Retirement Income Blog

Study shows long term care - though needed - is often too costly for seniors

Paying for long term care (LTC) poses a serious dilemma for seniors according to a recent study  by Boston College’s Center for Retirement Research. Who needs LTC, what’s the cost, who’s supposed to pay for it, and who can afford it were issues addressed. Let’s see some of the findings and what seniors can do to afford long term care rates.

Table 1 shows that three of four 65 year-olds (in 2005) are projected to need LTC in their future showing the imminent importance of LTC planning.

 
Directly paying for long term care is expensive  with average assisted living facilities costing $30,000 to $40,000, home health costing in the $16 - $20/hour range and private nursing homes costs beginning at around $70,000 per year. Such costs can wipe out a person’s savings and legacy.  No one will argue that the long term care rates are not affordable by most.

Table 2, overall funding sources for LTC as of 2005, shows that 18% of dollars spent come from direct out-of-pocket payments by individuals. Medicaid pays most but only for those who have almost no assets, have spent down what assets they had, or had earlier divested themselves of their assets.

Only 7% of dollars were paid through private insurance. Long term care insurance rates are high.  Annual premiums are nearly $2,000 per person at age 65. And the expected LTC insurance dollar benefit for each premium paid is only $0.56 for men and $1.04 for women.  For the latest figures, use the long term care calculator.  To check the percentage of your income that long term care costs could consume, use the retirement income calculators.

The study concluded that 91% of Americans can’t afford to pay current long term care rates.  It also concluded that many Americans mistakenly think government will pick up much of long term care cost for everyone. This confusion and competing expenses prevents Americans from purchasing long term care insurance long before 65 when it costs much less. Lastly, long term care insurance rates will remain a costly dilemma until government provides universal long term insurance or enough Americans purchase long term care insurance to spread the risk and lower premiums.

For now, seniors may try to see if they qualify for long term care insurance to see if it remains an option. They should consider, through consultation with an elder law attorney, transferring their assets long before needing long term care to qualify for Medicaid. Lastly, they can look for long term care rates with other insurance combos that make paying premiums more palatable (e.g. life/long term care combination policies).

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The biggest problem early retirees face is failure to change spending habits when they retire early.  I worked with a couple who provides an example.  I set up their portfolio to provide a retirement income of $40,000 annually which combined with social security and pensions gave them an income of $80,000 annually. The brother of the wife became ill and she made three trips cross country.  I told her that she could not afford to take such trips because their early retirement budget did not allow for such discretionaryexpenses.  Next thing I knew, she paid $8,000 for elective dental work.  I resigned as their advisor because she refused to change her spending habits. This couple was fortunate enough to retire early but the wife’s unchanged spending habits was leading them to a life of poverty.
 
When you retire early, many estimate that you can probably live on about 75% of your pre-retirement income comfortably.  This assumes that some 25% of your pre-retirement income went to work and its associated taxes, transportation and clothes - and savings toward retirement. In fact, you can select any reasonable percentage of pre-retirement income as your goal and they key is to stick to a budget.  If you don’t keep to your budget, you permanently erode the nest egg that is designed to support you for the rest of your life.

The three early  retirement income sources are social security (if you have attained age 62), pension, and your savings. With so many people under funded for retirement, you may want to do some part time work to supplement your early retirement finances. Again, remember that any overspending will PERMANERNTLY erode you nest egg and cause future financial pain.  The fact that you were able to retire early will be offset by poverty in old age.

The maximum possible social security income for 2008 and 2009 is $2,185/mo. and  $2,323/mo. respectively if you start receiving it at your full retirement age. However, whatever your full retirement benefit is, it’ll be reduced by about 25% if you retire early.  It’ll also be reduced if you earn above a threshold income while you’re under your full retirement age (for 2008, you lose $1 of social security income for every two dollars you earn from working above $13,560/yr. $14,160/yr for 2009.

Your savings are composed of your savings accounts and your defined contribution plans – 401(k), IRAs, etc. You’ll want to choose the best way to convert these to income. When you retire very early, before age 59 1/2, you can employ rule 72t to access these retirement accounts without penalty. Possibilities include converting them to an annuity (use the fixed annuity calculators for an estimate), another form such as an IRA, or Roth IRA, and devising your own withdrawal procedure that ensures that your retirement income will last as long as you.

Controlling your expenses helps prevent them from robbing needed early retirement income. You can categorize your expenses under essentials, debts, taxes, and enjoyment. Essentials cover your food, housing, and transportation. Housing and transportation may have more inexpensive alternatives you can choose from. If you are attracted to an area with lower housing expenses, the sooner you make the move, the better.

Debts such as mortgage, car, and credit card payments should be reduced as much as possible when you retire early. Paying off these loans is often the best way to handle them. Downsizing your material possessions is important in these first two expense categories.   While your pre-retirement ego may have had you buy a new BMW every three years, a used Chevy will get you to your destinations just as fast.

When you retire early, income taxes are pretty much dependent on how you choose to handle your distributions from savings and what tax category your savings are in – tax deferred, taxable or tax free (such as a Roth IRA). See a retirement advisor because the order in which you spend your different post of money can affect your tax bill by thousands of dollars each year. Part-time work can produce a very high penalty on your efforts if they diminish your social security benefits if under your full retirement age.

With your expenses minimized, you can better plan on the travel and enjoyments that you’ve set aside for your early retirement years.  Be a smart shopper.  You may have enjoyed staying at the Ritz while working but when you retire early, you need to get accustomed to clean three star hotels in the off season.

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Deferred annuities are designed for building a tax-deferred retirement nest egg by people age 20 to 60.  During volatile times, this may be one of the better retirement options for conservative investors.  You can have your funds guaranteed by the insurance company and receive their modest annual declared interest rate or you can opt for a variable annuity where you, the investor, select from a menu of investment accounts in hope of gaining a return better than the fixed annuity rates provided by the insurance company.  In both cases, your money accumulates tax deferred.  IRS wants these vehicles to be used for retirement savings so there is a 10% penalty for withdrawals prior to age 59 1/2.

Accumulation Phase

During the accumulation phase is when the money goes in.  You can make a single payment, additions over time or systematic monthly payments from your checking account. During this time period, the funds grow tax deferred.  In a deferred variable annuity, you have the flexibility to switch your funds between the various investment options offered.  During the accumulation phase surrender charges apply.  Think of these as early withdrawal fees.  If the annuity has a 7 year term (which you can renew at the end of each term if you choose), any withdrawals during the term may trigger a surrender charge.  Most every insurance company allows you to withdraw 10% of your account value each year before the surrender charge is assessed.  Additionally, many allow larger withdrawals, exempt for surrender charges, for emergencies so as confinement in a nursing home.

Distribution Phase

After age 59 1/2, you may want to take distributions for your retirement years.  You can choose several ways to distribute your money

1. in a lump sum.  This is not a good idea as you would need to pay the deferred income tax all at once.
2. in payment over a term of years (e.g. 10 years) or lifetime payments.  In the case of lifetime payments, the insurance company guarantees a regular payment for as long as you live.  if you live to 105, you win.  If you die tomorrow, they keep your money and they win.  The lifer arrangement can also be arranged over two live, e.g. you and your spouse.
3. interest withdrawals

In the case of the life annuity, it is best to start that flow later in life.  The monthly guaranteed payments to you are higher the later you start. In the case of a variable annuity, your payments will normally vary based on the performance of your investment choices by most insurance companies will offer conversion to a fixed payment stream for retirement.  It’s possible that between a social security check and a lifetime fixed payment from your annuity, you may have all the income you need.  Consult the retirement calculators.  (Note that if you like the idea of a fixed payment for life and have not saved through a deferred annuity, you can still purchase a retirement annuity or immediate annuity now).

Post provided by Javelin Marketing

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