What Worries Retirees the Most?

Retirees don’t want to run out of money. However, homeowners over 62 who have considerable equity in their homes may want to look at a strategy that can minimize their money anxiety. A reverse mortgage will let them tap into home equity, by providing funds to keep them financially stable. Could the reverse mortgage payments take a bite out of their Social Security or Medicare benefits?

Motley Fool’s recent article asks, “Can a Reverse Mortgage Impact Your Social Security or Medicare Benefits?” The article explains that reverse mortgages, also called home equity conversion mortgages (HECM), were created in 1980 to help seniors stay solvent, while remaining in their homes.

You know that in a regular mortgage, you pay the bank monthly installments. However, with a reverse mortgage, the bank pays you. You take out money against the equity in your home, and the loan doesn’t come due until you sell the home, move out of it, or die. The amount you can get is based on a formula that takes into account your age, the equity in your home, its market value and the interest rate you’ll be paying. You can get your reverse mortgage funds as a lump sum, a monthly payment, or a line of credit.

There are some drawbacks to a reverse mortgage. This type of loan can have big fees, including origination fees, closing costs (similar to a regular mortgage) and mortgage insurance premiums.  These fees can usually be rolled into the loan. It will, however, increase the amount the bank is entitled to receive once the loan ends.

A reverse mortgage isn’t for you, if you want to leave your home to your family. Perhaps they can pay off the balance of your HECM once you die or move out, but that could be costly. If you want to sell it (perhaps to simplify the splitting up of that inheritance), the share your heirs will receive from the proceeds may not be as much as you’d anticipated. If you’re having a hard time keeping up with the day-to-day costs of running the house, a reverse mortgage may not be the best option. However, if you’re just looking to add to your retirement income for peace of mind, it’s a decent financial planning tool to consider.

The good news is that it has no impact on your Social Security benefits, because the program is not means-tested. Therefore, the amount of income you have won’t affect your monthly benefit when you file. As a result, you don’t need to take Social Security into account when you’re thinking about this type of loan.

Likewise, Medicare is a non-means-tested program. However, a reverse mortgage can have an impact on Medicaid and Supplemental Security Income (SSI) benefits, because those are based on your current financial assets. If you’re receiving either of those, talk to an elder law attorney or estate planning attorney to discuss how a reverse mortgage might have an effect on your specific circumstances.

Reference: Motley Fool (November 1, 2019) “Can a Reverse Mortgage Impact Your Social Security or Medicare Benefits?”

Relocating for Retirement? What You Need to Know

Sometimes having too many choices can become overwhelming. Move closer to the grandchildren, or live in a college town? Escape cold weather, or move to a mountain village? With the freedom to move anywhere, you’ll need to do some serious homework. A recent article titled “Don’t Relocate in Retirement Without Answering These 5 Questions” from Nasdaq contains some wise and practical advice.

There are some regions that are more retirement-friendly than others. If you end up in the wrong place, it could hurt your retirement finances. Therefore, ask these questions first:

What are the state’s taxes like? If you are living on Social Security benefits, retirement savings and a pension, the amount of money you’ll actually receive will vary depending on the state. There are 37 states that don’t tax Social Security benefits, but there are 13 that do. There are also some states that do not tax distributions from retirement accounts. Learn the local rules first. If you currently live in a state with no income tax, don’t move to a state that may require a big tax check.

If you live in a high tax state and don’t have enough money saved for a comfortable retirement, then moving to a lower tax state will help stretch your budget.

Is there an estate or inheritance tax, and is that a concern for you? If leaving money to heirs doesn’t matter to you, this isn’t a big deal. However, if you want to pass on your assets, then find out what the state’s inheritance taxes are. In some states, there are no taxes until you reach a pretty large amount. However, in states with inheritance taxes, even a small estate may be taxed, with those who inherit sometimes owing money on even small transfers.

What’s the cost of living compared to where you live now? When you’re working, moving to a place with a higher cost of living is not as big a deal, since your wages (hopefully) increase with the relocation. However, if your cost of living goes up and your income remains fixed, that’s a problem. The last thing you want to do is move to a place where the cost of living is so high, that it decimates your retirement savings.

If you live somewhere with high taxes and high prices, moving to a lower cost of living area will help your money last longer, and could make your retirement much easier.

Is it walkable or do you need a car? Cars present two problems for aging adults. One, they are expensive to maintain and insure. Two, at a certain point along the aging process, it becomes time to give up the keys. If you live in a walkable community, you may be able to go from having two cars to having one car. You might even be able to get rid of both cars and do yourself a favor, by walking more. This also gives you far more independence, far later in life.

What’s healthcare like? Even people who are perfectly healthy in their 50s and 60s, may find themselves living with chronic conditions in their 70s and 80s. You want to live where first-class healthcare is available. Check to see what hospitals and doctors are in the area before moving. You should also find out if medical care providers accept Medicare. Consider the cost of a nursing home or home care in your potential new community. Some areas of the country have much higher costs than others.

Reference: Nasdaq (Aug. 9, 2019) “Don’t Relocate in Retirement Without Answering These 5 Questions,”

Retirement Planning: Where to Start?

While you may be thinking about retirement for a long time, with visions of tropical beaches or grand trips overseas, when the date starts to get closer, it’s time for some real analysis and planning, says limaohio.com’s recent article “What to consider when starting retirement.”

Start with a realistic assessment of your healthcare needs. At age 65, most people are eligible for Medicare. There are many different parts of Medicare, identified by letters, that are optional add-ons to expand coverage to serve more like the health insurance you have while working. Medicare is not directly charged to individuals, but the parts in which Medicare participants opt into, do require out of pocket payments.

Next, prepare a budget and cash-flow plan that reflects your current cash-flow situation and compare that to your expected cash-flow situation upon retirement. During retirement, income comes from several sources: part-time work, Social Security, distributions from retirement plans and earnings from investments or returns from investments.

As you get closer to retirement age, you can secure an estimate of your benefits from the Social Security Administration. This can be done by going to the government agency’s website and creating a “my Social Security” account, by calling the local office or sending a letter via mail. Note that the estimates are only estimates. Don’t depend on those being the final numbers.

Social Security benefits are based on the number of years you have worked and the amount of money that was contributed to Social Security over a lifetime. Many people mistakenly think that Social Security is a government managed retirement system, where there is a relationship between what gets paid and what is distributed. However, Social Security’s process of determining benefits is based on a formula.

Based on your birthdate, Social Security calculates the age at which you can receive the program’s maximum benefit. If you take benefits before that date, then the monthly amount will be smaller over your lifetime. The longer you can delay taking benefits after your Full Retirement Age (FRA), the larger the monthly payment will be.

Retirement accounts, like 401(k)s and IRAs, allow for withdrawals without penalty after age 59 ½. Unless the account is a Roth IRA, any amounts withdrawn will be subject to taxes. At age 70 ½, account owners are required to withdraw a certain amount from IRAs and 401(k)s, known as Required Minimum Distributions (RMDs).

All this information needs to be considered to plan for retirement, especially with the prospect of needing long-term care, including nursing home or in-home care. This usually involves planning to someday become eligible for Medicaid, if needed.

When you are preparing for retirement, it’s also a good time to make sure that your estate plan is in place. An estate plan that has not been reviewed in three or four years may only need a few tweaks, or it may need a complete overhaul. Speak with your estate planning attorney to make sure you’ve covered all of your retirement bases.

Reference: limaohio.com (Aug. 31, 2019) “What to consider when starting retirement.”

What’s Long Term Care About?

Many people are scared about the prospect of needing help in a long-term care setting, and they are right to be worried. For many people, a spouse or adult children will become the go-to caregivers, but not everyone will have that option, says Market Watch’s article “This is how much long-term care could cost you, and don’t expect Medicare to help.”

If that’s not worrisome enough, here are facts to consider:

  • More than a third of people will spend some time in a nursing home, where the median annual cost of a private room is well over $100,000, says Genworth’s 2018 Cost of Care Survey. Don’t expect those numbers to go down.
  • Four of ten people will opt for paid care at home, and the median annual cost of a home health aide is more than $50,000.
  • Half of people over 65 will eventually need some kind of long-term care costs, and about 15% of those will incur more than $250,000 in costs, according to a joint study conducted by Vanguard Research and Mercer Health and Benefits.

Medicare and even private health insurance don’t cover what are considered “custodial” expenses. That’s going to quickly wipe out the median retirement savings of most people: $126,000. With savings completely exhausted, people will find themselves qualifying for Medicaid, a government health program for the indigent that pays for about half of all nursing home and custodial care.

Those who live alone, have a chronic condition or are in poor health have a greater chance of needing long-term care. Women in particular are at risk, as they tend to outlive their husbands and may not have anyone available to provide them with unpaid care. If a husband’s illness wipes out the couple’s savings, the surviving spouse is at risk of spending their last years living on nothing but a Social Security benefit.

The best hedge against long-term care costs is to purchase a long-term care insurance policy, if you are eligible to purchase one. Wait too long, and you may not be able. One woman persuaded her parents to purchase a long-term insurance policy when her father was 68 and her mother was 54. Five years into the policy, her father was diagnosed with Parkinson’s disease. The policy covered almost the entire cost of his 24-hour care in the final months of his life. Her mother lived to 94, so the investment in the policy was well worth it.

Everyone approaching retirement needs a plan for long-term care costs. That may be purchasing long-term care insurance, speaking with a qualified elder law attorney, or purchasing a hybrid life insurance product with long-term care benefits. If there is no insurance and one member of the couple is still alive, getting a reverse mortgage may be an option.

Reference: Market Watch (July 19, 2019) “This is how much long-term care could cost you, and don’t expect Medicare to help.”

Be Aware of These Myths about Social Security

Despite everything written about filing for benefits as late as possible, more than half of seniors apply for Social Security before they reach full retirement age. It is now 66 and will rise to 67 for people born in 1960 and later. More than a third of all Americans apply as soon as they possibly can—at age 62. Only one in twenty-five applicants puts off filing to age 70, when monthly benefits max out, says the Washington Post in the article advising readers “Don’t believe these Social Security myths.”

Some people have no choice and must take their benefits early, because they’ve lost their job and have no savings. Others have better options, but they aren’t aware of them. That’s because of the many myths about Social Security. A survey found that while 77% of Americans thought they were pretty smart about Social Security, 95% couldn’t answer eight basic questions about the program.

Let’s look at these myths.

It doesn’t matter when I take Social Security. Benefits increase by about 7% every year from age 62  to your full retirement age, and then by 8% each year between full retirement age and 70. This is a planned adjustment to ensure that people who opt for a larger check for a shorter period don’t receive more than those who file earlier and receive smaller checks. It’s better to delay, both for the larger check and the benefits that the surviving spouse receives. People who live longer can run out of savings, so having a larger check in your 90s could make a huge difference.

If I don’t expect to live a long time, I should claim benefits early. Most of us underestimate our life span. A 65-year old man today can expect to live to 84, and a 65-year old woman can expect to live to 86.5. Life expectancies are even longer for those in their mid-50s. However, here’s the thing: even if one spouse doesn’t live as long, by taking Social Security earlier, their spouse will have a smaller benefit. Married couples lose one of their checks when the first spouse dies, causing a big drop in income. The survivor receives the larger of the two checks the couple was receiving. Therefore, the higher earner in a couple, whose check will be larger, should delay taking benefits, if at all possible, to benefit the surviving spouse.

I can claim benefits early and invest the money to come out ahead. No investment today offers a guaranteed return as high, as what can be obtained from delaying benefits. You’d have to take a lot of risk to get close to the 7% or 8% guaranteed by Social Security.

As soon as I stop working, I have to file for Social Security benefits. Not true. You don’t have to file for Social Security benefits until you want to. Even delaying four years, from 62 to 66, can translate into a sustainable 33% increase in your standard of living.

I better apply before Social Security runs out of money and closes down. This myth becomes more widespread every year. If Congress doesn’t act, which is unlikely, by 2035, the system will still be able to make payments, although they may be curtailed by 20%. Eighty percent of your Social Security check is not zero. It’s also more than likely that Congress will address Social Security fixes.

Reference: Washington Post (June 10, 2019) “Don’t believe these Social Security myths”

Social Security Is Just One Slice of Retirement, Not the Whole Pie

Social Security was never designed as a public retirement plan. It doesn’t provide total income replacement for retirement. Those who expect it to do more than fill in the gaps, are often surprised by this, says Fox Business in the news segment “3 Social Security Realities You Need to Face.” Here are three solid facts that everyone needs to know about what Social Security can and cannot do for retirement income.

Social Security will not cover your cost of living in retirement. Many people actually neglect saving for retirement, thinking they can simply rely on Social Security for expenses when they retire. Social Security replaces less than half of the average earner’s pre-retirement income. Most seniors need about 80% of their pre-retirement income to enjoy a comfortable lifestyle.

Don’t believe it? The average Social Security check is $1,461 a month. That’s $17,532 a year. Could you live on that? Even by cutting back on all discretionary spending, that’s not likely to be anywhere near enough for most middle-class Americans. Even a small amount of money set aside during working years will add up over time. What is the best time to start saving, no matter how old you are? Now.

A Social Security reduction is entirely possible. If Social Security doesn’t have enough payroll taxes to draw from, it’s possible that everyone on Social Security will face across-the-board reduction in benefits in the coming years. There are trust funds available to bridge the gap, but those funds are expected to run dry in 2035. Unless and until Congress acts, there might be as much as a 20% reduction in benefits for everyone.

Therefore, if Social Security replaces about 40% of your pre-retirement income and there’s a 20% reduction, you’ll need even more in your nest egg to pay for your retirement.

Claiming benefits earlier than expected happens often. Social Security benefits are based on the 35 highest earning years, but the amount is calculated based on when benefits are first taken. File for benefits at full retirement age (FRA), and you’ll get the full monthly benefit based on your earnings history. If you file for benefits earlier, benefits are reduced for every month they are claimed before FRA.

Some people are impatient to get their benefits and file early, because they want to. However, many end up filing earlier because they have no choice, knowing that they are getting less every month.

Seniors often stop working in their early 60s, and not always by choice. They may have health issues, be laid off or work in a field that is no longer viable. A new job or a part time job may not pay as much as their previous job.

There’s nothing wrong with factoring in Social Security benefits as part of your retirement cash flow. However, it shouldn’t be the only source of income. Setting aside $200 a month over a 30-year period will give you a $227,000 nest egg, if investments generate a 7% annual return. The ideal is to have a long savings period and to save consistently.

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Reference: Fox Business (June 12, 2019) “3 Social Security Realities You Need to Face.”

Retirement-Age Workers Crack the 20% Mark

At some point last century, single income families vanished.  It now seems the idea of Americans being able to retire after age 65 may be headed in the same direction. For the first time in 57 years, the participation rate in the work world of people of retirement age has gone to more than 20%, says Crain’s New York Business in the article “America’s elderly are twice as likely to work now than in 1985.”

As of February 2019, the ranks of people who are 65 and older who are retirement age and either employed or seeking employment has doubled from a low of 10% in 1985. The biggest group of older workers? Those who have a college degree. The share of employees age 65 and older with at least an undergraduate degree is now at 53%, up from 25% in 1985.

The dramatic increase has pushed the demographics inflation-adjusted income to an average of $78,000, which is 63% higher than what older workers earned in 1985. By comparison, American workers below age 65 saw their average income increase only by 38% over the same period.

A study by United Income, which drew on data from the Census Bureau and the Bureau of Labor Statistics, shows a mismatch between older workers who need the money the most and those who are college educated and still working.

The wealthier, college-educated workers who are in better health are working, but the less-educated workers are more in need of the income.

The Bureau of Labor Statistics expects the aging baby boomers to continue to represent the strongest growth in the labor force participation through 2024. At that point, they’ll be between 60–78. Many will likely continue to work, even after starting to receive Social Security benefits.

The outlook for retirement for all Americans is not great. Most people will need at least 80% of their pre-retirement income to maintain their lifestyles, when they stop working. Social Security only covers about 40-50%. The typical worker on the bottom half of the income distribution has no retirement savings and is completely dependent upon Social Security.

People in the middle range have a median of $60,000 saved, so they are not really prepared for retirement either.

The top 10% of earners have a median amount of $200,000 saved. While this number does not include real estate or other tangible assets (and it does not include any potential inheritances), they aren’t fully ready either.

With most experts recommending people have at least $1-2 million saved to retire comfortably, it’s no wonder that most Americans will be working well into their so-called “golden years.”

Reference: Crain’s New York Business (April 22, 2019) “America’s elderly are twice as likely to work now than in 1985”

Worried about a Spouse Needing Nursing Home Care?

The six-figure cost of nursing home care is worrisome for those who are married, when a spouse has to go to a nursing home. In the example above, Tom has had some major health issues in the past year and Louise is no longer able to care for him at home.

In this case, the couple live in Pennsylvania, where nursing home care statewide is $126,420 a year ($342.58 per day). The state has a Medical Assistance program that is a joint state-federal program that will pay for nursing facility care, if a person meets both the medical and financial criteria.

Tom has met one of the major Medical Assistance threshold requirements, because he is “nursing home facility clinically eligible,” which means that a doctor has certified that due to illness, injury or disability, Tom requires the level of care and services that can only be provided in a nursing home.

What will happen to their assets?

In 1988, Congress passed the Medicare Catastrophic Coverage Act, which created a process of allocating income and resources between a spouse who needs to live in an institutional setting and the spouse who can continue to remain in a community setting.

Tom and Louise’s resources are divided into two buckets: one that is exempt and the second that is non-exempt.

The family home, care, and cost of a pre-paid funeral, if that has been done, are exempt or non-countable assets.

Everything else, whether they own it together or individually, is considered non-exempt. In Pennsylvania, Louise’s IRA is the exception. However, that is not the same in every state.

Louise is entitled to keep one half of what they own, with a maximum of $126,420, as of January 1, 2019. This is her “community spouse resource allowance.”

Anything else they own, is used to pay for Tom’s nursing facility care or purchase a very select group of “exempt” assets, like a replacement car or the cost of a prepaid burial.

They would have needed to give away their resources, at least five years preceding an application for Medical Assistance. If they have given money away in an attempt to preserve some of their assets, that would have changed the timeline for Tom’s being eligible for care.

Louise needs income to live on, so that she is not impoverished. She is entitled to a monthly minimum maintenance needs allowance of $2,058 and a maximum needs allowance of $3,150.50. These numbers are federally adjusted and based on inflation.

The numbers that must be examined for Louise’s income are her Social Security benefits, Tom’s Social Security benefits, any pension either of the two may have and any other income sources. She can keep her income, as long as she does not go over a certain level.

Sounds scary? It is. This is why it is so important to do advance planning and have an ongoing working relationship with an attorney with experience in estate planning and elder law. There are changes over time to address the changing circumstances that life and aging presents.

Reference: Pittsburgh Post-Gazette (April 29, 2019) “Married and concerned about one of you going to a nursing home?”

 

How Big or Small Will Your Retirement Paycheck Be?

You’ve spent years saving for retirement, and maybe you’ve gotten that down to a science. That’s called the “accumulation” side of retirement. However, what happens when you actually, finally, retire? That’s known as the “deaccumulation” phase, when you start taking withdrawals from the accounts which you so carefully managed all these years. However, says CNBC, here’s what comes next: “You probably don’t know how much your retirement paycheck will be. New technology is working to change that.”

Unless you are a trained professional, like a financial advisor or a CPA, chances are good that you have no idea how to transform a lifetime of savings into a steady, tax-efficient income stream. A study for the Alliance for Lifetime Income asked pre-retirees, if they have done the math to figure out how much money they’ll need for retirement. About 66% say they haven’t done the calculations. Just 38% of households can count on having a pension or an annuity to provide a steady stream of cash.

In response to this common question, one company has launched a feature that was created to help you create a steady paycheck in retirement. The company, Kindur, was founded by a woman whose career included nearly two-decades in asset management at J.P. Morgan. She was inspired by her own experience helping her father decide how to draw down his assets. After devoting hours to Social Security books, she realized that technology could solve this problem. Throughout her career, she saw how financial institutions used technology to present and manage complex information. The goal of her company was to take this complexity out of retirement income planning.

Kindur, however, is not alone in this space. The founder of Social Security Solutions and Income Strategy found himself wishing there was a way to coordinate retirement income some ten years ago. He teamed up with the investment strategy chair at Baylor University, for what he thought would be a short project. In the end, it took years to sort through all the rules of Social Security. However, a platform was created to help people figure out claiming strategies. His second company analyzes   the accounts from which they should withdraw and when.

Another company, Income Strategy, provides users with help to figure out how to withdraw money and provides the option of how that transaction will be executed.

The future will likely hold more of these kinds of platforms, as the next generation becomes more comfortable with allowing AI (Artificial Intelligence) to manage their money and their withdrawals. For now, most people are still more comfortable with a person providing financial guidance, although that guidance is often helped by AI. Together, AI and an experienced professional make the best advisors.

As you plan for the future, remember to include the estate planning component. There have are many online legal drafting platforms, but so far, they have fallen short.

Reference: CNBC (April 7, 2019) “You probably don’t know how much your retirement paycheck will be. New technology is working to change that.”