I was honored to help US News and World Report recently in their article “How Grandparents Can Help Save for College” the author of the article and I discussed how difficult it can be for families to discuss money and saving for college and different ways to broach the subject. We also discussed how the money that a Grandparent has saved for a grandchild can sometimes hurt their financial aid prospects depending on how it is managed. We also discussed different investment vehicles and the pros and cons of each.
My financial planning engagements are very detailed, especially for clients that are nearing retirement. I find when talking with colleagues at conferences and continuing education meetings that many of them do not discuss how Medicare works, the potential cost of healthcare in retirement, or even potential Long Term Care needs. I know that the clients who come to me, often come to me with misconceptions about these items. Which is understandable, since they have never encountered these situations before. I feel good about introducing them to these topics so that they can prepare.
One of the most common misconceptions that I see is, if someone needs to move into a nursing home that Medicare will cover the cost. While Medicare will cover medical care for skilled nursing care for 100 days, they do not cover custodial care. What I tell people is Medicare is health insurance, and if you are being rehabilitated and your health is expected to improve then that is health insurance and you are covered. But if you are not expected to improve, and you are needing coverage to pay for Activities of Daily Living to care for you like eating, bathing, dressing, toileting, walking/moving from the bed to a chair, then that is not health insurance, that is Long Term Care and that is covered by:
1) your savings or
2) Long Term Care insurance or
3) government benefits after you have spent your assets down (Medicaid or VA benefits.)
This information is eye opening for a lot of people who come to me.
I mention this so that you consider learning all that you can about Long Term Care. It is more than just buying Long Term Care insurance. It is thinking about all of your preferences and discussing them with your family. It is preparing your home for successfully aging in place, learning about your housing options should you decide you no longer want to live at home, learning about how you can take care of yourself to prevent falls and other action steps that you can take so that you have a long and enjoyable retirement. Planning in advance gives you control and confidence versus making hurried decisions in a crisis. A terrific resource for learning about Long Term Care is www.LongTermCare.gov.
The information below is copied and pasted from an educational resource that I have access to called Forefield Broadridge, I hope you find it helpful.
Housing Options for Older Individuals
Use your current income as a starting point
You have probably read financial press articles that discuss desired annual retirement income as a percentage of your current income. Depending on the article, that percentage could be anywhere from 60 to 90 percent, or even more. The appeal of this approach lies in its simplicity, and the fact that there’s a fairly common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you’ll no longer be liable for (e.g., costs associated with working such as lunches out, dry cleaning, commuting, etc.) will, theoretically, allow you to sustain your current lifestyle.
The problem with this approach is that it doesn’t account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100 percent (or more) of your current income to get by. It’s fine to use a percentage of your current income as a benchmark, but it’s worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.
Project you retirement expenses
Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That’s why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you’ll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:
- Housing: Rent or mortgage payments, property taxes, homeowners insurance, HOA fees, property upkeep and repairs
- Utilities: Gas, electric, water, telephone, cell phone, Internet, cable TV, trash
- Transportation: Car purchases or payments, auto insurance, gas, maintenance and repairs, public transportation
- Insurance: Medical, Medicare Supplement, dental, life, long-term care
- Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
- Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
- Taxes: Federal and state income tax, capital gains tax, personal property tax
- Travel: for fun, to visit family, to go to family events such as weddings and funerals
- Debts: Personal loans, business loans, credit card payments
- Education: Children’s or grandchildren’s college expenses
- Gifts: Charitable and personal such as Christmas, birthday, wedding
- Recreation: dining out, hobbies, leisure activities, season tickets to sports or entertainment
- Miscellaneous: Personal grooming, pets, club memberships, household items
Don’t forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 2.3 percent. (Source: Consumer price index (CPI-U) data published by the U.S. Department of Labor, January 2015.) And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, will increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it’s always best to be conservative). Keep in mind that some expenses have historically gone up at a rate greater than inflation. For example, in our retirement projections we inflate healthcare expenses at a rate of 6%.
Decide when you will retire
To determine your total retirement needs, you can’t just estimate how much annual income you need. You also have to estimate how long you’ll be retired. Why? The longer your retirement, the more years of income you’ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it’s great to have the flexibility to choose when you’ll retire, it’s important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.
Estimate your life expectancy
The age at which you retire isn’t the only factor that determines how long you’ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live, but with life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect.
Identify your sources of retirement income
Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov). Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.
Make up any income shortfall
If you’re lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you’ll come up short? Don’t panic–there are probably steps that you can take to bridge the gap. We can help you figure out the best ways to do that, but here are a few suggestions:
- Try to cut current expenses now so you’ll have more money to save for retirement
- Consider delaying your retirement for a few years (or longer)
- Lower your expectations for retirement so you won’t need as much money (no beach house on the Riviera, for example)
- Work part-time during retirement for extra income
The best way to determine if you are on track for the retirement you envision, is to get started now on a financial plan. You don’t have to go it alone; you can enlist the help of a professional. Contact us today.
Based on an article Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016
I was honored to be quoted recently in the article “Traditional vs. Roth IRAs: Understanding the Retirement Planning Benefits of Each” on Learnvest. It is a good introduction to the differences between the two types of IRA accounts and when you might choose between them.
Some of the differences and rules covered are:
- Contribution Limits
- Income Restrictions
I find when planning with families that the decision is a multi-step process. We need to take into consideration all of the vehicles available to them including work and/or self-employment, their potential matching from employers, if they have a spouse and if the spouse is considered an active participant in an employer plan, the quality of their plans, their income phaseout thresholds, and their entire picture of financial goals ranging from short term to long term to determine how much they can afford to put toward all of their goals. That then informs us what the best vehicle is, or in most cases, vehicles are.
The St Louis Post Dispatch quoted me in their article “Is Your Honey Good With Money? Better Find Out Before Tying The Knot.” in the Sunday paper.
I shared my thoughts on couples and financial compatibility. As a financial advisor for twenty some years, I have worked with many different couples of various age ranges, so I was able to share some ideas for checking to see if you think about money in the same way.
Even if you don’t, one of the most important things to do is to talk about it before you marry. Money squabbles are one of the leading causes of divorce. Valentine’s Day has just passed and love is in the air, take a look at this article to make sure it stays that way!