Category Archives: Healthcare

Housing, health-care costs are retirement killers

April 25, 2013 11:37 amLeave a Comment

Plan now to manage these expenses later

Retirement planning, in many ways, is all about the rows and columns. How much money is coming in, how much is going out, and for how long. But far too often, some retirees and many pre-retirees don’t have a handle on what their expenses will be after age 65.

A new report from the Social Security Administration should, however, go a long way toward helping those who haven’t built a spreadsheet get a sense of where their money will go in retirement, and how much they might need set aside for various types of expenses.

Read Expenditures of the Aged Chartbook, released March 2013.

So what does insights can be gleaned from the SSA Chartbook?

Housing is a budget buster

Most noteworthy is that housing is the largest component of the average retiree household’s expenditures. In fact, housing represents 35% of expenses followed by transportation (14%); out-of-pocket health care (13.2%); food (12.3%); entertainment (5.1%); and apparel (2.6%). Other expenses, such as alcohol, personal care, reading, education, tobacco, miscellaneous items, cash contributions to persons or organizations outside the household, personal insurance, pension contributions, and Social Security payroll taxes, accounted for 17%. And Social Security payroll taxes and pension contributions were small components of total expenses (3% and 1%, respectively).

To be sure, expenses—including that for housing—differ depending one’s income, sources of income, and age. For instance, those age 65 and older and who have earned income spend less on average on housing (33.6%) than the average retiree household; while those in the lowest income quartile (those with income of $16,207 or less) spend more on average (42.6%) than the average retiree household. And housing represented 34.9% (or $10,784) of expenditures for those age 65 to 74 and 35.9% (or $7,832) for those age 70 or older.

But no matter how you slice the data, the inescapable truth about retirement is that housing is year-in and year-out budget buster. It represents, if you want to use walking-around numbers, a good third of your expenses in retirement. What should you make of that?

Retire debt-free

Well, if you have designs on aging in place, some experts recommend that you minimize housing costs as much as possible. “It is so essential for retirees to minimize housing costs during retirement,” said Ron Rhoades, an assistant professor at Alfred State College, SUNY as well as the curriculum coordinator for the financial planning program at the very same school.

“Since many retirees desire to stay close to their family members, rather than move to more distant and often cheaper retirement housing destinations, a strategy every working American should have in place is to own a home, outright and with no mortgage or other debt, by the time they start retirement,” Rhoades said.

By doing so, he said, your home can also serve as a source of funds in retirement, through a reverse mortgage, should the need arise.

Don’t underestimate rising costs

If you do age in place, don’t overlook the rising cost of property taxes and maintaining your home. “With all the focus in the cost of health care, we may lose the awareness that housing is the biggest item in retirees—probably everyone’s—budget,” said Michael Lonier of Lonier Financial Advisory. It’s three times higher than out-of-pocket health care, three times higher than food, two and one-half times transportation, and two times ‘other.’”

According to Lonier, maintaining your home during your later years is just as important as maintaining your body. “It’s best to look after your roof and your basement as well as your heart and diet,” he said.

What’s more, he warned that rising property taxes, like rising health insurance, are the villains of inflation that can undermine retirement plans.

Read “The most tax-friendly states for retirees” if you’re interested in moving move to a state with generally low property tax rates.

Don’t age in place

Others, meanwhile, advise against aging in place. “One way to plan for a secure and sustainable retirement income is to lower housing costs for the entire retirement period,” said a Kenn Tacchino, a professor at Widener University and the editor of the Journal of Financial Service Professionals.

According to Tacchino, housing costs may be unnecessarily high for the majority of consumers who choose to age in place. “This lifestyle choice may cause them to jeopardize financial security,” he said. The house that was suitable for raising a family may not be financially suitable for retirement living.”

He noted, for instance, that high taxes, extra home heating and cooling costs, and costly home maintenance can be mitigated by downsizing to a home that is more senior-friendly. “This constitutes a win-win for the retiree,” he said. “It frees up needed cash and it creates a safe and manageable environment.”

What’s more, he said, retirees can have their cake and eat it too; they can choose to remain near family, keeping the same church, doctors, and community. “Seniors need the courage to move to a living arrangement that suits their retirement budget,” Tacchino said. “Retirees who are house rich and cash poor must remember that counting on the home as an investment may be problematic because of the lack of liquidity and the lack of diversification, not to mention fluctuating housing prices.”

According to Tacchino, downsizing can, among other things, turn the equity in your home into cash that can be invested and/or used fund your retirement expenses. “Any retiree who can downsize and eliminate mortgage costs has already guaranteed a rate of return equal to the interest rate they used to pay to the mortgage company,” he said.

Don’t forget about health-care costs

Health-care costs, which—according to Rhoades—are largely contained at the moment thanks to Medicare, are another expense about which to worry. According to the SSA Chartbook, out-of-pocket health-care expenditures ranged from ranged from 5% of total expenditures for retiree households aged 55–64 to 14% for those aged 75 or older. And on average, in 2010, retirees spent $3,091 per year on health insurance premiums, $792 on medical services, $805 on prescription and over-the-counter drugs, and $158 on medical supplies.

In the main, however, Rhoades noted that the Medicare system now removes “most of the largest financial risk present” and that just 13% of seniors’ expenditures, on average, are for out-of-pocket health-care costs. “The saving grace for many retirees is the U.S. Medicare system, which was substantially enhanced with the addition of prescription drug benefits,” he said.

But health-care expenses as a percent of a retiree’s budget could change for the worse in the near future for at least two reasons. One, future changes to the Medicare system might increase the percent retirees spend on health care. And two, shocks and long-term care costs tend to dramatically change how much one spends on health care.

“Future efforts to restrain spending in this huge government program, including proposals to move to a voucher system, would likely greatly increase the financial burden upon seniors as to health-care costs,” he said. “It is doubtful that most seniors can afford any material increase in health-care costs.”

What’s more, he said those seniors with some discretionary funds—for entertainment, travel, or small gifts to family members—would likely see those discretionary funds used instead for health-care costs, should some of the current proposals floating around in Congress be enacted. “Now is the time for seniors to voice their concern to their elected representatives in Congress,” Rhoades said.

Others also expressed concern that health-care costs are problematic given potential changes to Medicare. “Whether Medicare and other insurance programs will continue covering some very expensive drugs will be an issue,” said Sherman Hanna, a professor at The Ohio State University and chair of that school’s undergraduate financial planning program. Hanna doesn’t expect real ‘death panel’ decisions soon, but he said the current policy direction would be to move us more toward the British National Health Service model with higher-income households having the choice to maintain life and/or quality of life by spending tens of thousands of dollars per year on prescriptions if Medicare cuts back because of efforts to control costs.

Beware long-term care costs

Rhoades also noted that Medicare doesn’t provide much in the way of support for the expenses of long-term care. “In that circumstance, many seniors who become impoverished turn to the states’ Medicaid system.” He said. “Many more are cared for by younger family members, often placing a huge burden on caregivers, and removing skilled workers from the workforce.”

His advice for those age 45 or older who have significant assets to protect against the ravages of long-term care, where facility costs often exceed $100,000 a year and much more in some states, is to consider long-term care insurance.

Rhoades also noted that roughly 40 states have “partnership programs,” in which qualifying long-term care insurance policies can protect a person’s assets, even if the length of stay in a nursing home or other long-term care facility exceeds two or three years.

Save early, save a lot

Overall, Rhoades said the SSA’s Chartbook paints a bleak picture of retirement. “Most senior Americans are ill-prepared for retirement and are, as a result, living on very limited incomes,” he said. “On a per capita basis, 73% of retirees spend less than $25,000 a year. Does this show frugality? Only in a mandated way, as most retirees have inadequate retirement savings to supplement their receipt of Social Security benefits.”

The SSA Chartbook also reveals, he said, that only 13% of senior Americans are spending $35,000 a year or more in retirement—a level which permits a greater opportunity to pursue long-awaited lifetime goals. Yet most of the income for those in this 13% upper level is derived from continued work, not from accumulated retirement savings.

His advice: “Workers today should be saving, starting in their early 20s, at least 11% of their gross incomes,” he said. “If they wait just 10 years to start saving, the individual’s rate of saving needs to approach 18%. And such saving should occur via vehicles which provide tax benefits, such as IRA accounts or which provide matching employer contributions, such as many 401(k) plans. And retirement savings need to be invested wisely, as well—in low-cost, diversified investments.”

And since most Americans are ill-equipped to undertake the strict personal expenditures budgeting process, discern the best method to save for retirement and other needs, and invest correctly, Rhoades recommends that consumers seek out trusted, fiduciary and fee-only advisers.

Two sources he recommended are the National Association of Personal Financial Advisors, and the Garrett Planning Network.

Retirement Expert: Robert Powell

 

Robert Powell is a featured writer on the MarketWatch Retirement blog, a Research Fellow at the California Institute of Finance, and  a Featured Contributor here on the CIF blog.

Posted in Featured Contributors, Healthcare, Lifestyle, Real Estate, Retirement Planning, Robert Powell

12 questions to answer before you retire

March 29, 2013 11:55 amLeave a Comment

Most people know a thing or two about retirement. Stan Hinden, by contrast, knows 12.

And that should come as no surprise given that Hinden has recently published the fourth edition of his book, “How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire.”

According to Hinden, who is 86 and wrote the “Retirement Journal” column in The Washington Post for years after he retired as a financial writer in 1996, there are 12 important decisions that you must make before you retire. And in his book, he details those decisions. In an interview, he boiled those decisions down to the essence of the matter. Learn more about the book.

Are you ready to retire?

Among the questions that you must contemplate is whether you are ready to retire. According to Hinden, there are three good reasons to retire. One, the time is right; two, you have more compelling things to do; and three, your job is changing. There are also three good reasons not to retire: One, your work is your identity; two, you will miss the people you work with; and three, you want to stay in the loop.

In the current economic environment, however, Hinden said, more and more people might be ready to retire but not able. “People aren’t feeling comfortable about retiring,” said Hinden, who was born in the same year Charles Lindbergh first flew across the Atlantic Ocean. “So the answer to the question ‘Are you ready to retire?’ is ‘I’d like to, but I don’t know if I can.’ That is been a change since I wrote the first edition of the book in the retirement scene.”

Instead of retiring outright or only working, Hinden said he sees older Americans now doing both: retiring and working. And to him—and he’s living proof—that’s a good a way to enjoy the best of two worlds. (Hinden, besides updating his book, also writes a weekly column for AARP called the Social Security Mailbox. Read that column.)

Can you afford to retire?

To be fair, in the current economic environment, Hinden said the question of retirement is less about whether you are ready and more about whether you can afford to retire. And one of the key questions to answer about whether you can afford to retire is a rather simple one: Will your income in retirement be greater than your expenses? Of course, there’s more to it than that. But that’s the essence of it.

“When you approach retirement, you really have to sit down and look at your financial situation and try to estimate what your income will be and what your expenses will be,” he said. “It seems to be more and more people will find that their expenses may be more than their income.”

There are, of course, ways to increase your income and lower your expenses. But there are some hard truths to consider as well. One, retirement includes living mostly on a fixed income without the benefit of salary increases as there were during one’s working years. And two, retirement includes expenses that aren’t fixed: health-care costs and taxes tend to rise often faster than inflation.

Among the many things you can do to increase your income, according to Hinden, is use the power of time and compounding. He recommends saving and investing as much as you can as earlier as you can in employer-sponsored and other types of retirement accounts, including Roth IRAs and Roth 401(k)s.

Another issue that plagues current retirees has to do with the zero-interest-rate world. It’s becoming increasingly difficult for older Americans to generate income without having to put their assets at risk in the stock and bond markets. “It hasn’t been easy” finding safe investments, he said.

When should you apply for Social Security?

One way to increase your income in retirement, according to Hinden, is to delay taking Social Security till age 70, if you can afford it. That is especially so in this low-interest-rate environment and the benefits of this tactic, the delayed retirement credit. (Your Social Security benefit will increase 8% per year for every year you delay taking it after full retirement age.) Read Retirement Planner: Delayed Retirement Credits.

Thus, delaying taking Social Security accomplishes two things, he said. One, you’ll get the largest possible Social Security benefit. Plus, widows and widowers will get the largest possible survivors benefit. Read Survivors Benefits.

“If you can afford it, the better decision is to wait,” said Hinden.

To be sure, deciding when to apply for Social Security is very much a personal decision. And the numbers seem to suggest that most take Social Security either at full retirement age or sooner. In fact, some 74% of the 35.6 million retired workers received reduced benefits because of entitlement before full retirement age, according to a recent government report. Read Annual Statistical Supplement to the Social Security Bulletin, 2012.

“It was obvious in the past, and even more so now, that people take Social Security early for two reasons,” he said. “One, they need the money. And two, people may be afraid they won’t live long enough to get as much as they think they would like to get.”

If, however, you have enough money or income from other sources, from work or from your portfolio, to carry you from normal retirement age till age 70, then it is a good deal to delay taking Social Security, he said. “I live in a place where there are at least a dozen people who are 99 or 100-plus years old,” he said, suggesting that delaying Social Security could make a big difference if you happen to live that long. “If this is a good bet, then the odds are growing in favor of taking your Social Security later.”

Hinden also noted that the widow’s survivors benefit “will be much, much better” if her husband has waited at least until full retirement age to collect Social Security. “One of the main reasons for poverty among aged widows is the fact that their Social Security is so low,” he said. “And the reason it is so low is because their husbands took their benefits at age 62.”

How should you take your pension?

Another decision some retirees have to make concerns their pensions and whether to take a lump sum, or monthly payments based on a single life or on a joint-and-survivor basis. In his case, Hinden said, he took his pension as monthly payments based on his life. But now, with the benefit of hindsight, he would have chosen the joint-and-survivor annuity, the option where the monthly payment is reduced but doesn’t end if he predeceases his wife, Sara. “At the time, I had a fair amount of life insurance,” he said. “But then one day I sat down and did some arithmetic and began to realize that I made the wrong decision. The arithmetic I did was to figure out what income we were getting as a couple and then figuring out what income Sara would get as a single person, as a widow, after I died. And without the pension, she would not have done very well. It was pretty clear that if I done that arithmetic before I retired I would have made a different pension decision.”

Often, he said, we don’t realize the repercussions of making the wrong decision until it is too late.

“The one theme that I’ve been trying to stress in the book all this time is that, as Sara frequently told me, preparation is next to Godliness,” Hinden said. “And she was right. These decisions are coming up. There are many things that you have to learn about retirement. Start learning them now. Start thinking about what you need to know and that will help you a great deal when you finally retire.”

In fact, he said, he wrote his book to help people learn all the things that he should have known before he retired.

What should you do with the money in your company savings plan?

Among the many things that you need to know is what to do with the money in your employer-sponsored retirement plan, after you retire or leave your company. According to Hinden, the best option typically is to roll over your IRA. He also suggested that workers consider not investing in their company’s stock inside in their retirement plans or keep it to a small percentage.

When do you have to take money out of your IRA?

When it comes to taking money out of your IRAs and other retirement accounts, Hinden offered this advice: “My advice would be to avoid a bad case of ‘brain sprain.’” Hinden said those who are faced with the deciding when and how to take money from their IRA should work with a financial adviser or CPA who is familiar with IRA distribution rules. “It’s not a hard calculation to make if you understand the tables and how they work but they are complicated,” he said. “I can remember the first time I did it I wrote a column asking why retirement had to be such hard work.”

How should you invest during retirement?

As for investing in retirement, Hinden said, the trick is to strike a balance between investing for growth and investing for safety. Hinden said he “got caught in the tech bubble” and in retrospect he wishes he had been more conservative with his investment portfolio. And in general, given the vagaries of the market, he recommends that retirees be more conservative than aggressive with their investments. “I’m not in favor of putting everything in bonds,” he said. “You still need stocks. You still need growth and protection against inflation. But you have to do it carefully. There is a price to being in the market. And no matter how well diversified you are, it may not matter.”

What should you do about health insurance?

Hinden also recommends that retirees purchase, if able, Medigap insurance—given the increase in health-care costs, the expenses that Medicare doesn’t cover, and the potential that health-care costs could ruin one’s retirement. “Medigap is very important,” he said. “I’ve always had it since I went on Medicare, and I wouldn’t give it up. I think it is absolutely essential that people have Medigap insurance if they are on Medicare.”

Visit the government’s website, Medigap Policy Search, to learn more about Medigap policies.

Hinden also expressed concerns over efforts to make “Medigap more expensive and more difficult to use.” Policy makers suggest that if Medigap policies cover less of beneficiaries’ costs, some seniors will be less likely to overuse Medicare-covered health care services.

What should you do to prepare for an illness that requires long-term care?

Hinden also recommends that Americans, if they can afford it, purchase long-term care insurance. “And if they can’t afford it, they should figure out a way to afford it,” he said.

Hinden, in this case, speaks from personal experience. His wife Sara, who became afflicted by Alzheimer’s disease in 2007 and now resides in an assisted living facility, has benefited from a long-term care insurance policy Hinden purchased some years ago. “That long-term care insurance policy has been a Godsend to her,” he said. “It doesn’t cover a whole lot, but it is enough to really make a difference.”

Where do you want to live after you retire?

As many know, most Americans prefer to age in place. And the same can be said of Hinden. After raising his family, he and his wife moved to a retirement community and stayed there for many years. After his wife developed dementia, they moved to a senior residence where they could access more health-care support. Today, his wife lives in an assisted living house and he continues to live in the senior residence.

How should you arrange your estate to save on taxes and avoid probate?

According to Hinden, death is not only an emotional event, but also a legal event and a taxable one. And a favorable outcome depends on advance planning, getting good advice, and carefully assembling your financial records and documents.

How can you age successfully?

Hinden said the key to aging successful is a matter of three things. One is to exercise, particularly walking, on a regular basis, two is diet, to eat well, and three is to retain your social contacts. “You need to continue to be part of groups or clubs, to be in touch with people.” he said. “It’s extremely important to be in touch with people. Nobody ought to become a couch potato in retirement. Retirement can be a great experience.”

Retirement Expert: Robert Powell

 

Robert Powell is a featured writer on the MarketWatch Retirement blog, a Research Fellow at the California Institute of Finance, and  a Featured Contributor here on the CIF blog.

Posted in Estate Plans, Featured Contributors, Healthcare, IRA, Longterm Care, Retirement Income, Retirement Planning, Robert Powell, Social Security

7 ways to help aging parents handle finances

January 25, 2013 4:50 pmLeave a Comment

Make no mistake about it, there’s a large generational role reversal taking place in this country. Adult children are increasingly providing advice and counsel to their aging parents about a wide variety of financial and nonfinancial issues. And, they are being asked to answer questions about everything from Medicare to how to reinvest a maturing CD.

Knowing full well that you might be called upon to become a subject matter expert, if you haven’t already, we asked experts for some help.

“Children of aging and/or disabled parents need to help their parents face up to the decisions they need to make now,” said Chris Cooper, the owner and founder of ElderCare Advocates.

Below is what experts said adult children and aging parents ought to consider, now.

Financial matters

All of us are going to lose our ability to make more complex financial decision when we reach advanced ages, said Michael Finke, an associate professor at Texas Tech University. “The problem is that we often don’t recognize the decline,” he said.

This is very similar to what happens to older drivers, he said. “Since the decline is so gradual and consistent (we measure the decline in financial decision making at about 2% per year), we often don’t recognize when we become vulnerable to making mistakes,” said Finke.

So, his advice to aging parents and their adult children is this: “Part of a retirement plan needs to be accounting for the decline in our ability to make these decisions,” said Finke. “That means sitting down with a trusted relative or financial adviser and putting a plan in place to delegate some decisions in advanced age,” he said.

Selecting investments that require less active management, such as annuities or a managed payout mutual fund can also help. “We need to not only protect our portfolio against market risk, we also need to protect it against the risk of cognitive decline,” said Finke.

And for adult children, Finke’s recommended the following: “Create a plan with an older parent that includes establishing a power of attorney and allowing an adviser to contact a trusted child if they become aware that the parent is making financial mistakes.”

What’s more, Finke advised doing this sooner rather than later. “Putting the plan in place early in retirement before cognitive decline begins may be easier than convincing a parent who is exhibiting signs of dementia that they need to relinquish control of their finances,” he said.

Jack Tatar, author of “Safe 4 Retirement: The 4 Keys to a Safe Retirement,” agrees. “We all end up having the conversation, but usually too late, when mental capacities are diminished and certain expectations may be set, such as one sibling’s belief that they will get this or that.”

Having these conversations, said Tatar, provide peace of mind for everyone. “Allowing the retiring/retired parents to be more comfortable living out their retirement dream and providing the adult child with a major task done,” he said. “These conversations should result in documented plans, which should be updated regularly.”

Get those documents in order

Speaking of documents, Tatar said, one major way adult children can help their aging parents is make sure all their affairs are in order. “Adult children need to be sure that their parents have things documented such as wills, assets, end-of-life considerations, even their medications and health records,” said Tatar, whose new book, “Having ‘The Talk” with Your Parents About Retirement,” will be published in January 2013.

In some cases, an adviser could be the central point of contact or the adult child, or both.

Where to live

Most aging parents will stay in their own home. “That may be fine, but expand the discussion to ensure that they have thought about the natural changes in life,” said Joe Coughlin, the director of the Massachusetts Institute of Technology AgeLab.

For example, more than 70% of Americans over age 50 live in suburban or rural areas. “In those regions if driving is no longer a comfortable or possible option are there alternatives from walking to friends to alternative transportation?” Coughlin asked.

Does where they choose to age offer quality health care to treat older adults who typically have multiple complex conditions and medication management issues? “Retiring to the lake or mountains is a young person’s game—while beautiful, few of those destinations offer transportation that is easily accessible or medical services beyond the local vet,” Coughlin said.

This discussion and decision, Coughlin said, is best made with people you know and who care about you, and who are able to do the research about the possible alternatives and naturally think out the logical options and contingencies of a choice. “You neither want to engage the family heavy—say, the oldest son who is looking to seize the patriarchal mantel—nor the family member or friend who might want to just keep everyone happy and is supportive of any decision regardless of its future impact,” said Coughlin.

Estate planning

Cooper and others also said adult children need to address their aging parent’s estate-planning issues. “Who will take over managing finances, paying bills, filing tax returns, handling property and investments, managing insurance policies and claims, and who will make medical decisions if the parent cannot speak for themselves?,” Cooper asked.

Providing guidance to adult children or a partner is critical in the event that disease or death make it impossible for you to articulate your preferences or make choices on your own, said Coughlin. “This means working out with your spouse and those that you trust—adult children, close friends or relatives—what your intentions are,” said Coughlin. “This goes beyond wills and do-not-resuscitate (DNR) orders, this includes the introduction of your financial adviser, CPA, attorney or any other professional adviser to your trusted personal network of family and friends so they can hear from you what your intentions and future desires are likely to be.”

Harry Margolis of ElderLawAnswers said best thing kids can do is to get their parents to meet with an estate or elder law planning attorney “to make sure that they have a management structure in place in case their capacity begins to flag.”

Focus on making sure that there is a plan rather what the specifics of the plan. That way parents will be less threatened. “It’s not that the kids want the parents’ money, but that they want to make sure that they can help the parents when and if the time comes,” Margolis said.

Yes, many seniors are worried about legal fees. But Margolis said some attorneys don’t charge for the initial consultation. “And for those that do, the children might offer to pay the fee so that it’s not an impediment to their parents doing the necessary planning,” said Margolis.

Talk health

Tatar also recommends talking not only about financial matters but also health-related issues. “Although my parents did a nice job of setting up a single point of contact with their adviser and we had good documented financial plans, I knew nothing of their health situations and medication, which became an issue when my mom was ill and kept her ‘real’ condition away from us, which unfortunately led to the unexpected loss of my own mother,” said Tatar.

The best-laid retirement financial plans are often destroyed by health-related issues. So, children should ask their parents whether they have health conditions that could adversely affect their situation, Tatar said.

Asking a parent a question such as ‘Do you have a health conditions that may have an impact on your situation?’ may provide the necessary information to address this before it creates a problem for them, said Tatar.

Adult children should also ask their parents about health-care treatments. “What does the parent want if treating a disease such as cancer does not work or is killing the parent from the cure?” asked Cooper.

Coughlin, for his part, posed these questions: Who do you want to provide care and how do you want it provided? If disease or a catastrophic health event was to occur, what are their wishes? Do they want to stay at home at all costs? Would they be willing to relocate to a continuing care retirement communities (CCRC) or nursing care facility if necessary? Have they prepared financially for the contingencies or researched what those care options might be?

“This is best worked out with at least two people you trust with a professional,” Coughlin said. “Two gives you redundancy if something should happen to one, moreover, this should be done face-to-face with your attorney or other professional and the people you want making decisions in your stead. Together reduces the confusion and conflict later.”

What’s your plan?

Tatar also said adult children should be aggressive about asking their parents what they’re going to do in retirement. “It’s critical for retirees to not only be physically active—exercise is no longer optional for an aging body—but to build and nurture social relationships which will be critical to their well being in retirement,” he said. “Strong social structures are a vital element to living longer and happier in retirement.”

Getting started

Tatar also has some pointers for adult children who want to broach financial and other subjects with aging parents. You can start a discussion by referencing an article, or book that recommends it, or simply telling a story about a family member or family friend’s situation. “Doing so can help you launch a discussion about ‘How we need to discuss this so that doesn’t happen to you,’” said Tatar.

Robert Powell

 

Robert Powell is a featured writer on the MarketWatch Retirement blog, a Research Fellow at the California Institute of Finance, and  a Featured Contributor here on the CIF blog.

Posted in Estate Plans, Featured Contributors, Financial Planning, Healthcare, Insurance, Lifestyle, Retirement Planning, Robert Powell

Coping with rising retiree medical costs

August 8, 2012 11:19 pmLeave a Comment

Rising Retire Medical Costs(MoneyWatch) A recent report from Fidelity Investments estimates that a 65-year-old couple retiring in 2012 would need about $240,000 in today’s dollars to cover medical expenses throughout their retirement. This represents a 4 percent increase over the 2011 estimate of $230,000.

Since 2002, Fidelity’s estimate has increased every year except in 2011 (when the one and only decrease was due to a one-time adjustment that reflected changes in Medicare). These changes reduced out-of-pocket expenses for prescription drugs. Yet even this small improvement against the broader backdrop of rising health care expenses is in jeopardy if the Affordable Care Act is overturned by the Supreme Court. That would likely cause retiree health costs to rise even more. Fidelity’s estimate also doesn’t include vision, dental, or long-term care costs, painting a potentially even darker picture for millions of Americans.

What can you do?

For one thing, don’t give up! You can take steps now to address the threat of high health care costs in retirement.

First, realize that you don’t need to have all this money in your 401(k) or savings account today, dedicated just to cover retiree medical costs. You’ll pay for medical premiums and expenses throughout your life; for example, most retirees have Medicare’s premiums deducted from their monthly Social Security income. If you’re lucky enough to have a pension from work, you can also use that monthly income to pay for medical premiums and expenses.

However, using Social Security alone to fund Medicare premiums and medical expenses represents a challenge. Fidelity estimates that for the average couple, medical expenses would consume about 35 percent of their Social Security income in 2012 — and that percentage would increase to 61 percent in about 15 years.

As a result, you’ll need other sources of retirement income to pay for retiree medical costs. That means boosting your savings in your 401(k) or health savings accounts (HSA), if eligible. Many employers have implemented high-deductible health plans that combine HSAs with robust wellness programs. Often, these programs will contribute to your HSA if you participate in the wellness activities.

Be well

Not participating in such a wellness program is actually worse than not taking full advantage of your company’s 401(k) match. Not only would you be leaving money on the table, you’d be passing up the opportunity to reduce future health care costs by improving your health. That’s a move only Homer Simpson would make!

How much can you save by taking care of your health? I’ve previously estimated that only about 30 percent, or $72,000, of the $240,000 projected by Fidelity would be needed to pay for Medicare premiums. The remainder, about $168,000, would pay for deductibles and co-payments — in other words, costs you’re charged when you get sick. While it’s unrealistic to think you can eliminate this amount entirely, it represents your total potential savings if you get serious about taking care of your health by maintaining a healthy weight and getting sufficient exercise.

Another win-win is to consider working during the early part of your retirement years. Not only will you earn additional money, but you might be eligible for medical coverage as an active employee, which will reduce your out-of-pocket expenses for medical care. Many employers provide medical insurance to part-time workers and subsidize a portion of the cost, so you won’t have to pay the full freight for insurance coverage. And working can keep you socially active and engaged with life in your retirement years, which might improve your health, as well!

While there’s no need to despair over this news, consider it serious motivation to take steps that will help you live long and live well in retirement.

Steve Vernon

 

Steve Vernon is a featured writer on the CBS MoneyWatch Retirement blog, a Research Fellow at the California Institute of Finance, and a Featured Contributor here on the CIF Blog”.

Posted in Featured Contributors, Financial Planning, Healthcare, Retirement Planning, Steve Vernon

More people save for retiree health care costs

April 20, 2012 12:48 pmLeave a Comment

(MoneyWatch) According to the results of a recent survey by Fidelity Investments, the number of employees with health savings accounts (HSAs) at the firm jumped 61 percent last year as more employees took advantage of the tax-free savings vehicle to fund current and future health expenses. HSAs offer three key tax advantages:

– Money contributed to an HSA is tax deductible.
– Investment gains are generally free of federal income taxes, although state tax treatments can vary.
–
Withdrawals aren’t subject to federal income taxes for qualified medical expenses. Again, state tax treatments can vary.

The average annual contribution to HSA accounts at Fidelity was $2,677 last year, taking both employer and employee contributions into account. The annual contribution limit set by the IRS for 2012 is $3,100 for an individuals and $6,250 for families. Add $1,000 to these limits if the HSA account holder is age 55 or older.

The Fidelity survey also reported that most HSA account holders carry their account balances forward to future years. Unlike flexible spending accounts, the annual HSA contribution doesn’t need to be spent in the current year.

I’m glad to see more people putting aside more money in HSAs, since retiree medical expenses represent a significant expense in your retirement years. However, just because you’re saving in an HSA, you shouldn’t get complacent about taking care of your health. It will
be hard to accumulate sufficient funds in an HSA account to pay for a significant portion of your out-of-pocket medical expenses in retirement, so you’ll still want to take whatever steps you can to minimize the odds of contracting expensive medical conditions.

Open enrollment moves that will improve your retirement
HSA contributions: Save or invest?

To be eligible to contribute to an HSA account, you need to participate in a high deductible medical plan. The existence of this high deductible should give you an extra financial incentive to take care of your health. If you’re eligible to contribute to an HSA, I encourage you to save as much as possible and adopt healthy eating and exercise habits. The unfortunate reality is that more and more, we’ll be on our own to pay for
medical expenses in our retirement years. The best we can do to address this threat is to take a hint from the Boy Scouts, and be prepared.

Visit the California Institute of Finance’s Website to learn more about our MBA In Financial Planning.

Steve Vernon

 

Steve Vernon is a featured writer on the CBS MoneyWatch Retirement blog, a Research Fellow at the California Institute of Finance, and a Featured Contributor here on “Advisor Pages”.

 

 

Photo courtesy of iStockphoto contributor >philipdyer

Posted in Healthcare, Insurance, Steve VernonTagged