“I think I’ll take a moment celebrate my age
End of an era and the turning of a page
Now it’s time to focus in on where I go from here
Lord have mercy on my next thirty years” – Tim McGraw, My Next Thirty Years
Retirement planning is a holistic process that helps one to crystallize the relationship among savings habits, investments and debt. The exercise is designed to project into the future how current disciplines along with expectations can form specific retirement life milestones from needs to wishes. A plan must align a future retiree’s big vision with the specifics of ground-level finances. This is often a challenge.
Retirement is perceived as a continuous road; mile markers that represent age may be visualized along the path. However, if one looks to retire at 67 and in relatively good health, it’s a challenge to comprehend what quality of life may be like at 80. It’s easy to understand how 40 may not look too different from 60, especially from a quality of health perspective. The stretch from 60 to 90 may be so dramatically different, it’s tough to envision. How does one contemplate their own increasing frailty?
The difference between retirement and retirement care well, IS care. At the start of retirement, care defined as financial and caregiver resources required to perform daily activities such as bathing and dressing, is an afterthought.
I hear too often especially from parents who do not undergo formal retirement planning, that children are assumed to be their future caregivers. The revelation astounds me every time. Personally, I couldn’t imagine my daughter interrupting her life to feed or care for me. It’s not a result I want for her and at this point her life is more important than mine.
Bankers Life Center for Secure Retirement in a study conducted by Blackstone Group in October 2018, discovered that middle-income Baby Boomers (those with an annual household income between $30 and $100,000 and have less than $1 million in investable assets), are increasingly concerned about staying healthy enough to enjoy retirement (56%). Yet, an astounding 4 in 5 (79%) of Boomers sampled have no money set aside specifically for retirement care needs.
As I lament at workshops, on the radio, to clients at face-to-face meetings – heck, to anybody who’ll listen! – Long-term care expenses are the greatest threat to a secure retirement. Confounding about this specific study is that over 53% of Boomers are confident about managing retirement care costs yet the majority have nothing set aside. The results lead me to conclude there’s a strong and dangerous case of DENIAL going on here. Is there more to the story? Since 50% of middle-income Boomers maintain less than $5,000 in emergency reserves, saving for retirement AND retirement care is most likely too burdensome.
Less than one in five (18%) middle-income Boomers said that retirement care planning is a high or very high priority. Twice as many (40%) said it is a low priority or not a priority at all.
Per the U.S. Department of Health and Human Services, roughly 70% of people turning 65 will require long-term care services at some point in their lives. Women require care longer (3.7 years) than men (2.2 years).
If you’re a decade or less from a retirement aspiration, ignore retirement care reality at your own risk.
Here are a few action steps to consider now.
Don’t Panic. Plan.
Your rightful concern, if I got you thinking, is to take a deep breath and search out a Certified Financial Planner® who is also a fiduciary. In other words, your interests above all else.
Financial plans laud strengths; plans also expose financial vulnerabilities that require remedy.
I dare to say retirement care is going to be a big, if not your biggest concern. Although an empirical metric isn’t available to prove that households who utilize financial planners (not transactional brokers) make better decisions, David M. Blanchett, Ph.D., CFA, CFP® head of retirement research for Morningstar makes a strong case in his writing “Financially Sound Households Use Financial Planners, Not Transactional Advisers,” for the Journal of Financial Planning.
David explored five elements of decision making – portfolio risk assessment, savings habits, life insurance coverage, revolving credit card balances and emergency reserves using the Survey of Consumer Finances from 2001-2016. Households utilizing financial planners and even the internet made better decisions than those who used transactional brokers. In those cases, consumers made the worst financial decisions.
Per the Center For A Secure Retirement® study, six out of ten Baby Boomers have a plan for how they will fund retirement. Puzzlingly, only one-third have a retirement care plan which leads me to believe this group is not undertaking holistic financial planning which considers every facet of a fiscal life including the possible need for long-term care from custodial to skilled nursing. I’m not surprised that 88% of Boomers who have included a retirement care strategy reported a positive impact to their overall plan.
At the minimum, look to cover one spouse.
I’m not going to lie; the mitigation of long-term care risk using insurance isn’t cheap. The older you get, the higher the premium. According to the American Association for Long-Term Care Insurance, the best age to apply is in your mid-fifties. To obtain coverage, the current condition of your health matters or you may not qualify. Only 38% of those age 60-69 make the cut. Even if healthy, at a point in life, especially around the mid-sixties, premiums are known to be household budget prohibitive. For example, a couple both age 60 in a preferred health class can wind up paying close to $5,000 a year in premiums and will likely experience premium increases over time.
The number of insurance carriers is shrinking – down to less than 12 from more than 100. Recently, Genworth, one of the heavy hitter providers of long-term care insurance temporarily suspended sales of traditional individual policies and an annuity product designed to provide income to cover long-term costs such as nursing home stays.
If you’re astute enough to plan for retirement care and concerned about the impact of dual premiums on the household budget including saving for other goals, work with a Certified Financial Planner to create a scenario to consider at least partial coverage for the spouse with a greater probability of longevity. For example, on average, women outlive men by 7 years.
If single and do not have a reason to leave a legacy to children or grandchildren, it’s likely that asset liquidation can adequately cover a long-term care event. Again, it’s best to work with a CFP Fiduciary who can help create a liquidation strategy.
Don’t assume your adult children will be caregivers.
I’m shocked by parents who flippantly assume their adult children will take care of them or ‘take them in’ in the case of a long-term care event. Personally, I find it too painful to interrupt my daughter’s life and impact her physical, emotional and financial health by providing long-term assistance to her dad.
According to www.caregiver.org, 44 million Americans provide $37 billion hours of unpaid informal care for adult family members and friends with chronic illnesses and conditions. Women provide over 75% of caregiving support. Caregiving roles are going to do nothing but blossom in importance as the 65+ age cohort is expected to double by 2030. There will be a tremendous negative impact, financial as well as emotional, on family caregivers who will possibly need to suspend employment, dramatically interrupt their own lives to assist loved ones who require assistance with activities of daily living.
Parents must begin a dialogue with adult children to determine if or how they may become caregivers. Armed with information learned from discussion, I have helped children prepare for some form of caregiving for parents.
A 47-year-old client has added financial support for parents as a specific needs-based goal in her plan; another recently purchased a larger one-story home with an additional and easily accessible bedroom and bath. Yet another has commenced building a granny pod on his property for his elderly (and still independent), mother. All these actions have taken place due to open, continuous dialogue with parents and siblings.
In addition, elder parents have been receptive to allocating financial resources to aid caregiver children. Siblings who reside too far away to provide day-to-day support have been willing to offer financial support as well. However, these initiatives weren’t pushed on children. Children weren’t forced into a situation based on an assumption. If you’re a parent, ask children if they’d be willing to provide care. As an adult child, don’t be afraid to ask parents how they plan to cover long-term care expenses.
Think creative with HECM (home equity conversion mortgages), hybrid policies, and employer-based options.
Three out of every five financial plans I create reflect deficiencies to meet long-term care expenses. Medical insurance like Medicare does not cover long-term care expenses – a common misperception. Close to 56% of people surveyed in the Bankers Life Center study are under the false impression that Medicare covers long-term care expenses.
The Genworth Cost of Care Survey has been tracking long-term care costs across 440 regions across the United States since 2004.
Genworth’s results assume an annual 3% inflation rate. In today’s dollars a home-health aide who assists with cleaning, cooking, and other responsibilities for those who seek to age in place or require temporary assistance with activities of daily living, can cost over $45,000 a year in the Houston area. On average, these services may be required for 3 years – a hefty sum of $137,000. We use a 4.25-4.5% inflation rate for financial planning purposes to reflect recent median annual costs for assisted living and nursing home care.
As I examine long-term care policies issued recently vs. those 10 years or later, it’s glaringly obvious that coverage isn’t as comprehensive and costs more prohibitive. It will require unorthodox thinking to get the job done.
One option is to consider a reverse mortgage, specifically a home equity conversion mortgage. The horror stories about these products are way overblown. The most astute of planners and academics study and understand how for those who seek to age in place, incorporating the equity from a primary residence in a retirement income strategy or as a method to meet long-term care costs can no longer be ignored. Those who talk down these products are speaking out of lack of knowledge and falling easily for overblown, pervasive false narratives.
Reverse mortgages have several layers of costs (nothing like they were in the past), and it pays for consumers to shop around for the best deals. Understand to qualify for a reverse mortgage, the homeowner must be 62, the home must be a primary residence and the debt limited to mortgage debt. There are several ways to receive payouts.
One of the smartest strategies is to establish a reverse mortgage line of credit at age 62, leave it untapped and allowed to grow along with the value of the home. The line may be tapped for long-term care expenses if needed or to mitigate sequence of poor return risk in portfolios. Simply, in years where portfolios are down, the reverse mortgage line can be used for income thus buying time for the portfolio to recover. Once assets do recover, rebalancing proceeds or gains may be used to pay back the reverse mortgage loan consequently restoring the line of credit.
Our planning software allows our team to consider a reverse mortgage in the analysis. Those plans have a high probability of success. We explain that income is as necessary as water when it comes to retirement. For many retirees, converting the glacier of a home into the water of income using a reverse mortgage is going to be required for retirement survival and especially long-term care expenses.
American College Professor Wade Pfau along with Bob French, CFA are thought leaders on reverse mortgage education and have created the best reverse mortgage calculator I’ve studied. To access the calculator and invaluable analysis of reverse mortgages click here.
Insurance companies are currently creating products that have similar benefits of current long-term care policies along with features that allow beneficiaries to receive a policy’s full death benefit equal to or greater than the premiums paid. The long-term care coverage which is linked to a fixed-premium universal life policy, allows for payments to informal caregivers such as family or friends, does not require you to submit monthly bills and receipts, have less stringent underwriting criteria and allow an option to recover premiums paid if services are not rendered (after a specified period).
Unfortunately, to purchase these policies you’ll need to come up with a policy premium of $50,000 either in a lump sum or paid over five to ten years. However, for example, paying monthly for 10 years can be more cost effective than traditional long-term care policies, payments remain fixed throughout the period (a big plus), and there’s an opportunity to have premiums returned to you if long-term care isn’t necessary (usually five years from the time your $50,000 premium is paid in full). Benefit periods can range from 3-7 years and provide two to five times worth of premium paid for qualified long-term care expenses. As a benchmark, keep in mind the average nursing home stay is three years.
I personally went with this hybrid strategy. For a total of $60,000 in premium, I purchased six years of coverage, indexed for inflation, for a total benefit of close to $190,000 in future dollars.
Last, we urge clients to pay closer attention to their employers’ benefits open enrollment. It’s amazing to discover how many people have bypassed or didn’t realize their employers offer long-term care insurance coverage. Those with health issues and possibly ineligible for coverage in the open marketplace will find employer-offered long-term care insurance their best deal.
Retirement care analysis is a deep dive into the overall retirement planning process. Unlike income planning, retirement care planning requires us to face our inevitable physical limitations and the toll it can have on personal finances along with the negative ripple effects on wealth and health of loved ones.
It’s best to expose vulnerability and plan accordingly while there’s precious time to do so.
Richard Rosso, MS, CFP, CIMA is the Head of Financial Planning for RIA Advisors. He is also a contributing editor to the “Real Investment Advice” website and published author of “Random Thoughts Of A Money Muse.” Follow Richard on Twitter
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