Thanks to this year’s stock market rally, the number of people with at least $1 million in their 401(k) accounts has grown about 25% so far this year.
But here’s the story you haven’t heard about Retirement in America…
While the aspirational status of becoming a millionaire once meant you were “rich,” thanks to inflation, even a $1-5m retirement nest egg might not be enough to last you through retirement.
People like to talk about retirement as the “golden years” of their life. But how golden can those years be if you’re constantly living in fear of going bankrupt in retirement?
Answer: With proper planning, you may be able to legally shield substantially all of your assets from creditors in bankruptcy proceedings using IRAs, 401ks, and Irrevocable Trusts.
Now, I’m not saying you should put all of your assets into these “shields,” take on a ton of debt, and then simply declare bankruptcy to wipe it all away while you retain substantially all of your assets…
But chances are, you – or someone you know – could benefit from planning ahead for the things that may send the elderly into bankruptcy.
Let’s dive in,
-Equifund Publishing
P.S. This is Part 2 in an ongoing series I like to call “Secret Investment Strategies of Insiders and Elites,” where we talk about how tax-advantaged vehicles – like 401(k)s, IRAs, corporate entities, trusts, health savings accounts, and life insurance policies – can be used to build generational wealth.
Mathematically speaking, the best way to improve returns is to reduce fee drag. For most people, taxes are the single largest expense we pay every year.
However, reducing your lifetime tax burden usually requires forward-looking planning to properly build the entities and structures required to reduce taxes like Insiders and Elites do.
While we cannot provide any individualized advice or recommendations about what you should do in regard to your specific situation, I fully expect people to have a LOT of questions about how these things work. If you think some of the concepts presented here might apply to your situation, it may be helpful to speak to a tax adviser or an estate planning attorney.
Bankrupt in Retirement: What REALLY threatens your nest egg (and what you can do to protect your wealth from danger)
The social safety net for older Americans has been shrinking for the past couple decades. The risks associated with aging, reduced income, and increased healthcare costs, have been offloaded onto older individuals.
At the same time, older Americans are increasingly likely to file consumer bankruptcy, and their representation among those in bankruptcy has never been higher.
Using data from the Consumer Bankruptcy Project, we find more than a two-fold increase in the rate at which older Americans (age 65 and over) file for bankruptcy and an almost five-fold increase in the percentage of older persons in the U.S. bankruptcy system.
While seniors make up only 8% of total bankruptcy filings, the number of those filing aged 55 and older has doubled in the past 16 years. Those 55 and older account for 20% of all bankruptcy filings.
This trend will likely only get worse as 10,000 Baby Boomers retire each day, and are expected to live longer (and possibly sicker) lives than generations before them.
So, before you start preparing for the collapse of the American Empire and the death of the dollar, government confiscation of assets, or hyperinflation that would make Venezuela blush…
Let’s talk about the very real risks you face going into retirement that – statistically speaking – are the most likely to impact your nest egg…
And some simple strategies for what you can do to start protecting (and growing) your wealth the way Insiders and Elites do.
For regular readers of Private Capital Insider, you probably already know our core thesis: the easiest way to improve investment returns is to reduce fee drag.
Statistically speaking, the single biggest fee you pay each year is your tax bill. That’s why tax-advantaged and tax-deferred investment vehicles – like IRAs and 401(k)s – serve as crucial retirement planning tools for millions of Americans.
But even if you have assets inside of these retirement plans that are shielded from taxes, in one form or another…
Chances are, you’re paying hidden fees charged by your plan provider or administrator that, compounded over time, can rob you of a substantial amount of wealth.
Many 401(k) participants pay an average all-in fee of 2.22% of their assets, but most 401(k) accountholders will pay a wide range between 0.2% and 5%.
These percentages may sound small, but they can make a big impact.
The cost of hidden fees is one of the drivers behind the Labor Department’s fee-disclosure rule, designed, in part, to give consumers better clarity about how much they’re paying in fees. But understanding the impact of fees — especially slight differences between similar products — is still up to consumers.
This is true especially now that the guaranteed income streams provided by Defined Benefit pensions have been replaced with the uncertainty of Defined Contribution plans (like IRAs and 401k plans).
- Action Step: Review your 401k/IRA statements, and determine the fees you’re paying
If you’re like most people, you probably have no clue what types of fees you’re currently subject to in your current 401k or IRA.
That’s why the single easiest thing you can do today is to review your plan – and the investments inside your plan – to understand what your total annual fees come out to.
When you receive a 401(k) statement, check for labels like “Total Asset-Based Fees,” “Total Operating Expenses As a %” or “Expense Ratios.”
In some cases, the solution may be as simple as investing in lower-fee investment products provided by your plan.
However, you may decide that you’d rather have full control over the investment options you have in your retirement accounts, and choose to open a Self-Directed IRA (SDIRA) instead.
While you’ll still likely be subject to some sort of Custodian-related fees (which are disclosed on their fee schedule when you sign up), you’ll have access to a broader range of investment options that may deliver a better “net-of-fee” performance.
Last but not least, all types of individual retirement accounts, or IRAs, recognized under the federal tax code enjoy substantial protection from creditors during a bankruptcy.
Protection for IRAs was signed into law by President George W. Bush under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Protection under this law varies, depending on the type of IRA. Traditional IRAs and Roth IRAs are currently protected up to a value of more than $1.5 million.
SEP IRAs, SIMPLE IRAs, and most rollover IRAs are fully protected from creditors in bankruptcy, regardless of the dollar value.
Wealth Robber #2: Medical Expenses
Despite the widespread belief that Medicare meets the health needs of older Americans, for so many retirees, it is utterly inadequate; a study published in the American Journal of Public Health in 2019 found that 66.5% of bankruptcies in the U.S. were due to medical issues, like being unable to pay high bills, or due to time lost from work.
A recent report from the Kaiser Family Foundation showed that 41% of U.S. citizens carry some sort of medical debt, and 24% were considering bankruptcy to solve a medical debt issue.
A 2018 analysis from Fidelity Investments estimated that a healthy 65-year-old couple will need $280,000 to cover health costs alone through retirement.
That’s up from $160,000 in 2002, and likely to get more expensive.
In order to make ends meet when dealing with debt, seniors often make trade-offs that may save money in the short term, but can also be harmful to their health or finances.
When asked about some specific problems they, or someone in their household, may have experienced in the past five years as a result of their health care debt, six in ten adults with health care debt say they cut back spending on food, clothing, and basic household items (63%).
Nearly half say they used all or most of their savings (48%), and about four in ten say they increased their credit card debt for other purchases (41%), took on an extra job or worked more hours (40%), and skipped or delayed paying other bills or debt (37%) due to their health care debt.
That’s why it’s important to plan ahead for one of the most predictable expenses you’ll face in retirement today while you still can.
- Action Steps: Talk to your financial advisor about how long-term care insurance, Health Savings Accounts (HSAs), and a “Medicaid Trust” could help mitigate risk
While there’s not necessarily an “easy button” to health care expenses during retirement (outside of staying healthy, and avoiding injury and sickness as much as possible)…
If you’ve still got time left on the clock, now might be a good time to talk to an advisor about various insurance products – like long-term care insurance – that could help mitigate some of your financial risks.
But one of my favorite “tricks” of Insiders and Elites, is to make judicious use of HSAs and their unique triple-tax advantage – deposits are tax-deductible, growth is tax-deferred, and spending is tax-free.
- Your contributions are 100% tax-deductible, meaning contributions can be deducted from your gross income.
- All interest earned in your HSA is 100% tax-deferred, meaning the funds grow without being subject to taxes unless they are used for non-eligible medical expenses.
- Withdrawals from your HSA are 100% tax-free for eligible medical expenses (i.e., deductibles, copays, prescriptions, vision, and dental care).
Most people don’t know this, but when you put funds inside of your HSA, you are responsible for investing those funds however you see fit.
Even cooler? Once you reach the age of 65, any funds left over can be rolled into an IRA, and withdrawn as part of a longer-term distribution plan for your retirement assets.
It’s kind of like having all of the tax benefits of a Traditional IRA and Roth IRA smashed into one wealth-building vehicle.
But the real “Insider” secret is – as it almost always is – to utilize the benefits of Irrevocable Trusts. More specifically, transferring assets out of your personal name and into what is called a “Medicaid Trust,” is a way to artificially lower your net worth and qualify for Medicaid.
The Administration on Aging, a division of the U.S. Department of Health and Human Services, says, “This is the only kind of trust that is exempt from rules regarding trusts and Medicaid eligibility.”
To make sure Medicaid will not disallow any assets you include in the trust, you must set it up and transfer assets into it at least five years prior to entering a nursing home or applying for long-term care (often called a “lookback period”).
And another “last but not least,” assets held inside an irrevocable trust are ALSO 100% shielded from creditors in bankruptcy (assuming it was built correctly)!
This means that if the creator/grantor is sued for old medical bills, those assets can’t be touched so they can be passed down to that person’s heirs as intended.
In our opinion, these strategies are probably not a good weekend DIY project. Please contact your financial advisor, tax advisor, or estate planning attorney to discuss what options make sense for your personal planning needs.
Wealth Robber #3: Financial Scams and Elder Abuse
Financial scams targeting older adults are costly, widespread, and on the rise.
According to the Federal Bureau of Investigation’s Internet Crime Complaint Center (called IC3), In 2022, total losses reported to the IC3 by elderly victims increased 84% from 2021.
For reference, in 2021 there were 92,371 older victims of fraud, resulting in $1.7 billion in losses… A 74% increase in losses compared to 2020.
Tech and Customer Support schemes continued to be the most common type of fraud reported, with 17,800 complaints filed by victims over 60.
Monetary losses due to Investment Fraud, reported by victims over 60, increased over 300%, more than any other kind of fraud, largely due to the rising trend of crypto investment scams.
“Elder financial exploitation can destroy the lives of members and their families,” Jilenne Gunther, national director of AARP’s new BankSafe program, recently said. “One in five older Americans are victims of financial exploitation, and each victim loses an average of $120,000.”
What can you do to protect yourself from financial scams?
- Action Steps: Talk to your advisor about estate planning
I think we all intuitively understand that we should have key estate planning documents – like wills and trusts – in place sooner than later…
But thinking about your eventual death usually isn’t high on most people’s list of fun things to do.
However, there’s simply no ignoring the fact that when you – or your relatives – age, mental health becomes a very real factor in our decision-making capabilities.
Again, one of the key tools Insiders and Elites use to protect their wealth are Trusts.
An elder law or estate planning attorney may create a trust for a senior who is still competent, which figuratively creates a “vault” holding the seniors’ assets, and gives the vault key to a responsible family member or institution. Only this “trustee” can make financial transactions on the senior’s behalf.
When predators, such as telephone scam artists, figure out that the senior does not have the key to the vault holding his or her assets, they often quickly lose interest in continuing the scam.
Again, definitely not a DIY-type project. Please talk to a reputable estate planning attorney to help you navigate this process, and get a plan in place to protect your nest egg from scams.
Final Thoughts: Buyer Beware
The unfortunate reality is that we live in a world where we – the consumers – are responsible for protecting ourselves.
Even though government agencies (or insurance policies) may offer some sort of recourse after the fact, it’s anyone’s guess how long that could take, or how much you can recover, especially if those monies end up overseas.
This is especially important to remember if you plan on investing your retirement accounts in early-stage investment opportunities!
The saying “if it’s too good to be true, it probably is,” exists for a reason.
While that’s not to say achieving exceptional returns is impossible to do, it’s important to have realistic expectations about the risk/reward of any investment opportunity you’re presented with…
Especially if that investment was solicited to you by someone you don’t have a reliable relationship with.
And even if you do, knowledgeable investment advisors can still be fooled – or otherwise, feel pressured by the fear of missing out – by what appears to be an excellent investment opportunity.
Remember: it is the job of stock promoters to get you to make a purchasing decision quickly.
While there certainly are opportunities that do require you to make decisions in a timely manner, generally speaking, avoid anything that requires you to make an uninformed decision quickly or secretly.
