to your Option B coverage, especially after age 40. I have seen Feds save tens of thousands of dollars over their career by doing this. That’s more money to go toward retirement savings, always a good thing.
My closing thoughts on this would be to urge you to be intentional about life insurance planning. Don’t just check a box or buy a policy and forget it. Determine what you want to accomplish in your financial life and then ask yourself how much of that you want to happen even if you are not here to do it.
Here’s a favorite quick check used by our director of tax and investment strategy. If you were hit and killed by a tractor trailer owned by a multibillion-dollar corporation, for how much would your family sue? 2 million, 5 million, 10 million?
Now compare that to your existing balance of insurance death benefits. Is there a difference? Why?
OOH Jen. That’s dark.
I know, but I’m just looking out for your family.
Closing Thoughts
I hope you have found this series helpful. In no way does this list take the place of comprehensive planning and strategy. My hope as always is to help you under and perhaps see the challenges though the lens of a planner. If you are thinking differently after reading, my goal is accomplished.
Thank you for reading this and I wish you the best from your career in federal service.
p.s. And yes, I remember that in my first article in the series I wrote that I had identified over 20 ways. I promise I will cover them in an upcoming series.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Jennifer and not necessarily those of Raymond James.
Guarantees are based on the claims paying ability of the issuing company. Long Term Care Insurance or Asset Based Long Term Care Insurance Products may not be suitable for all investors. Surrender charges may apply for early withdrawals and, if made prior to age 59 ½, may be subject to a 10% federal tax penalty in addition to any gains being taxed as ordinary income. Please consult with a licensed financial professional when considering your insurance options. *
** Written by Jennifer Meyer, Financial Planner. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jennifer Meyer and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
