Q: My husband and I have a question about long-term care. We are both retired and 71. We have one joint account with about $200,000 and four IRAs totaling about $395,000. We were shy of the market a few years back and foolishly transferred our funds into fixed annuities, from which we are now drawing monthly income. We took out a long-term care policy when we were 65. The total annual premium is $4,450. We are thinking about canceling it because we heard that IRAs are exempt from nursing home care. That would leave our joint account to cover those expenses should we need it. We have no mortgage nor car payments. We pay cash for most everything. Our only debt is about $5,000, which is mostly interest-free for one year. Can you help us decide what is best for us? We hate paying that large premium every year out of our savings.
A: The answer is up to you. I can’t contribute much because what happens in the future is all a matter of chance. You may be fortunate and live full lives until the day you both die. It happens. You might also be unfortunate and suffer the fate the insurance folks love making us fear. With about $600,000 in financial assets that you may be able to draw about $30,000 a year from, however they are invested, the $4,450 premium is not a major drag on your standard of living. That argues for keeping the policy.
Your “IRAs are exempt from nursing home care” comment needs to be considered in its meaningful context, which is qualifying one spouse for Medicaid and how assets can be shared or spent in order to qualify. This is a subject best discussed with an elder-law attorney. That might be a bit premature today, but if the subject causes you angst, a consultation might give you some peace of mind and show you how things are likely to work in the event one of you needs long-term care.
Q: Most of our retirement is in 401(k) or Roth IRA plans managed by a large firm with a reasonable expense ratio, TIAA-CREF. A small startup firm that trades in managed futures has recently contacted us. The firm’s adviser uses a trend-following algorithm to govern all trades. There is a minimum investment in the low six figures. The story looks good, the returns look good (even net of fees), and it appears to be an asset class that is not represented in our otherwise fairly diverse portfolio. I have three questions: What is your opinion of trading in managed futures? Are the adviser’s fees reasonable — a 2 percent management fee and a 20 percent incentive fee? And are there better and lower-cost ways to have exposure to this market than a dedicated managed futures adviser?
A: Managed futures accounts are really great for the managers and the brokerage operations that trade the commodity futures contracts. They aren’t so good for you or me. The main reason is that commodities are not an earning asset, so you are really betting that your account managers will make enough speculating on price changes to overcome a 2 percent managing cost, 20 percent of any profits, and the cumulative bid/ask spread and commissions for all the trading done. Basically, you’re “playing against the house.”
If you want a big, simple protection from inflation, consider buying an exchange-traded fund that is an index of energy companies, such as the Energy Select Sector SPDR (ticker: XLE; expense ratio 0.18 percent) or Vanguard Energy (ticker: VDE; expense ratio 0.14 percent). You’ll start with earning assets and the possible revaluation of oil and gas reserves due to inflation or declines in the dollar.
Is this a perfect commodity hedge? Absolutely not. You’re buying a pool of common stocks. But those common stocks represent earning assets and proven reserves, so they are a better foundation than futures contracts.
You might also ask: But what about all the other commodities, like wheat and corn, or pork bellies and orange juice? Well, if you examine the major commodity indexes, you’ll find that they are dominated by energy in different forms. For example, energy accounts for 78.65 percent of the widely used Goldman Sachs Commodity Index and 55 percent of the Deutsche Bank Liquid Commodity Index. It has also been said that wheat, corn, soybeans and other food commodities can also be considered proxies for energy since they cannot be produced without oil.
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