Welcome to part two of a three-part series where we reflect on the most important decisions we made about our money last year. In Part I we looked at our decision to pay off our mortgage, keep our investment allocation and contributions on a steady course despite the market volatility, and how we diversified our income streams to be better prepared for unplanned events. Let’s jump into three more areas.
1. Long-Term Care & Aging Parents
Advising on long-term care insurance is a tough area for financial planners. The premiums are not fixed and the resultant price increases over the last two decades have turned off a whole generation of consumers. In addition to the unpredictable costs, there is also uncertainty on whether the buyer will need the coverage and for how long. Additionally, the long-term health and viability of the insurance company selling the policy should weigh into the decision. Despite these concerns, my wife Sherise and I decided we will purchase a long-term care policy.
Why did we do it?
My grandmother (90) has complete dementia and has been in a nursing home for about three years. Other than her memory, her health appears okay. Long-term care insurance helps with the truly catastrophic 15% of the cases where a patient needs extended skilled care for years and years. In 2018, my mother’s (76) health also took an alarming decline. After breaking her hip and facing a host of other health problems, she and my father had to leave their home and move into my brother’s house while she seeks better medical care. My parents do not have long-term care and we have witnessed some of their decisions to ration care and scrimp on home health aides and other expenses that would improve their quality of life. As lifelong savers who don’t want to spend down assets, we decided having long-term care insurance will ease the money decisions around rationing care and will also help our own four children better manage their own lives while trying to assist us when the time comes.
Why it may not work for you?
Don’t believe any insurance agent that claims your long-term care insurance premiums are not going to increase: healthcare costs in the U.S. are simply rising too quickly. You need to be prepared for the premium increases and to be able to afford them in your budget for the rest of your life. We suggest you plan for 3% to 5% increases each year to determine if long-term care insurance is viable for you.
2. Continued Tracking Real Estate Adjusted Cost Basis
After you complete all the paperwork and finally close on your home, don’t just throw your HUD settlement sheet in a folder and forget about it. Create an excel spreadsheet to track your adjusted cost basis in the property so you can save on taxes when it is time to sell. We bought our home in Maine in 2016 and have been adding our capital improvements to our original cost each year and keeping a folder of the receipts. For example, we built the “Taj Mahal” of chicken coops for $881.65 last year and planted $162.41 of blueberry plants. According to IRS Publication 523, landscape improvements and outbuildings add value and are added to the cost basis of the property. Repairs to keep your home in ordinary, efficient operating condition are NOT added to your basis. In other words, capital improvements add value; repairs and maintenance do not.
Why we did it?
For investment properties, it is critical that you keep these records to minimize your taxes when it is time to sell. There is a capital gains exclusion for a personal residence if you have lived in your home for two of the last five years (longer for military and Foreign Service families) and you may never need to pay taxes. However, you never know when opportunity knocks and a move is required. For us, we envision a time when our youngest child heads off to college and we can really crank up our travel. While away, we plan to seasonally rent out our home and turn it into a mixed-use property.
Why it may not work for you?
Aside from those of you who do not yet own real estate, this consideration is applicable to everyone. We recommend you get in the habit of tracking your cost basis so you are prepared for whatever unfolds. If you’d like us to share our template, email us firstname.lastname@example.org.
3. Importance of our Emergency Fund
Our 2018 unexpected expenses included a new dishwasher, new toilet, multiple trips to Florida to care for aging parents, and a couple thousand dollars to remove fallen trees after a windstorm. The 2017 emergency expenses included a punctured kidney for our oldest son after a bike accident. In 2019, the current federal furlough is further proof that everyone needs to be financially prepared for the unexpected. Life is always throwing you expensive curveballs and these events drive home the importance of having an adequate emergency fund.
How much is enough?
Conventional wisdom is that an emergency fund should include 3-6 months of living expenses. For some professions, that may not be adequate depending on the prospective job market so we urge you to always air on the side of caution and plan on unexpected home repairs, health concerns, or job searches taking longer than you expect. Since we spent down our emergency fund over the last couple of years, rebuilding ours is a top priority for 2019. Finally, don’t let your emergency fund languish at a big bank paying .15% in interest: research the online banks such as Ally, Marcus and CIT that offer 2.2% to 2.4%.
Having an emergency cash fund is always the first choice for financial planners so you will not impact your other goals. In dire circumstances, turning to family and friends for a loan, borrowing from your TSP or 401(k) or withdrawing your Roth contributions (there is no penalty or taxes for withdrawing contributions) may be appropriate. Still, as a Financial Planner, I hope those options are all last resorts.
We hope sharing insight into these challenges add color to challenging financial decisions you are facing. Be on the lookout for Getting Personal: Sneak Peek of a Financial Planner’s Own Money Moves in 2018 (Part III) in two weeks.
As a former Foreign Service Officer and Air Force pilot, I’m passionate about continuing to serve those in government and the military. Our services and publications are designed for individuals and families in these communities. Follow me – Chris Cortese - on LinkedIn so you can continue to benefit from our expertise.
Financial Planner & Founder
Logbook Financial Planning, LLC
“Investment advisory services are offered through Logbook Financial Planning, LLC, a Licensed Investment Adviser in the state of Maine and Registered Investment Adviser in the state of Virginia” “All written content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions.” “Logbook Financial Planning, LLC is not affiliated with or endorsed by the Social Security Administration or any government agency.”