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Retirement Planning - Why Are Long Term Care (LTC), Life Insurance, and Annuities Important?

Posted on 30, Dec, 2013

It's never too early to start planning for your retirement, although that might seem a bit morbid to some people. The reality is however that if you wait until you're 45 to start saving, investing and planning for your retirement then you're facing an uphill struggle and an awful lot of financial commitments. Basically somebody in their 20's will have an easier time of it simply because they're not trying to make up for 20-years of saving.
Another aspect of modern retirement planning is that we (human beings) are living longer, in fact far longer than we have before in human history. Right now the average life expectancy for a citizen of the United States is 78.6 years. From a financial point of view this means that you're going to need at least 60% of your pre-retirement salary to carry you through your golden years, so that's why making contributions to your retirement fund early and regularly is a great idea. Obviously compound interest on your savings will help you along, but don't rely on that to make up for lost time.
There are three core "competencies" to any well-rounded retirement plan:
Long-Term Care
Life Insurance
Long-Term Care
The fact that most people are now living to almost 80-years of age means that long-term medical and health care need to be planned for well in advance. There's every possibility, for example, that you could live to the grand old age of 100 when you take advances in modern geriatric care into account. The downside to living longer is that an average nursing home costs roughly $70,000 per year to live in, so you'll need to factor that into your long-term financial planning. That's why it's also important to have long-term care insurance, because this helps pay for the majority of costs involved in either in-home or residential care. 
Life Insurance
The type and extent of your life insurance policy will depend entirely on your current financial circumstances, and more to the point what you can actually afford to pay for the next few decades. Life insurance is about more than just taking care of your own future because a good life insurance policy will also protect the financial interests of your family in the case of your passing away suddenly. It's very hard to gauge at what point during retirement that you may no longer need life insurance, but the security it offers your entire family is hard to be argued with, plus there's also the fact that it can be used to pay for estate taxes when that time comes. The problem with any form of insurance is that you never wind up needing it until literally 5 minutes after you allow the policy to lapse and then something will instantly go wrong in your life.
Although these don't necessarily offer the best return for your money, and they're not exciting or sexy, they are tried and tested ways of investing large sums of money over a period of several decades. An annuity is a financial product that you pay into overtime and that then pays out income on a regular basis once you've actually retired - the closest European equivalent to this would be a pension scheme. 
The biggest problem people have with annuities is that they can be expensive over the long term in terms of fees applied and there are also penalties for withdrawing money from them earlier than you had actually agreed to. That being said these financial products are one of the staples of any US-based retirement plan, simply because they seem to weather all forms of economic storm very well. 
There are two basic forms of annuity:
Fixed Annuity - this provides you with a guaranteed amount paid out upon your retirement
Variable Annuity - the payments you receive will depend on the performance of the investments at the heart of your annuity
One of the main reasons people include an annuity as part of their retirement plan is simply because you can use it to store large amounts of tax-free cash in until you're ready to retire.
If you haven't already started planning for your retirement then right now is a great time to start!

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