Long-term care insurance, which covers the cost of nursing homes, in-home care, and assisted living, can help tremendously if such a need arises when you retire. According to the AARP, out-of-pocket costs for long-term care average $140,000 (and these types of expenses typically aren’t covered by Medicaid), and by the time you reach the age of 65, there is about a 50-50 chance that you’ll have to pay for long-term care at some point. The U.S. Department of Health and Human Services has stated that 70 percent of people who are turning 65 will need long-term care.
Why, then, do so few people not plan for their long-term health care needs? Only about 7.2 million Americans have long-term care insurance, according to the AARP, and for many people, it’s a problem that they aren’t prepared to handle. Long-term care insurance policies can be costly, and the premiums typically become more expensive as you grow older. When you’re still relatively young and healthy, the need seems less pressing. As a result, long-term care insurance can be an easy expense to postpone. Here’s why you need, at minimum, a plan for financially managing long-term care issues, even if you’re perfectly healthy right now.
Assess Your Situation
First, it’s helpful to look at your life circumstances. Do dementia or other debilitating diseases run in your family? If that’s the case, you may need assisted care later in life. Consider how you’d pay for this care. Will your savings cover it? Would your children be able to help? Could you use your home equity? In some situations, financial advisors say that you could comfortably do without long-term care insurance, such as if you are using less than 4 percent of your savings for annual living expenses. If you have few assets, then you may qualify for Medicaid.
However, most people will eventually have to face the reality of how to cover long-term care. According to LifePlans, an industry research firm, long-term care insurance premiums cost an average of $2,700 a year. The average stay in a nursing home is about two-and-a-half years, and prices tend to increase each year. Genworth Financial has tracked the price of care for 16 years, and its 2019 data shows that the costs for assisted-living facilities and in-home care have increased, on average, between 1.71 percent and 3.64 percent each year since 2004, an increase that’s often greater than the U.S. inflation rate. For in-home care, that’s an average increase of $892 each year, and for a private room in a nursing home, it’s an increase of about $2,468 annually.
Benefits of Long-Term Care Insurance
Some believe that Medicare will pay for long-term care, but this coverage typically only covers short-term nursing home care or a percentage of at-home care costs. Additionally, patients must be in specific situations in order to qualify for this type of care. Most of the time, families must pay for the care themselves. This is why long-term care can be so valuable, as it covers the cost of residential or in-home care, regardless of the diagnosis. Premiums are based on how much coverage the policy holder would like to have on a daily basis. Policies are typically available from private insurance companies or through employer-sponsored insurance plans. Some companies offer their employees group long-term insurance plans, which are often cheaper. One drawback is that once you no longer have a job, then you lose the insurance plan.
If you do want long-term care insurance, it’s never too early to purchase it. Waiting until you are sick or older may seemingly save you money in terms of the premiums. However, your age and health can work against you if you try to purchase coverage late in life. Conditions such as multiple sclerosis, metastic cancer, dementia, and Parkinson’s disease—all progressive health conditions—are often reasons why applicants are not approved for long-term care insurance. In 2010 (when the most recent data became available, according to the American Association of Long-Term Care Insurance website), 23 percent of people in their 60s who applied for long-term care insurance were rejected, and 14 percent of applicants in their 50s were declined. According to the American Association of Long-Term Care Insurance, the prime time to apply for long-term care insurance is when you are in your mid-50s.
Considerations to Keep in Mind
In addition, there are some considerations to keep in mind if you’re thinking about purchasing long-term care insurance. The number of carriers offering long-term care has shrunk significantly. According to one expert, 10 years ago more than 100 insurance companies offered long-term care policies; now, only about 12 do so. Questions remain about how much longer these policies will be available, even for those who have already purchased them.
If you’re in “The Big Middle,” a term that SCAN Foundation Chief Bruce Chernof coined for those who are not wealthy enough to pay their own long-term care costs and not poor enough to qualify for Medicaid, the choice remains about whether to invest in long-term care insurance.
Financial decisions in our youth can be simple. How much can I afford to pay in rent? Should I budget for two meals out a week or four? What amount of car payment can I afford?
As we get older, however, our finances—and our financial decisions—can become more complex. As we accumulate wealth and begin thinking about the financial side of issues such as retirement, second homes, and leaving an inheritance, most of us could use some guidance. That’s where wealth management comes in.
What is wealth management?
Wealth management is an individualized financial planning service for highly affluent clients. These individuals work with either a single wealth manager or a financial advising team that provides comprehensive services and has expertise in a wide range of financial services and products.
What is a wealth manager?
Serving as personal consultants, wealth managers focus on issues that affect extremely wealthy clients, such as managing estate tax rules. They spend time getting to know their clients, including their financial and life priorities.
Along with answering questions and meeting with their clients, wealth managers often coordinate legal and accounting services for them as well. Wealth managers help clients with all financial planning needs, whether it’s setting up a trust for your grandchildren or working through how tax rules impact your business’s income.
Wealth managers provide across-the-board financial services, working with clients on all aspects of their financial holdings and decisions. Clients looking for a single service, such as help with retirement planning, may find it is more efficient to work with a financial planner who offers a la carte services. Similarly, individuals who are interested in guidance creating an investment strategy may want to consider a portfolio manager, who will offer advice on maximizing returns and minimizing risk but won’t provide additional financial services.
Wealth managers provide many services. These include estate and tax planning; accounting; retirement planning; providing legal guidance on finance-related matters; offering investment management and advice; setting up trusts and foundations; creating a plan for charitable giving; engaging in risk management; and planning for Social Security benefits.
Your initial meetings with a wealth manager may be more conversational as you talk through your personal and financial goals. A wealth manager will need to be familiar with the entirety of your finances as well as your financial history, hopes and plans for your future, and the legacy you want to leave. Using all this information, a wealth manager will craft a financial strategy that will meet all of your goals.
How do I find a wealth manager?
Generally, there are two types of wealth managers. Large firms such as Merrill and Morgan Stanley offer wealth management experts along with banking and other types of financial services. Smaller independent firms, on the other hand, may provide a more personalized experience.
Either way, you’ll want to make sure that the wealth manager you choose is certified. Only one certification specific to wealth management, the certified private wealth advisor (CPWA) is available.
Financial advisors with this certificate are qualified to work with clients whose net worth is at least $5 million. The certified financial planner (CFP) and chartered financial analyst (CFP) certify a professional in general financial planning practices and are valuable certifications for wealth managers.
You can start looking for a local wealth manager through online search. This should provide information about large financial institutions and small private firms in your area. You also could ask around. Word of mouth can be a valuable tool in finding a qualified professional that others— especially peers who have similar levels of wealth and financial situations—recommend.
The cost of wealth management services typically is based on a percentage of the client’s assets that are being managed. That means the more financial assets you have, the higher your fees will be. Firms may also add other charges—Morgan Stanley, for example, charges fixed fees for specific accounts and services. It’s important to talk to your wealth management advisor about their rates and fees before agreeing to work together.
What if I prefer online services?
If you’re more comfortable behind a computer screen, many financial institutions offer wealth management service online—although you’ll lose the personal touch of face-to-face meetings. Meetings can be moved to the phone or a video conference while much of the financial information is provided online.
Some online services offer unlimited access to a human financial provider or team of providers for a flat annual fee that’s determined by the services you need and how complicated your financial needs are. Other services calculate fees based on a percentage of your assets. The downsides for some of these services, especially when they offer a team approach, is that you may not consistently work with the same financial adviser.
Regardless of the criteria you use to select a wealth management service, it’s vital to think through your needs and research your options thoroughly. You have spent a lifetime building up your wealth. Your financial decisions often will impact your family for decades or more to come. This means it is important to work with a qualified wealth manager who takes the time to understand your financial situation and long-term goals.
For many people, the prospect of saving for the future and planning for retirement is daunting. You may feel like you have no options to increase your savings, or worry that you’ll have to make major sacrifices in retirement. You’re not alone—millions of Americans over the age of 40 lack substantial nest eggs for retirement.
However, don’t despair. There are many strategies to substantially boost your savings, even if you feel behind. People under the age of 40 have even more options to get a jumpstart on retirement savings, considering the power of compounded interest.
Some of the strategies you can use to quickly increase your retirement savings include:
Invest in permanent life insurance.
Most people have heard that they should buy term life insurance and invest the rest of their money, rather than going for the more expensive option of permanent life insurance. This option can work for some people, but many others end up spending the money they would otherwise invest, despite their best intentions. For many retirees, permanent life insurance is a better option.
With permanent life insurance, you’ll pay ongoing premiums, which is a sort of automated savings. Each premium increases the cash value of the policy tax-free, and you can borrow funds against the policy or sometimes withdraw cash from it. In addition, the policy will pay out death benefits, which aren’t subject to income taxes. In other words, permanent life insurance can serve as a way of supplementing your retirement income with non-taxable money. Think of permanent life insurance as a sort of bond or certificate of deposit (CD) that increases in value steadily over time.
Save the raise.
As you advance in you career, you’ll likely receive raises that provide a little extra room in your budget. While a raise can sometimes relieve the pressure on a tight budget, many people can make ends meet without the extra income. Frequently, a raise just leads to a corresponding increase in spending. But what would happen if you saved your raise instead? If you put that extra income into a retirement account rather than buying a nicer car or new home, for example, you’ll set yourself up for a more comfortable retirement where you won’t have to sacrifice much to maintain your standard of living. The best part about this strategy is that you won’t have to make cuts to your budget or feel pinched by the extra savings, since you’ll still enjoy the same monthly income.
Take advantage of Roth savings.
Research has shown that Roth accounts are one of the most underutilized retirement preparation strategies. Many people understand the importance of maxing out a 401(k) and taking advantage of employer matching, but aren’t aware that they can do even more. Roth accounts are funded with after-tax income, but withdrawals during retirement are not subject to taxes. This option is especially good for people who may be in a higher tax bracket in retirement than they currently are. The other value of a Roth account is its potential to diversify your retirement savings. With both tax-deferred and Roth accounts, you can minimize the potential impact of future tax changes.
Purchase a home.
There’s still debate about whether buying or renting makes better financial sense. In some areas, renting a home is certainly cheaper in the short term than a down payment, mortgage, and property taxes. At the same time, research by the Harvard University Joint Center for Housing Studies shows that people who own homes tend to increase their wealth significantly more than renters, even after controlling for socio-economic differences and other factors. This may be because home ownership is a type of forced savings. Every mortgage payment builds equity in your home. You pay down your debt on the home while its value likely increases. Of course, it’s important to think strategically about home ownership and realize it is a long-term investment. If you buy and sell homes frequently, you’ll squander any gains on closing fees and other one-time expenses.
Fund a Health Savings Account.
Not everyone is eligible for a Health Savings Account (HSA), but those who are often fail to use them strategically as they prepare for retirement. Contributions to an HSA are tax-deductible and can be invested to fund qualified healthcare expenses you’ll encounter later in life, including during retirement. Very few people use an HSA for long-term savings, even though the accounts can be rolled over annually. With healthcare costs typically increasing during retirement, it’s important to have money set aside to deal with these expenses. An HSA can help you offset the costs of healthcare without needing to rely on your primary sources of income. Ideally, you would start investing in an HSA early and invest the money so that it grows over time and serves as a sort of insurance.
Ideally, retirement is a time when people relax and enjoy their lives, but following bad financial advice or not planning enough can keep you from fulfilling your retirement dreams. While it is imperative to understand the key financial steps to take in preparation for retirement, it is equally as important to know the errors that many people make. Knowing these common pitfalls can help you to ensure that you stay on the right track as you plan for retirement.
Read on for some of the most common financial mistakes that people make in relation to retirement:
Paying off a mortgage.
People often want to enter retirement with as little debt as possible. Many think that paying off their biggest monthly expenses, such as their mortgage, early is the quickest way to free up more money. However, home loans tend to have very low interest rates—paying off a mortgage now will not save you much in the long run. In fact, it may be best to refinance your home at a low rate and invest the money that you would have otherwise used to pay off the home loan early.
You should always think about interest rates in relation to debt and strive to get rid of high-interest debt, such as credit cards, first. When it comes to low-interest debt, paying it off is not always the best decision since your money can be invested with a return higher that the interest on the loan.
Investing in variable annuities.
An annuity is a great investment tool for retirees since it provides monthly payouts, sort of like a pension. The most common type of annuity is deferred, which means there is a set payout upon maturity.
However, many people select variable annuities, which invest in the market. While the return can prove higher with variable annuities, they are also vulnerable to market fluctuations and can fees as high as 3 percent. These fees quickly eat into retirement savings, especially when that loss is compounded over the years. For these reasons, variable annuities can actually detract from retirement savings.
Neglecting emergency funds.
Everyone needs an emergency fund, even retirees. In fact, emergency funds become even more important during retirement, a time when many people live on a fixed income.
Emergency funds also prevent you from dipping into retirement accounts, such as a 401(k), during a financial emergency. Borrowing from retirement comes with massive penalties and fees, and doing it even once can significantly lower your overall savings (as the money that would otherwise compound over the years has been taken out). The makeup of an emergency fund will vary according to household, but a good general rule of thumb is to have enough saved to cover living expenses for at least a few months.
Taking Social Security benefits too early.
Too many retirees fail to understand how the value of Social Security benefits changes depending on when they are taken. Though you can get 100 percent of your Social Security benefit at age 66 or 67 (depending on birth year), it pays to wait even longer if you do not have a great financial need. Benefits continue to increase beyond 100 percent after full retirement age until you turn 70 (at that point, it will not grow anymore). Waiting means a significantly higher monthly benefit, and that amount will remain the same for as long as you remain living. The increase in payout starts to outweigh the cost of delaying for anyone who lives past age 82.
Purchasing a timeshare.
Many retirees imagine themselves using a timeshare frequently enough to make the purchase worth it. Unfortunately, this is rarely the case. In addition to the upfront cost of the timeshare, you will also need to pay annual fees to maintain the property. Even if you do use your timeshare frequently, the fees may not be any cheaper than simply renting a vacation home, an option that provides much more flexibility. Also, timeshares are not very liquid, so getting rid of them can be quite difficult.
In general, retirees should avoid timeshares altogether unless they get them at a significant discount from a third party and are sure they will use them regularly.
Retiring too early.
Too often, people retire before they are ready because they feel some sort of pressure to do so. Taking the time to work a few more years can keep you from getting bored, and it can also help you save more money for retirement. Then, when you do retire, you will have more spending money to engage in fun activities, like traveling. While you may have expectations about when you should retire, it’s important to be realistic about savings and work for a few more years, if you can.
The decision to retire can cause a great deal of anxiety, especially if you aren’t sure if you’re ready. Some people use milestones like career achievement, age, or even savings to assess their readiness for retirement, but there are other factors you should consider as well.
Ideally, you should create a comprehensive plan for your financial well-being in retirement. Such a plan makes it easier to deal with financial setbacks and other bumps along the road. Furthermore, the plan should help protect against as many contingencies as possible, to minimize the odds of being caught off guard. To ensure you’re prepared for retirement, it can be helpful to create a readiness checklist. While this list will look different for everyone, some of the key items to include are:
It’s probably not possible to say exactly how much you’ll spend in retirement, but estimates can help you get a general sense. A detailed budget will give you a better idea of how much you’ll need, both monthly and annually. This estimate should include all expenses: basic costs such as housing, utilities, food, transportation, and healthcare, as well as irregular expenses like travel and vacation. Your expenses may change in retirement, but it’s still a good idea to figure out how much you’re spending now, to create a baseline estimate. Remember that the more detailed your budget is, the better—don’t leave any expenses out.
During retirement, you may receive income from a wide number of sources, including investments, Social Security payments, and more. You may also have an annuity or pension income. Adding up your expected monthly income from these different sources can give you a better sense of what you’ll need to save to close the gap and ensure you can cover your bills. In addition, this tally will help you determine if you’ll need to reduce your spending or increase your income through options like downsizing to a smaller home or getting a part-time job.
The question of how much you need to save for retirement is a complicated one. Ultimately, you should base this number on the retirement budget you created for yourself, and then add plenty of room for cushion. To get a very broad estimate, multiply your estimated annual spending by 25. If you expect to have other sources of income in your retirement besides savings, subtract them from your annual spending, then multiply that number by 25. If your actual savings are less than the calculated estimate, it is time to revisit your budget and see what adjustments you can make.
Prior to retiring, you’ll need to plan how you will draw from your retirement accounts. It’s important to be strategic about how you draw down, especially if you have a variety of different accounts. Typically, tax-advantaged accounts should go untouched for as long as possible. Of course, traditional 401(k) and IRA plans have minimum required distributions once you reach 70.5 years of age, but Roth accounts do not have the same requirements. Roth accounts can continue to grow well into retirement, so try to keep as much money as possible in these accounts, for as long as you can.
Carefully consider your anticipated healthcare costs in retirement and figure out what insurance you’ll need. For most people, healthcare is the most significant cost in retirement. Medicare is a given, but many people find that they need supplemental insurance. You should also have an emergency fund for expenses not covered by insurance plans. Keep in mind that the cost of long-term care can quickly lead to bankruptcy, because traditional insurance does not cover it. If you know you won’t be able to shoulder the cost of long-term care, it’s vital to research insurance for this level of care. Long-term care policies become more expensive as you age and your health declines, so you may want to purchase a policy sooner rather than later.
While you might wait until you’ve actually retired to begin legacy planning, start thinking about what you want to leave behind before leaving the workforce. Your legacy could influence your retirement savings target, the timing of your retirement, and your estimated retirement budget. You should also draw up an estate plan. Be sure to revisit it regularly (at least every five years) to ensure everything remains up to date. During retirement, it’s important to have regular conversations with your spouse and heirs, so that everyone knows what to expect and any transition of assets proceeds smoothly.
No one wants to think about the possibility of losing their spouse. However, if you are married, it’s important to consider how your death or the death of your spouse will affect the survivor’s finances. Failing to plan for this could put one of you in a terrible financial situation during one of the most emotional times in life. Talk to your partner about what the surviving person should do; consider things like whether you should stay in the same home or whether you’d need additional sources of income. Some sources of retirement income are tied to one partner, so their death could mean the loss of a specific income stream. Identifying these potential gaps early will help you and your spouse protect each other and your family.
One of the biggest risks that people face in retirement is the cost of healthcare. People frequently underestimate the cost of healthcare and often do not get adequate insurance to protect themselves.
That said, sometimes it’s impossible to correctly anticipate the coverage you’ll need in retirement. While some people know the health issues they will face in the future, most people must guess. Either way, underestimating healthcare needs can put a significant strain on your finances and make it difficult to make ends meet. Many people believe that Medicare will cover them completely. While Medicare Part A covers some levels of hospitalization, you’ll have to pay premiums for Medicare Part B, and you may need supplemental insurance. Even with this, you’ll still have out-of-pocket expenses.
Some of the Issues with Health Insurance Coverage in Retirement
During your working years, your employer will often pick up the majority of healthcare insurance premiums, so it’s understandable that many retirees are caught off guard with the amount they suddenly have to pay. At the very least, you will need to pay Medicare Part B premiums. These premiums depend on income; costs are higher for people who make more money. While the premiums are low, starting around $140 per month, Medicare Part B does not cover all health expenses, which leaves many people needing a Medicare Advantage Plan or a Medigap policy to fill in the cracks. Even still, Medigap policies may not provide dental or vision coverage, both of which could also leave you with costly bills. Medicare Advantage covers dental and vision needs, but it offers fewer hospitalization benefits, so a serious illness could come at a very high expense.
The other issue you’ll need to consider as you approach retirement is long-term care coverage. Long-term care is one of the most expensive healthcare needs for older adults, and Medicare does not cover the majority of the cost. Luckily, long-term care insurance is available, but it’s not always cheap, especially if you wait until retirement to purchase it.
As a general rule, purchasing insurance earlier in life makes the premiums much more affordable. The downside is that you’ll be making monthly payments during a time when you’re less likely to actually need long-term care. At the same time, long-term care can quickly bankrupt you in retirement, so this type of insurance shouldn’t be dismissed lightly. This is especially true if you have a family history of a serious geriatric disease, or if you have a serious chronic health condition.
The Average Healthcare Costs Faced by Today’s Retirees
As you approach retirement, it can be helpful to use an online calculator to help estimate the costs of care you’ll face in the years to come. For the average, 65-year-old male, the typical cost for premiums and out-of-pocket healthcare expenses is about $4,500 per year, which translates to $375 per month. You should try to factor at least this amount into your monthly expenses.
Keep in mind that the cost of healthcare is rising at a rate double that of inflation. In other words, your out-of-pocket healthcare expenses could easily be closer to $675 in another decade. If you have a chronic condition, you may have to pay even more, and couples will need to double that figure. In addition, this amount does not account for long-term care. In other words, the cost of healthcare in retirement can be extraordinarily high.
The Key Strategies for Reducing Healthcare Costs in Retirement
Luckily, retirees aren’t completely helpless when it comes to the extremely high costs of healthcare. One of the most important things that you can do to control your costs is to stay healthy by receiving proper preventative care. Healthcare plans prior to and during retirement will cover preventative visits and services. While routine check-ups and such may seem unnecessary and come across as a hassle, they are all aimed at keeping you healthy and helping you avoid costly treatments and procedures. Skipping out on these visits can cause a small health problem to become more serious and therefore more difficult and expensive to treat. In addition, some cancers are curable only when detected and treated early.
The other side of the strategy for keeping your healthcare costs low involves managing distributions in a strategic way. As mentioned above, the cost for Medicare increases as your income rises, but you can manage your distributions in such a way that your premiums are kept in check.
For example, income from HSA accounts, Roth IRA accounts, and cash value life insurance policies do not factor into the formula that determines monthly Medicare Part B premiums. Income from a reverse mortgage is also not included in this calculation. If you have significant amounts of money in a traditional IRA, you may want to consider transferring some to a Roth account before turning 65 to avoid being forced to take large minimum withdrawals down the line. These minimum withdrawals do not apply to Roth accounts. You can also use deductible healthcare expenses to offset the money withdrawn from a traditional retirement account.