Financial Planning

Long term care (LTC) is associated with the elderly for good reason. Over the past 50 years, life expectancy has increased significantly and is therefore something all families should be prepared to address. Even though we may live to a ripe old age, that doesn’t mean we will be healthy or able to live independently. Most people develop one or more chronic conditions that require living assistance – and many live with that ailment for years. Conditions such as arthritis, joint and muscle deterioration, or back pain often lead to chronic disability, making it difficult to impossible to take care of your own physical and lifestyle needs. Among even healthy seniors, about half of people age 80 and older experience some form of dementia or cognitive impairment.

Most LTC insurance (LTCi) contracts require that the policyowner no longer be able to perform at least two of the basic activities of daily living (ADL), which including dressing, bathing, toileting, feeding and moving without assistance. However, before getting to that stage, many people may live for years needing help with domestic ADLs, such as preparing meals, paying bills, shopping, attending appointments, etc.

New Criteria for LTC Insurance

An unfortunate influence of the pandemic is that some LTC insurance carriers now require an in-person medical exam as part of the application process. In the past, underwriting generally involved a telephone interview, a completed questionnaire and medical records review. These days, in addition to an exam, issuers have increased the number of pre-existing conditions that are excluded from coverage. Furthermore, insurers are declining more applications for medical reasons. In fact, there is preliminary data that suggests more LTCi applications are declined, or higher premiums charged, in geographical areas where populations have persistently higher rates of serious COVID-19 infections. Not surprisingly, these areas are generally correlated with lower vaccine rates.

New Policy Options

Even before the pandemic, LTCi sales were on the decline and many insurers exited the market. This is because with longer life expectancies, carriers increased premiums to cover the financial risk. This priced many policies out of range for most households. In recent years, the life insurance industry has found a strong market in sales of hybrid policies, which guarantee benefits one way or another. For example, a contract might include a rider that allows the policyowner to use the future death benefit in the present to pay for LTC expenses while she is still alive. If she doesn’t need the money, her beneficiaries will receive the value when she dies. Another benefit of hybrid policies that they guarantee premiums will not increase. In many cases, a policy can be purchased with a single lump sum.

New Focus for LTC: Live at Home

Apart from exploring new ways to pay for long-term care, there is political interest in finding ways to provide LTC more efficiently than in the past. For perspective, consider that the current U.S. system of placing Medicaid recipients into nursing home facilities proved to be one of the most vulnerable components of the pandemic. As of February 2021, more than 170,000 residents in long-term care facilities had died due to the coronavirus.

Various public agencies and non-government organizations (NGOs) are looking at new paradigms for caregiving as an alternative to high-volume residencies in order to minimize the risk of disease contagion. Some recent proposals include the following:

• Enhance our current public programs that support independent living (e.g., Original Medicare, Medicare Advantage (MA) plans and Special Needs Plans (SNPs) with integrated benefits such as wellness care, behavioral healthcare, case management, home-delivered meals, transportation and adult day services.
• Allow Medicaid’s long-term services and supports (LTSS) programs to reimburse long-term care expenses at home and for community-based services.
• Expand efforts already originated in a handful of states (e.g., Illinois, Michigan, Minnesota, Washington) for state-sponsored, long-term care insurance plans.
• Consider building on state initiatives such as California’s Master Plan for Aging, which includes plans to:
  • Create community housing solutions that that are age-, disability- and dementia-friendly, as well as climate- and disaster-prepared.
  • Improve quality of life for the elderly and disabled by presenting opportunities for work, volunteering, engagement and leadership regardless of age or disability. The purpose of this initiative is to reduce isolation, discrimination, abuse, neglect and exploitation.
  • Generate up to1 million highly-qualified, well-paid caregiving jobs.
  • Improve financial security for the elderly population by making long-term care affordable.
• Reimagine nursing homes using continuum of care housing models designed for 8 to 10 residents with integrated staffing.

The current trend in the caregiving industry is to help seniors be able to live at home for as long as possible. In many cases this increases the burden on families. Since some people have to leave the workforce to care for family members, this hampers economic growth and tax revenues that could be used to fund better options. While LTC insurance remains expensive, it’s important that potential buyers are aware that most policies pay out benefits regardless of where care is bestowed, including nursing homes, assisted living facilities, the insured’s home or even if the insured has moved to a family member’s home.

During the first year of the pandemic, many homeowners spent their down time upgrading their homes. The year 2020 alone experienced at 3 percent uptick in spending on home improvements – to the tune of nearly $420 billion nationwide. This included modifications for remote work, online schooling and leisure activities at home.

Between remodeling, high inflation and today’s elevated real estate prices, it’s important to review your homeowner’s insurance policy to ensure it’s up-to-date. Does it include enough coverage for recent upgrades to your home? Does it carry an inflation factor to ensure coverage is on par with more expensive building material costs and labor increases? Do you have coverage for ancillary factors, such as the cost of meeting local building ordinances, or flood insurance for today’s extreme weather events?

Replacement vs. Actual Value

One term to check on your policy’s declaration page is whether your coverage is determined by replacement cost or actual cash value. Replacement cost will pay for repairs to your home or replace your personal property (e.g., laptop, television) up to coverage limits, regardless of its current value. In other words, the policy will pay for a new computer even if your old one was 3 years old.

Actual cash value refers to a cash payout equal to the current value of your property. In other words, if your computer was 3 years old, you will receive the cash value of a 3-year-old computer – which will not likely cover the cost of a new replacement.

Guaranteed Replacement

In lieu of upgrading your home’s cost coverage each year, you might have the option to pay for guaranteed replacement, which is an extra fee that ensures the policy will cover the entire cost to rebuild your home. Extended replacement cost coverage pays out a certain percentage above your policy’s stated dwelling coverage limit if the cost to rebuild is higher than the face amount. For example, a policy with $200,000 coverage and 25 percent extended replacement coverage will pay up to $250,000 to rebuild your home.

Ordinance Coverage

Homeowners who live in older homes should consider adding ordinance coverage if it is not standard under your policy. Ordinance coverage pays for the cost to meet current building codes should you need to rebuild. These fees can be substantial and would have to be paid out-of-pocket if you don’t have this form of coverage. Note, too, that although guaranteed replacement cost coverage might offer a higher payout, that is only for the material and labor costs to rebuild – not local ordinance fees, licenses or inspections.

Inflation Impact

As you review your current policy, note that the section labeled Coverage A represents the amount available to rebuild your home. It generally rises by 2 percent to 3 percent each year for basic cost-of-living increases. However, it is worth noting that building materials, such as lumber and steel, increased by 19 percent in 2021, and in June the general inflation rate increased to 9.1 percent, its highest level in more than 40 years.

Because home building costs, the inflation rate and the increasing number of weather events have plagued the home insurance industry, policy premiums are starting to increase at a higher rate each year than in the past. In additional to higher costs due to supply chain disruptions and inflation, the home building industry is hampered by a lack of qualified workers – and experienced workers are demanding higher pay. This is yet another component that is factored into calculating insurance premiums. Basically, anything that would lead to a higher cost to repair your home will result in higher rates.

Insurance companies calculate your policy premiums by multiplying your home’s replacement rate with your home’s current value. Therefore, a combination of higher building costs and higher real estate values have contributed to higher insurance premiums. Some states have set an annual percentage cap on how much insurance companies can raise homeowner rates each year. However, given the increasing number of extreme weather events (e.g., storm surge, wildfires) in recent years, state legislators also have increased those rate caps so that insurers have the latitude to cover excess payouts. Note that rate increases vary by geographical area, based on local weather activity, labor costs and building supplies.

Some insurance policies offer an inflation guard, which automatically increases coverage limits to match inflation rates when the policy is renewed.

Flood Damage

Be aware that homeowners insurance does not cover flood damage. Mortgage lenders require homes located in government-designated Special Flood Hazard Areas (SFHA) to purchase a separate flood insurance policy. However, we have seen inland and even metropolitan areas that are not located in flood zones be devastated by the effects of storm surge following a hurricane. Homeowners who live in these higher-risk areas should consider purchasing a separate flood insurance policy as well. 

Imagine selling slices of a large pizza. You can cut it into four even slices and charge $2 a slice. Or, you can cut it into eight even slices and charge $1 per slice. Either way, the total value of the pizza will still be $8.

That’s what happens when a stock splits. Let’s say a stock’s market price is $100. With a 2-for-1 split, each current owner receives one additional share for each share he owns. Now, each share is worth $50. If you had one share to start, you now have two, but the total value of the investment remains $100.

A stock split differs from when a company decides to issue new shares, wherein new shares flooding the market can dilute the value of existing shares. With a stock split, the value of existing shares do not decrease. The total market value of a shareholder’s holdings will remain the same.

There are different forms of stock splits, such as the 2-for-1, 3-for-1, or 3-for-2 stock split. They all work the same way: You get two shares for everyone you hold, or three shares for everyone you hold, or three shares for every two shares you own.

Another, the less common form is called the reverse stock split. This is when a company decides to reduce the number of outstanding shares, which in turn will increase the stock price of shares held by stockholders. This strategy is generally used to boost the price of a stock that has lost value over time.

It is important to recognize that the stock split is a simple strategy designed to affect the stock price. It in no way changes the company’s market capitalization (i.e., total value of all outstanding shares) or other fundamental metrics. In order to issue a stock split, it must be approved by both company management and the board of directors. Furthermore, the company must publicly announce its intention to conduct a stock split within days or weeks of implementation.

The timing of the announcement is important because some investors try to take advantage of a stock split, believing that the value of the stock will increase as a result. This has more to do with market sentiment than any change in company fundamentals.

For example, in the past when a stock split its value often returned to its pre-split price within a year. This is not necessarily because the company has improved fundamentals, but rather because the investor market simply believes that stock is worth that price — it’s a form of confirmation bias. However, in recent years it is not as common for split stocks to climb back to their original price as it was in the past.

Why Conduct a Stock Split?

Again, the reason for a stock split is largely driven by market sentiment. For example, some investors may not have a lot of discretionary income to invest, so they look for a lower-priced stock. While they might not consider a stock valued at $100 per share, they may be interested in the company at $50 a share. In fact, following a recent stock split, investors may see it as getting a bargain price for that stock. As such, they might buy two shares. Now they’ve spent $100 on two shares whereas they were reluctant to buy one share for $100. The value is the same, but psychologically, that stock now seems like a great buy. This is referred to as unit bias. Psychologically, most people perceive lower per share prices to mean that a stock is “cheaper” and therefore may have more room to make gains.

In addition, now they can further diversify their portfolio with different stocks, whereas before those high-priced shares may have dominated their portfolios, exposing them to greater market risk.

A stock split also gives current shareholders the opportunity to increase their holdings at half price. While the value hasn’t changed when they make the buy if the stock increases in the future their portfolio will increase in value because they have more shares of that stock. For example, let’s say you have 10 shares of a stock priced at $10, for a total value of $100. The stock splits 2-for-1, so now you have 20 shares priced at $5, still valued at $100. In a few years, the stock price grows to $20 per share. Had the stock not split, your total value would grow to $200. But because you now own 20 shares, the total value of those shares would grow to $400.

Clearly, the true value of a stock split comes from holding those shares until the price increases substantially.

Mutual Fund Split

Some mutual funds also engage in the split strategy, but instead of splitting an individual stock, the fund company issues additional shares of the fund at a reduced price. In all other ways, a mutual fund share split works like an individual stock split.

If you’d like to learn the history of a company’s stock splits, consider the following resources:

• Click on the investor relations tab on the company website, which often provides a history of the company, including dates of past stock split activity.
• Search by the ticker symbol at stocksplithistory.com or Morningstar.com.
• Another option for both stocks and mutual funds is to search by the stock symbol at Yahoofinance.com. On the stock’s performance chart, look for the Events tab and check the Stock Splits option. You may need to reduce the historical time frame to see splits marked clearly.
• You also may be able to search for stock split history on the website of your online broker. Many outfits offer these types of research tools.

Often the first house a person buys is an affordable condominium, townhouse or older single-family dwelling, also referred to as a “starter home.” It might be small and lack features they dream about, from new appliances in the kitchen, to dual sinks in the bath, to a large yard or a garage.

However, the key to a starter home is not to acquire your dream house, it is to build equity that you can eventually deploy to buy your dream home. It’s important not to wait until you have enough money for the ideal property. Start as early as you can and buy something affordable to get your foot in the door of homeownership.

Interest Rates and Maintenance Expenses

Buying a home when mortgage interest rates are low offers a key advantage for building wealth because it reduces your loan payment, thereby freeing up more discretionary income to put toward other investments, home upgrades or pay down the mortgage balance.

When deciding your price range for purchasing a home, it’s also important to budget common maintenance costs, such as utilities, repairs and upgrades, as well as homeowner’s insurance and property taxes. These costs can be substantial, yet many new homebuyers do not account for them in their budget. They only take into consideration whether or not they can afford the monthly mortgage. It is always a good idea to have a lower payment that you can well afford in order to avoid relying on savings or credit to pay for maintenance expenses as they arise. And remember, maintenance of your property is critical because it can help improve your sale price when you move, which is key to building wealth.

Building Home Equity

The next step to building wealth through homeownership is to sell for a substantial profit. Home equity, which is the market price for which you can sell the home minus your remaining mortgage balance, is achieved in two ways. One way to build equity relies on the real estate market. Over time, houses generally increase in price, so most people are able to sell their home for more than they paid for it. How quickly home prices rise will depend on the overall economy and your home’s particular appeal. That’s why it’s important to make an attractive location one of your top requirements. For example, even if you don’t have children or want children, buying a home in a sought-after school district will likely increase the value of your home faster. Other location features include easy access to shopping districts, major highways and even an airport.

The second way to build equity is through the monthly payments you make on the mortgage, which reduce the balance owed. If you can afford it, adding more to your monthly payment and directing the excess toward your principal balance helps build home equity faster. Another payment option that can help build equity faster is to apply for a shorter-term loan than the standard 30-year mortgage. For example, a 15-year term mortgage features a lower interest rate and the borrower pays off the loan in half the time. Note that monthly payments will be higher, but a homeowner can save thousands of dollars in interest with a shorter-term loan.

Transaction Costs

The garden variety advice is to remain in your home for at least five years. That’s because selling your home and buying a new one involves substantial transaction expenses, from closing costs to initiating a new loan, as well as paying commission fees to both the seller’s and buyer’s real estate agents (usually 3 percent each). Therefore, you need to have lived in the property long enough to build equity through payments and market appreciation to offset these expenses and still make a profit.

Sales Tax

Be aware that it is advantageous to live in your primary residence for at least two years before you sell. Otherwise, your sales profit could be subject to capital gains taxes on the first $250,000 for single tax filers, and as much as $500,000 for married filing jointly. The tax rate is the same as your ordinary income tax rate if you owned property for less than one year; after that, the capital gains rate is based on your tax bracket (15 percent or 20 percent).

Trade Up, Then Down

Over many decades, you can build wealth by buying a home and then periodically “trading up” once you attain substantial equity. The tactic of trading up means you invest your profits in a more expensive home and then begin building equity again. One way to save for retirement is to keep trading up until you retire, then downsize to a less expensive home with lower maintenance expenses. At that point, you can redeploy the profit derived from the home equity you have accumulated into a stream of retirement income.

Today’s Market

In recent years, high prices and low inventory in the residential real estate market have made it harder for young adults to buy a starter home. For those currently shut out, keep saving until the market stabilizes, because the higher your down payment, the lower your monthly payments will be – and the more equity you’ll have in your home. You can still build wealth through homeownership, even if you start late.

Starting in 2020, new legislation increased the age to begin Required Minimum Distributions (RMDs) from 70½ to 72. More recently, the IRS updated the Uniform Life Table for alignment with longer life expectancies. Note that it takes years for actuaries to work up new data for this table, and the recent changes do not reflect the downturn in life expectancies resulting from the pandemic. These updates were established pre-pandemic and scheduled to take effect in 2022.

The good news is that retirees who prefer not to withdraw from their retirement portfolios now have a couple more years of growth opportunity before they are forced to take distributions.

Because retirement portfolios fluctuate based on market performance, and your life expectancy changes with each year you continue to live, your RMD amount also changes each year. To calculate your annual RMD, you need your retirement plan’s previous year-end account balance and the most updated Uniform Life Table. To determine the correct amount, divide the year-end value by the estimated remaining years of your lifetime, based on your age on Dec. 31. This is the formula: Account balance ÷ Life expectancy factor = RMD.

The new Uniform Life Table is updated with a longer average life expectancy than the prior table, so the divisors have increased. This means that the amount required to be withdrawn is now reduced from what would have been required under the previous table.

The following are some guidelines to keep in mind when calculating, withdrawing and managing your required minimum distributions.

• Once you reach age 72, you have until March 31 of the following year to take your first RMD. After that, RMDs must be withdrawn before Dec. 31.
• An annual RMD may be taken as a lump sum, on as-needed basis or as regularly scheduled payouts.
• Consider that if you delay taking the distribution until the end of the year, your portfolio has more time to grow tax-deferred before you reduce the balance.
• As long as you don’t own more than 5 percent of the company you work for, you may delay taking RMDs from the retirement plan sponsored by your current employer as long as you continue working and contributing to the account. RMDs are not compulsory from that account until you stop working.
• If you have multiple IRAs, including SEP and SIMPLE IRAs, you can withdraw the combined RMD amount from just one account (or any combination thereof).
• If you have multiple 403(b) accounts, you can withdraw the combined RMD amount from just one account (or any combination thereof).
• However, if you have multiple 401(k) accounts, you must withdraw RMDs from each account starting at age 72.
• Married couples may not combine their RMDs and withdraw them from one account.
• RMDs from an inherited IRA also may not be aggregated unless they were inherited from the same decedent.
• You do not have to take an RMD from a Roth IRA because the original contributions were already taxed.
• In the year you first quality for an RMD, it may not be a good to wait until March 31 of the following year to take it because you’ll have to take your second RMD by Dec. 31 of that same year. Two RMDs in one year could yield a substantially higher tax bill.

If you really want to make impact in your new grad’s life, make an investment in his or her future with a 529 College Savings account. There are two versions: an investment account and a prepaid account. Assuming you are opening an account now and don’t have time for investment growth, you may need to fund it with a significant chunk of money for it to be useful. The savings plan is good for building an investment balance over time, including while the student is in college. On the other hand, the prepaid option is a good way to reinvest a windfall – such as an inheritance or proceeds from the sale of property.

A 529 College Savings Plan allows the account owner to open, fund, choose the investments and name the account beneficiary – yet you still retain control of the assets. Be aware that contributions do not qualify for a federal tax deduction, but more than 30 states allow a limited tax deduction or credit. While earnings and withdrawals used for qualified education expenses are not taxed at the federal level, there are a handful of states that do impose state taxes.

However, because you – the giver – retain control of the account, you can be assured that the money won’t be wasted on a trip to Cancun or a gap year backpacking through Europe. You determine when, how much and what distributions are used for. If you’re not happy with the student’s choices, you can change the beneficiary to someone else or keep it for yourself.

Gift Strategies for Retirees

There is generally no annual contribution limit to a 529 plan, but the total amount in a beneficiary’s account may not exceed the balance limit determined by each state. 529s are state-sponsored, but most states let non-residents open a plan. In addition, some states allow anyone who contributes to a 529 plan to take a state tax deduction. This way you also can invite friends and family to enjoy a tax deduction while contributing to the account for one big, combined graduation gift.

In 2022, you can contribute up to $16,000 per beneficiary ($32,000 per married couple) to a 529 plan without having to file a gift-tax return. However, if you want to stockpile the account for a big splash on graduation day, the IRS allows you to frontload up to five years’ donations in one year (up to $80,000; $160,000 for a married couple) outside the gift tax limit, although no other gifts can be made to the same beneficiary over the next five years. In this case, you must make the required election on a gift tax return that year to be allocated over five years. This five-year front-loading approach can be an effective estate planning strategy to remove assets from your taxable estate, yet retain control over them.

You also can maximize your gift by making it a two-for-one. In other words, gift it to your high school grad, then keep funding it during his university years. Any leftover balance can be his college graduation gift if he’s planning to go to law school or get an MBA. If not, you always have the option to keep the balance or gift it to him anyway – although proceeds not used for education expenses will be subject to taxes on earnings and a 10 percent penalty.

Student’s Choice

The 2019 SECURE Act enhanced the College 529 plan with additional options. Your new graduate can now use the money to pay for expenses associated with a registered apprenticeship program, or use up to $10,000 to repay student loans. Note that if proceeds are used to pay student loans, the loan interest cannot be used as a deduction that tax year.

The 529 gives your new graduate the option of how and when to use the funds. After all, the pandemic has thrown many young adults off course in different ways. Some are opting to go straight into the job market without a degree, while others are taking a gap year or two to get a feel for what type of career they want to pursue. With the College Savings investment plan, your contributions have the opportunity to grow tax-deferred indefinitely. Some states place time or age limits on the use of a prepaid plan. However, you can always retrieve unused assets from a 529 (subject to earnings and penalty taxes), so they are not lost by any means.

One of the easiest ways to save for retirement is to participate in an employer-sponsored retirement plan. You simply select a percentage of your paycheck that you would like transferred to your 401(k) (or similar) account. Not only does your employer make the transfer for you, but it comes out of your paycheck before income taxes are taken out. This way, you avoid paying taxes on that income from each paycheck, and those taxes are not due until you withdraw the money from your retirement plan. This usually happens once people retire and enter a lower tax bracket.

That’s the simple beauty of investing in a 401(k) plan. However, with a little more effort, you can do a better job of maximizing its potential. The following are strategies to consider.

Take Advantage of an Employer Match

Most employers offer to match your 401(k) contribution up to a certain percentage. For example, an employer might contribute an additional dollar for every dollar you contribute, up to 3 percent of your pay. Although the plan may allow you to defer more than 3 percent, it’s always a good idea to contribute at least the same percentage as your employer agrees to match. After all, the employer contribution is basically free money. Be aware, however, that your contributions, employer matches and all interest, dividends and capital gains earnings in the account will eventually be taxed as income when distributed. If your employer offers a matching contribution to your 401(k) plan, try to defer at least the percentage of your income required to take full advantage of that match.

Contribute More Each Paycheck

The best way to maximize your 401(k) is to deter the maximum amount of income you can from each paycheck. Remember, it comes out of your income before it ever hits your bank account, so you can learn to live on less while building up your retirement savings. In 2022, employees may contribute up to $20,500 for the year; those age 50 and older can save up to $27,000 (an increase for each group of $1,000 versus 2021). Another benefit is that employer matches do not count toward that contribution limit.

If you are not currently maxing out your 401(k) plan contribution, consider these tactics to help you get there.

• Increase your deferral rate gradually, such as once a year or each time you receive a raise, promotion or bonus. This will enable you save more without changing your take-home pay. Just be sure that increasing your deferral rate does not cause you to exceed the annual contribution limit.
• Some companies implement an automatic escalation feature, such as increasing your deferral rate by one percentage point each year – unless you opt out. If this is the case, don’t opt out of the automatic increase.
• A good time to increase your deferral rate is during the annual enrollment period when you are thinking about the cost of other benefits and how they will impact your household budget.

Consider an Annuity Option

The SECURE Act of 2019 included a provision that limits employers’ liability when they offer an insurer-issued retirement annuity option. A 401(k) annuity option typically offers the ability to convert that portion of your retirement account into a stream of income guaranteed (by the issuing company) for a certain period, or even for as long as you live. It’s usually recommended to put only a portion of your 401(k) savings into an annuity, as it has higher expenses and might have growth potential limitations. However, the annuity option is appealing because it can continue paying out income after your other investment options have dwindled, which ironically works much the same as a traditional pension (which the 401(k) was designed to replace). Not every employer offers an annuity option in their 401(k) plan, but thanks to the new legislation it could become more prevalent.

Invest More Aggressively

Americans are currently seeing the dramatic impact that a rise in inflation can have on their household budget. Now imagine that impact when you’re in retirement and living on a fixed income. One way to increase your potential earnings for a larger retirement nest egg is to invest in more growth-oriented assets now, while you’re still working. That generally means a higher allocation to stocks to help your 401(k) investment surpass the growth of inflation. In fact, many stocks are issued by companies that tend to increase revenues as inflation rises.

With additional effort and strategic planning, it’s not that difficult to get your 401(k) to work harder to help you save more for a long, fulfilling retirement.

If you pay $250 a month for cable and premium channels, that’s $3,000 a year. Over a 30-year period, the total cost would be $90,000. We don’t tend to think about how much we pay in regular expenses over the long term.

However, that’s how various industry analysts report the cost of healthcare during retirement. Recent estimates for a retiring 65-year-old couple fall between $300,000 and $400,000 to cover healthcare expenses in retirement. At first glance, that’s an intimidating number and implies that pre-retirees need to have this much saved by the time they retire.

Fortunately, when you break down the numbers, that’s not the case. First of all, that estimate includes premiums for Medicare with prescription drug coverage, which are typically deducted from Social Security benefits before they ever hit your bank account. According to T. Rowe Price, Medicare premiums account for 76 percent to 82 percent of most retiree’s healthcare expenses, so a large portion of these costs are paid for outside of your household budget.

The true cost of retiree healthcare expenditures is based on how healthy you remain during retirement. And actually, that’s not necessarily related to savings – it’s more a combination of genetics and peoples’ penchant for healthy living before and during retirement. However, it’s always best to prepare for the worst, so the more money you save and earmark for healthcare expenses, the better off you’ll be.

One way to control your monthly premiums in retirement is to shop and compare Medicare plans each year during open enrollment. It helps to keep a running tab of your out-of-pocket expenses each year so that you can increase your Medicare coverage if your costs start trending higher. Higher coverage might mean higher premiums, but that will lower out-of-pocket costs each year.

The following guide was developed by T. Rowe Price. It estimates how much retirees spend based on different types of Medicare plans using 2021 premiums and data from the Health and Retirement Study (HRS). Among retirees who enroll in either (1) Medicare Parts A, B and D; (2) Medicare Advantage HMO and Drug Plan; or (3) Medicare Parts A, B, D and Medigap:

• 25 percent will pay less than $500/year in out-of-pocket expenses
• 50 percent will pay less than $1,200/year in out-of-pocket expenses
• 25 percent will pay more than $1,900/year in out-of-pocket expenses
• 25 percent will pay more than $3,900/year in out-of-pocket expenses

As for paying those out-of-pocket expenses, remember that you pay them over time, so it’s not as if you’re paying a large lump sum all at once. One strategy is to fund a savings account with enough money to pay out-of-pocket expenses for the year, based on your prior year’s spending. Then replenish this account each year from other funding sources, such as an annual required minimum distribution (RMD) from a retirement account.

If you have access through your current health plan, pre-retirees can save for healthcare expenses with a health savings account (HSA). Contributions are tax deductible and, over time, you can invest your savings for earnings accumulation. These funds, including investment gains, are never taxed as long as they are used to pay eligible healthcare expenses. The account is particularly useful if you don’t tap it until retirement, when the money can be used to pay for things like dental and vision care, hearing aids, long term care insurance premiums and nursing home costs.

Despite those alarming projections about how much healthcare will cost you in retirement, remember that it can be manageable because it is paid out over time. 

In November, President Biden signed legislative funding that represents the largest transportation spending package in U.S. history. The $1.2 trillion Infrastructure Investment and Jobs Act authorized funding for roads, highways, bridges, public transit systems, utility systems, electrical grids, energy projects and broadband infrastructure.

Because the funding extends over a five-year period, it should not have a major effect on the fiscal deficit. This is not only good news for taxpayers, but also investors. Those long-term investments offer the potential for shareholders to get in on the ground floor of reliable and well-capitalized government projects by hundreds of American companies poised to get the business. The new bill is expected to enhance productivity, innovation, improve labor force participation and have a positive impact on inflation. Overall, the bipartisan bill is expected to help drive economic growth for the foreseeable future.

Local Funding

Because this funding has been long-awaited and is badly needed, infrastructure projects that have been in the planning stages for years can finally take off. Furthermore, the federal funds will be allocated to local public-private partnerships, which enable community job development and enhance local economies.

Transportation Infrastructure

More than $110 billion is directed to repair and rebuild 45,000 bridges, highways and major roads across the country. The funding also focuses on climate change resilience, as well as safety (reduce traffic fatalities) and parity across geographic areas and demographic populations. Industries poised to benefit include:

• U.S. steel companies
• Companies that produce aggregate materials (e.g., gravel, crushed stone, sand)
• Manufacturers of construction, roadbuilding, earthmoving and mining equipment
• Companies that lease heavy equipment

Broadband Internet

Presently, more than 30 million U.S. residents live in areas with either poor or no broadband access. Particularly during the pandemic, we have learned how important internet access is to keep Americans connected – in jobs, through online education, with community news and resources – not to mention social networks and personal relationships. The new legislation provides $65 billion in funding for broadband infrastructure, particularly in rural communities throughout the country, in an effort to provide universal access to reliable high-speed internet. Investment sectors that should benefit include:

• Manufacturers of wireless towers
• Power management companies that supply the electrical components and systems for wind and solar farms to integrate them into the national grid

Water Utility Infrastructure

The bill allocates a $55 billion investment into water infrastructure and the elimination of lead pipes for the 10 million American households and 400,000 schools and childcare centers that currently lack safe drinking water. Investment opportunities include utilities and companies that specialize in:

• Water distribution
• Water filtration
• Flow technology
• Water treatment/purification
• Manufacturing pumps, valves and desalination units

Public Transit

Currently, the United States has a repair/replacement backlog of more than 24,000 buses, 5,000 rail cars, 200 stations and thousands of miles of tracks, signals and power systems. To update and expand the nation’s public transit system, $66 billion will go toward passenger rail, $25 billion to upgrade U.S. airports and $17 billion for ports throughout the country. In addition to bolstering the nation’s supply chains and transportation systems, upgrades will focus on reducing emissions and deploying more electrification and other low-carbon technologies. Industry sectors that should benefit include:

• Railroads
• Airlines
• Trucking
• Marine transportation
• Delivery services
• Logistics companies

Sustainable Energy Sources

The infrastructure bill allocates $65 billion toward upgrading the nationwide power infrastructure with new lines for the transmission of renewable, clean energy. Another $7.5 billion is earmarked to install 500,000 electric vehicle (EV) chargers along highway corridors to accommodate the fleet of electric consumer and commercial cars currently in production. Opportunities in sustainable energy investments include:

• Electric vehicle industry, including government fleets of electric vehicles, such as U.S. mail trucks
• Companies that build EV charging stations
• Commodities used in green materials, such as copper (electric vehicles and renewable energy sources use four times more copper than internal combustion vehicles)

Given the breadth of infrastructure opportunities on tap, one way for investors to get exposure across the wide range of industries is to invest in a diversified infrastructure or utility funds (mutual fund or ETF). Through a single, professionally managed investment, investors can spread their capital across a wide spectrum of engineering and construction firms, rail travel companies, electricity providers, water and sewage services, and more.