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Letters to the Editor

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To the Editors:

I disagree with Ms. Solberg’s comments on Paula Hogan’s May 2005 article “What You Need to Know About Long-Term Care Insurance” (August 2005 AAII Journal Letters to the Editor). Specifically, I disagree with her assertion of the lack of need for a long-term care insurance policy with a term in excess of three years.

The data may show that, historically, the average stay in a nursing home is less than three years, but are we all average? Life expectancies are lengthening, and, as is the case in investing, past results are not predictive of future results. More people will need longer-term coverage.

Insurance is enough of a gamble. Why make it more so by limiting coverage?

Medicaid does not pay for care at home. Most people would like to stay home if they can. Having a choice, which a policy allows, seems to me a better option than not having a choice.

Costs of all insurance policies are on the rise, not just long-term care. Are you paying the same premium for homeowners and auto that you paid 20 years ago? We will all probably feel the insurance bite from Katrina as well.

I will state that if three years’ worth of coverage is all that one can afford, then one should purchase coverage with that term.

David T. Martula, CFP
Via E-mail

To the Editors:

Withdrawal Rules: Squeezing More From Your Retirement Portfolio,” by Jonathan Guyton (August 2005 AAII Journal) was excellent! I have read about 30 articles on this subject, including some in prior AAII Journal issues, and Mr. Guyton’s article is heads and shoulders above anything I have read. He explains the options so well and the risks and rewards of each strategy. The other articles are really too simplistic. For example, many retirees, such as my wife and I, wish to take some bigger withdrawals early on while health and ability to do things like travel remain good. If I make a hefty withdrawal under one of Mr. Guyton’s rules, I would be willing to scale back the next year to fit within one of the withdrawal rules if the market tumbles—tighten my belt for a year or so and make plans for another great year when the market recovers. John Kelley
Via E-mail

To the Editors:

I read with anticipation Jonathan Guyton’s article on withdrawal rules (August 2005 AAII Journal). Unfortunately, while the article describes ‘theoretically’ good news, like all the other initial withdrawal rate research I’ve read, it falls short of practical application for what I’m afraid is a relatively large segment of the population nearing retirement. That segment is those whose withdrawals from their investment portfolios over the course of their retirement cannot represent a nearly constant amount of ‘purchasing power’—far from it. There are at least two commonplace reasons for this.

The first case is individuals who retire early and have to make up with investment withdrawals—for potentially five to 10 years—the purchasing power that will later be provided by Social Security payments. This situation requires substantially larger withdrawals earlier in retirement. These withdrawals deplete the portfolio at a higher rate than a constant initial withdrawal rate would imply. This early depletion adds to the difficulty the portfolio will have in generating the required cash flow later in retirement.

The second case is individuals who receive a pension that is not indexed to inflation (i.e., is a constant dollar amount). This condition is more insidious. Assume an initial retirement cash flow made up of 1/3 investment withdrawals, 1/3 Social Security and 1/3 constant-dollar defined-benefit pension and an average inflation rate of 4%. Assume also that Social Security keeps up with inflation. After five years, annual investment withdrawals will need to be only 5% higher than they would be if they only had to ‘keep up’ with inflation. Thirty years later it’s almost 30% more.

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Guyton refers to a ‘perfect retirement planning storm’ in terms of the timing of a sequence of market returns and high inflation. The above describes another type of perfect storm where the portfolio that was depleted at a higher rate early on to compensate for the ‘not yet present’ Social Security payment stream is expected later in retirement to provide increasing cash flow to compensate for a pension that is paid in constantly deflating dollars!

Daryl L. Bahls
Via E-mail

 


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