Financial planning tools and services to put you on the path to the future you want
Your guide to financial planning and retirement
Connect with peers and experts
Get to know the people behind the company and the mission behind the work
Offer financial wellness to the people at the heart of your business
August 25, 2014
Three in four middle-class Americans will eventually run out of money during retirement, research shows. And when nursing home and home health care costs are factored into retirement spending, the number of people projected to run out of money is staggering.
According to the Employee Benefit Research Institute’s (EBRI) study on retirement shortfalls, by the 10th year in retirement:
Retirement Financial Planning for the Future, Living Now
“A lot of people don’t realize how much they’ll need in retirement,” says Ryan Thomas, certified financial planner at Indianapolis-based Column Capital Advisors, LLC. “You always have a conflict going on of thinking about yourself in the future versus thinking about yourself now. It’s challenging for people to consider what’s going to happen in the future when they have such current needs and obligations and concerns right now.”
But research shows that at least 70% of people over age 65 will need long-term care services and support at some point in their lifetime, according to the Genworth 2014 Cost of Care Survey.
These retirees will also face a steep increase in health care expenses over the course of their retirement. Previous reports have shown that within 20 years of retirement, Americans will need 127% of their Social Security benefits to cover their health care costs.
So with the increased dependence on long-term care services and the rising costs of health care, many retirees will find themselves running short of money.
To plan for these costs, financial planners suggest using a variety of strategies, including life insurance policies with certain benefits, health savings accounts, annuities and reverse mortgages.
1. Life insurance policies with long-term care riders
These policies essentially combine life insurance with long-term care insurance, with the primary advantage being that you will get some benefit from your premiums even if you do not eventually need long-term care.
Judy McNary, a certified financial planner based in Colorado, suggests her clients use life insurance policies with long-term care riders to plan for future health care costs.
“What I like about it is that if the client dies and never needed long-term care, the beneficiaries receive the life insurance proceeds,” she says. “If long-term care was needed, it just reduced the life insurance face value, not the client’s estate. … Unlike straight long-term care insurance, someone always gets a benefit.”
2. Health savings accounts
Health savings accounts, or HSAs, are savings accounts used specifically to pay for health care expenses. To be eligible to open an HSA, you must have a high-deductible health insurance plan.
HSAs are tax-deductible and can be a good option for those nearing retirement who want to offset future health care costs.
As long as you use the HSA for health care expenses, there’s no tax on the distribution that’s made, says Thomas, of Column Capital Advisors. The account can be invested and the amount is not taxed if it’s used for health care costs.
But people often make the mistake of immediately drawing from their HSAs, instead of letting their contributions grow, Thomas says.
“We advise our clients to not use HSAs for health care costs now, but rather let it be a tax-advantage savings vehicle to accumulate money to pay for costs during retirement,” he says.
Having an HSA can also have other benefits. Adults who used them were likely to be more cost-conscious and make more informed choices relating to health care expenses, the EBRI survey finds.
An annuity is an insurance product that pays out income. You make an investment in the annuity and then it makes payments to you, which can be a source of dependable income for your retirement.
“Annuities can be good because you’re offloading the risk of exhausting your funds before you die,” Thomas says.
Types of annuities vary, but generally they can be divided into two categories: fixed (pays a predictable income stream) and variable (payments depend on performance of underlying investments). Additionally, they can be deferred or immediate, meaning they begin paying out on a future date or payments can start right away.
4. Reverse mortgages
A reverse mortgage is a loan that converts some of your home equity into cash flow. Depending on your age and interest rates, up to 65% of the equity that you have built up over years of making mortgage payments can be made accessible to you through a reverse mortgage.
The money can be taken in a lump sum, monthly payments, as needed with a line of credit or some combination of these options.
“Reverse mortgages can be a good tool for an individual who needs to tap the equity of their home to cover their cash flow needs,” Thomas says.
To be eligible for a reverse mortgage, you must be at least 62 years old.
5. Start Today
Regardless of strategy, planning and saving for retirement is best done as early as possible. The sooner you start thinking about how to cover costs, the better suited you will be during your retirement years. But it’s not too late to get the ball rolling.
“They say the best time to plant a tree was 20 years ago, and the next best time is now. You should always try to do the best you can from this day forward,” Thomas says. “If someone’s in their 50s and just now starting to plan, they’ll likely need to work longer and live on less during their retirement, but that doesn’t mean they can’t do the best they can now to help save for retirement.”
Even if you are 70 and already retired, it is not too late to rethink and retool your finances!
If you think you would like help, you can browse retirement financial advisors or sign up to get a FREE one on one consultation with a certified planner. Or, use the NewRetirement Retirement Calculator to assess your current plan on your own.
Do it yourself retirement planning: easy, comprehensive, reliable
Take financial wellness into your own hands and do it yourself retirement planning: easy,
Share this post:
Our weekly newsletter full of inspiration, podcasts, trends and news.
© 2024 NewRetirement, Inc. All rights reserved.
Disclaimer: The content, calculators, and tools on NewRetirement.com are for informational and educational purposes
only and are not investment advice. They apply financial concepts in a general manner and include
hypotheticals based on information you provide. For retirement planning, you should consider other
assets, income, and investments such as equity in a home or savings accounts in addition to your
retirement savings in an IRA or qualified plan such as a 401(k). Among other things, NewRetirement
provides you with a way to estimate your future retirement income needs and assess the impact of
different scenarios on retirement income. NewRetirement Planner and PlannerPlus are tools that
individuals can use on their own behalf to help think through their future plans, but should not be
acted upon as a complete financial plan. We strongly recommend that you seek the advice of a financial
services professional who has a fiduciary relationship with you before making any type of investment or
significant financial decision. NewRetirement strives to keep its information and tools accurate and up
to date. The information presented is based on objective analysis, but it may not be the same that you
find on a particular financial institution, service provider or specific product's site. All content,
tools, financial products, calculations, estimates, forecasts, comparison shopping products and services
are presented without warranty.