Congress and think tanks are reviewing the issue of whether Social Security payments could or should be curbed for retirees with higher incomes. That may not be your particular worry, but it does raises the issue of when to apply for benefits.
Deciding when to start taking benefits involves unknowns. Are you in good health or poor health? What is the trend for life expectancy in your family? People in poor health may be advised to take the retirement benefit as soon as age 62 to maximize how much they receive in their lifetime. Those who hold off, however, will receive a monthly payment that is 7% to 8% higher for each year they wait. If someone waits until 70 rather than 62, the benefit is at least 76% higher, a significant increase. Go to www.ssa.gov to run your calculations.
If you receive $2,500 per month of Social Security benefits, which should be adjusted annually for inflation, this equates to $750,000 of liquid assets earning 4% interest. This is a significant investment, and you need to pay attention to it.
Social Security can be very confusing. Reach out to your agent or other financial professionals for advice and guidance. If you need help in locating an agent, go to the LIFE Foundation’s agent locator.
I published a blog the other day discussing the potential trillion-dollar shortfall in the funding of state-employee pension plans. Here we have another study showing people will need to work longer to fund their health and pension benefits.
The Employee Benefit Research Institute published a study recently showing that Americans age 55 and older are staying in the workforce longer as they are faced with higher health costs and economic losses. For those age 55 to 64, which EBRI labels the “near elderly,” this increase is due almost exclusively to the more women staying in the workforce. However, among those age 65 and older, labeled the “elderly,” the labor force is increasing for both men and women.
Workers are facing more responsibility in paying for their retirement expenses typically through self-funded 401k plans, and retiree health insurance is becoming increasingly scarce. As a result, the study says that workers today have greater incentives to stay in the workforce to accumulate additional assets in defined contribution plans and to have access to employer-based health insurance coverage. The alternative is to tap into their savings to pay for their expenses.
The study, which is based on U.S. Census Bureau data, shows that private-sector Americans, age 55 or older, who were in the labor force declined from 34.6 percent 1975 to 29.4 percent in 1993. However, since 1993, the labor-force participation rate has steadily increased, reaching 39.4 percent in 2008.
The study also shows that education is a strong determinant in an individual’s continued participation in the workforce at older ages. Individuals with higher levels of education are significantly more likely to stay in the labor force than those with the lower levels of education.
The upward trend is not surprising and will likely continue because of workers’ needs to access employer-based health insurance and for more earning years to accumulate assets. This also drives home the point that it is not too late to sit down with your agent or other financial professionals to determine a plan of action and set obtainable goals for a deferred retirement. If you have not done this, pick up the phone and do so now. If you wait too long, some planning options may no longer be available.
Many seniors are finding themselves unprepared for the new financial realities brought on by the recent recession. Many on fixed incomes have watched both their investments and their house values evaporate. They are now trying to replace lost income or rebuild safety nets.
The recently updated National Retirement Risk Index from the College Center for Retirement Research at Boston College points to a growing number of older Americans who may face shortfalls in retirement. This index measures the percentage of households that are at risk of being unable to maintain their preretirement standard of living through retirement. The study found that this share of households has increased to 51 percent as a result of the recession. Perhaps most troubling is that the study estimates this problem will worsen as the population continues to age and traditional sources of income such as Social Security and fixed pensions continue to deteriorate.
Before you get too far down this road, contact your financial professional to review your insurance and investment needs. Or if you don’t have an agent or adviser to help you, you can located one in your community here. You may find that the insurance you felt you no longer needed might still be required to replace the gap in your finances. It can be your family’s safety net while you rebuild lost income.
Are you, like me, dreading round two of “The Conversation” with your parents? Or have you not even had round one? What I’m referring to is the talk about who will be caring for them when they are no longer able to care for themselves. No one wants to think about not being able to perform day-to-day activities, but a large majority of Americans, 70 percent of those over age 65, according to the U.S. Dept. of Health and Human Services, will need some type of help. That’s why it’s so important to bring up the topic of long-term care with our parents, grandparents and other loved ones. And what better time than now, during Long-Term Care Awareness Month?
It’s often overlooked, but long-term care insurance is a mainstay in a solid financial plan. It’s an important topic to bring up, but the question is how do you to talk about long-term care with someone who has always taken care of you? Round one of “The Conversation” about long-term care insurance with my parents stopped short with: “It’s too expensive.” This was definitely not a novel reply from my parents, who grew up during the Great Depression. I was unsure of how to be prepared with round two, so I turned to long-term care expert Debra Newman, CLU, ChFC, LTCP, of Newman Long Term Care in Richfield, Minn., for advice.
Here are some of her suggestions for having an open discussion. Ask them, “What would we do if you needed long-term care? What are you expecting to happen?” Another approach might be to say, “I love you, but I’m not going to be your plan. I’m not going to be doing care-giving, so I’d like to know you’ve done some kind of planning.” Or, if they counter with the statement that long-term care insurance is too expensive, your reply can be: “What’s too expensive: the $7,000 or $8,000 a month for care, or the $2,000 or $3,000 a year for premiums?”
If you want to come to the table with facts in hand, find out exactly how much the various long-term care services cost where you live with Genworth Financial’s great interactive map. A private room in a nursing home in Boston costs $111,000 a year; in Atlanta, $63,000 a year; in Seattle, $91,000. Figures like that are enough to get anyone talking.
Long-term care is never an easy topic to talk about, but everyone must have this conversation. During Long-Term Care Awareness Month, and beyond, the LIFE Foundation is focused on giving you the information and tools you need to make smart insurance decisions. Start here to get the basics on long-term care insurance, and be sure to watch some realLIFEstories that illustrate why it’s so important for people to include long-term care insurance in their financial plans. Some times pictures are really worth a thousand words.
Tuesday, November 3rd, 2009 | pshelton | |
When leading financial columnist Terry Savage goes out of her way to say that the greatest risk to a financial plan is not a bear market, but long-term care, I think we should all pay attention. Here is what she writes in her new book The New Savage Number:
“What’s the greatest risk in your financial plan? We’ve seen how a stock market crash can devastate retirement plans. But the greatest risk is not the longevity of this bear market, or even another bear market. It’s the devastating cost of long-term care. And just as many pre-retirees didn’t take the possibility of declining stock prices into consideration when making their retirement plans, most people don’t consider the costs of living longer and the health-care and lifestyle implications.”
Here’s some quick background so you can see why she says this. The myth still prevails that long-term care insurance (LTCI) is nursing-home insurance for old people. But anyone can be in an accident, at any age. Anyone can have a brain tumor or stroke, at any age. If this were to happen, health insurance or Medicare would only pay for short-term care. And if you were counting on disability income insurance, remember, it only pays to replace part of your income so you can pay your bills. It doesn’t give you another $5,000 a month to hire caregivers.
Here are some other facts to keep in mind. Most people will never be in a nursing home, less than 15% of long-term care is administered there—but home care can often cost as much as nursing-home care. Also Medicare is not going to pay for your long-term care. A new sentence has been inserted in the Social Security benefits statement that Americans get each year: “Medicare does not pay for long-term care, so you may want to consider options for private insurance.”
The reality is that people are “self-insured” until they buy LTCI, whether they have made a conscious decision to do that or not. Someone with $3 million in savings and investments may think that paying for her own care is the way to go. At 5%, the $3 million generates an annual income of $150,000. Take $70,000 out of that for eight to 10 hours of daily home care and where did the income go? In a bad economy, the $3 million may be only $1.5 million, and the annual income only $75,000. What happens then? And how many of us are starting out with $3 million?
Getting LTCI is the smart thing to do. For under $100 a month, a 50-year-old can buy a plan with a $150 daily benefit ($4,500 monthly benefit), a three-year benefit period ($164,250 benefit account) and 5% compound inflation for life. Over 30 years, the person would pay in about $36,000, but the benefit pool would have grown to $657,000! The daily benefit would be $600 a day ($18,250 a month), so the entire $36,000 the person paid in premium would be paid back in less than two months of care. Investing the same $36,000 over the 30-year period at 8% would result in $135,000 before taxes and investment fees (vs. $657,000).
Don’t let anyone tell you that you’re too young to think about LTCI. It’s a rational, considerate decision to make for yourself and for those who would have to help care for you if you ever needed it.
Phyllis Shelton is a guest blogger who is an experienced financial industry professional, specializing in long-term care. She is president of LTC Consultants, based in Hendersonville, Tenn.
