Ask the Question

Jonathan Clements

THERE’S NOTHING THAT deters financial planning like a scarily large price tag.

We should ask ourselves all kinds of tough financial questions. But many of the toughest never get asked—because we know answering them will involve agonizing choices, difficult conversations and unthinkable amounts of dollars. Consider these four:

1. How would you cope if you were out of work for six months? As I’ve noted in earlier articles, the big financial emergency isn’t replacing the roof or the air-conditioning system, but rather losing our job. That’s why experts often advise amassing an emergency fund equal to six months of living expenses, knowing it could take that long to find a new job.

If you have that much cash socked away, congratulations, you’re in great shape. But most folks don’t. If a family pulls in $80,000 a year, it might need more than $20,000 to cover six months of living costs, and yet the Federal Reserve has found that 36% of families don’t even have enough cash to cover a $400 unexpected expense. That means that, if they’re hit with a spell of unemployment, most families are looking at unpalatable choices—slashing living costs, emptying retirement accounts, racking up credit-card debt and anything else that’ll put food on the table.

My advice: If you’re in the workforce, think about how you’d cover those six months of living costs, and consider whether there are steps you should take now to limit the potential financial damage. That might mean setting up a home-equity line of credit, identifying costs you’d immediately eliminate if you found yourself out of work, and—yes—perhaps socking away more cash.

You may not be able to amass a six-month emergency fund over the next year or two. But setting aside even a few hundred dollars every month can quickly add up, plus thinking about our financial goals in terms of monthly savings—rather than as a lump sum—can make them appear far less daunting.

2. How much can you help with college costs? According to the College Board, four years at an in-state university costs an average $89,000, including room and board, while private colleges cost an average $203,000—and both figures assume students finish within four years, which often isn’t the case.

If parents can help with college costs without imperiling their own retirement, I believe they should. But more important, I think parents should make it clear to their children exactly how much financial assistance they can offer—and they should have the talk no later than the start of high school. Kids deserve to know early on which colleges are affordable and which are out of reach.

Paradoxically, the less parents can afford to contribute, the more guidance they should offer. If a child wants to be a social worker or a teacher or (heaven forbid) a journalist, the parents need to steer the kid toward college choices that’ll involve little or no student loans, because it’s highly unlikely that the resulting career will make it possible to service significant amounts of debt.

3. How much retirement income will you realistically have? The 4% withdrawal rate is the subject of endless debate. But whatever its shortcomings, the 4% rule has one great virtue: It offers a quick-and-easy way to think about our retirement savings as retirement income. Got $100,000 in your 401(k)? That impressive sum doesn’t seem nearly so impressive when you think of it as $4,000 of annual retirement income, or just $333 a month.

With any luck, that realization won’t discourage retirement savers, but rather spur them to save even more. Ideally, it would also prompt folks to consider other steps that’ll boost their prospects of a financially comfortable retirement, like staying in the workforce for a few extra years, or working part-time in retirement, or opting for immediate fixed annuities so they squeeze more income out of the retirement savings that they have.

4. How would you pay long-term-care costs? Of all the elephants in the room, this is perhaps the biggest. According to Genworth, a private room in a U.S. nursing home costs an average of almost $106,000 a year, with costs in East and West Coast states often higher by 25% and sometimes much more. What if you spend your final five years in a nursing home? Depending on where you live, the tab could run $400,000 to $800,000.

This is not a pitch for long-term-care (LTC) insurance. I encourage you to check out Adam Grossman’s two recent articles, including the comments from readers. Premiums on traditional LTC insurance have been going through the roof and, to add insult to injury, it seems insurers make claimants jump through unnecessary hoops. How about falling back on Medicaid instead? Not only will you need to spend down your assets to qualify and you could end up in a mediocre facility, but also Medicaid, too, is an administrative nightmare. Maybe it’s no surprise that many folks don’t want to even think about LTC.

But think about it we should. Perhaps we should play the Medicaid game and give away our assets long before we need nursing home care. Perhaps we should buy one of the new hybrid LTC policies, where premiums should remain fixed, though submitting a claim will still mean running the insurance company gauntlet. Perhaps we should move into a continuing care retirement community while we’re still in good shape—which might mean a big down payment and a high monthly fee, but it should also allow us to avoid hefty nursing home costs down the road. Or perhaps we should just save like crazy and aim to self-insure.

Don’t like any of these options? My advice: Spend time pondering the question—and decide which is the most palatable of the unpalatable choices.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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