Retire Happy

The recession has hit people of every age and income level, including retirees and those contemplating retirement. A combination of falling real estate and stock prices combined with the loss of part-time employment gigs has meant that many retirees who, eighteen months ago, felt financially secure and now find that they can't pay their credit card debts.

In the last few years, many insurance companies have improved their long-term care policies. But, as with any consumer product, some are better than others. Here's a list of things to keep in mind when you're looking into long-term care insurance:

• Consider policies from good-sized, reputable companies rated AAA by Standard & Poor's or Moody's, or A+ by Best Insurance Reports. Many small companies that issue long-term care policies are poorly funded and at risk of cashing in their chips before you do, so make sure you've picked a solid insurer.
• Be sure that the daily benefit the policy pays enough to provide decent care when combined with your Social Security and other income. For many people, this will cost at least $120-$150 per day. Also, look for a policy where the benefit amount increases with inflation. Given fast-rising costs in this area, many experts consider a 5% annual inflation escalator to be on the low side.
• Realize that many policies limit the length of coverage to about three years, unless you choose to pay outsized premiums for unlimited coverage. Be sure you know what you're buying. Unfortunately, lots of people buy policies that cover a relatively few number of years -- precisely the period they would do better to self-insure.
• Try to make sure you know how much premiums will cost in future years before you buy your plan. Or, put another way, decide on one of the relatively few policies that will absolutely guarantee the amount of your yearly premium. Beware of policies that will only say rates will not change with age or health -- many companies simply raise rates for all policy holders, claiming that the increase is to cover higher than expected costs.
• Understand that policies have widely varying non-coverage periods. For example, a more expensive policy may provide that you only need be in a nursing home for 20 days before coverage kicks in; a less expensive one may require 100 days or more before the policy pays benefits. For most people, the 100-day or longer period may be worth considering if the cost is sufficiently lower.
• Carefully read fine print regarding home health care. For people with serious medical conditions requiring round-the-clock care, home-based care can be as expensive as a nursing home. Some policies that are advertised as providing home health care simply limit the amount of care provided to an unrealistically low level, and even how much services can cost, effectively guaranteeing that an inadequate level of care will be provided by people with limited skills.
• Just being elderly and infirm isn't enough to qualify for long-term insurance benefits, which helps explain why the majority of people living in elder communities and assisted living facilities aren't eligible for any benefits. In short, make sure you understand what medical condition will trigger the payment of benefits. Most policies won't pay unless you meet one of two main criteria: Either you're unable to perform two (or -- with the poorer policies -- three) activities of daily living, such as eating, bathing, using the toilet, moving about, and maintaining continence; or you have serious mental or cognitive impairment, such as that caused by Alzheimer's, dementia, or other disease.
• Check the periodic ratings published by Consumer Reports magazine, which take into consideration many important issues. Back issues of the magazine, along with a comprehensive subject matter index, are available at many public libraries.

Even though it's possible to significantly reduce the chances you'll eventually need long-term institutionalized care, as discussed in this previous entry, you can't eliminate the possibility. And given the high cost of an extended stay in a nursing facility, doesn't it follow that buying insurance makes sense?

The high cost of long-term health care will drag down the quality of life for nearly two-thirds of today's retirees, predicts the Center for Retirement Research at Babson College, as reported by David Pitt in the recent AP story "Retirees ill prepared for the long-term costs".

In the previous two entries I have explored a number of reasons why the conventional advice that you'll need about 80% of your pre-retirement income to maintain your lifestyle post-retirement is just plain wrong, and that 50% to 60% is usually closer to reality.

Okay, as discussed in Part 1 of this series, if the 80% rule is nonsense, how can you arrive at a reliable dollar figure for the amount of current income you'll need to replace after retirement?

Articles in the daily press, commentaries by financial planners, and "retirement kits" published by mutual fund and insurance companies all tell us that to live comfortably after retirement we will need a big annual income for at least 30 years. For example, a recent Associated Press article by Dave Carpenter quotes an AON consulting report stating that most employees will need an average of 77 to 94 percent of their pre-retirement income to maintain their lifestyle. No surprise there, as most insurance and investment outfits who want to sell us their products use 80% as the amount of income that must be replaced.

Since many of us have no hope of ever saving the megabucks needed to produce this yearly cornucopia, the main effect of these messages is to make us anxious. Fortunately, these "you'll need at least $1,000,000 to retire happily" articles more accurately reflect the biases of the investment industry than they do the spending patterns of real retirees. As a result, they greatly exaggerate the amount you'll really need to spend post-retirement.

Start figuring out how much you'll really need to spend after retirement by understanding that retirement planning is best done with a dash of black humor. That's because, no matter what the investment industry claims, it's impossible to predict with anything approaching accuracy how much you or anyone else really needs to save. For example, unless you are currently in the last stages of a terminal illness or plan to poison yourself next Friday, you can't know how long you will live or how healthy your mind and body will be in your retirement years, both essential facts to accurately determine how much money you'll need.

Continue reading "Post-Retirement Income (Part 1): What Percentage of Pre-Retirement Income Will You Need?" »

In my last entry, I discussed money and perspective. If we can agree that money isn't as important to a good life as having compelling interests, good health, and a rich family and friendship network, why not focus on improving the things that really count? And in a year where the world economy is in free-fall and obsessing about money is guaranteed to make us miserable, shouldn't this be doubly true?

• Sell and move to a less expensive place. In a down real estate market, many people believe that this is a poor time to cash in equity. But that's not necessarily true, since any place you buy will have similarly dropped in value. And especially if you live in an area where real estate values have held up reasonably well and you plan to relocate to a place where the bottom has fallen out of the market, you have a huge opportunity to both change houses and top off your bank account.
• Rent a room or two. I can already feel many readers saying, "No, no, a thousand times no!" Hold the hyperbole and think of it like this: The problem isn't having another person around (especially one who will pay), but the possibility that the person might be obnoxious, slovenly -- or even dangerous. But instead of imagining a parade of horrible renters, why not do the work to find someone you'll like? Fortunately, by taking advantage of the great filing cabinet that is the Internet, you can do a majority of the necessary research from your easy chair, only bestirring yourself to interview likely candidates. Or, put another way, if you would prefer a studious, religious female who goes to bed at 10:00 PM and hates hamsters, she's no more than a few clicks away. Plus, in many urban centers, there are even services available to match seniors with appropriate tenants.
  
• Share with a relative. When times are tough, parents may no longer be able to afford pricey assisted living, siblings may need a place to roost after losing a job, and kids may benefit from a temporary trip back to the homestead. Fine, welcome them -- but, especially if you need money to help finance you current life or retirement plans, be sure to charge them. And don't feel guilty! As long as the rent is slightly below market rate -- and everyone commits themselves to some basic rules of sensible living -- everyone wins.
• Get a reverse mortgage. If selling the family home and moving to a smaller place is unpalatable and you want to stay in your own house until the day you die, sharing it with no one, you may want to consider a "reverse mortgage". As discussed in more detail in my book Get a Life: You Don't Need a Million to Retire Well, the idea is simple: An older homeowner trades some or all of her equity in her house in exchange for a monthly payment from a bank or other lender. The payment can be in cash or in the form of a line of credit that can be drawn on as needed. After the homeowner's death (or if she voluntarily moves out), the house is sold and the lender repaid (plus interest, of course). Whatever is left over goes to the homeowner's inheritors. When first introduced two decades ago, reverse mortgages were largely a scam. But today they are more closely regulated and reliable. But as with any financial product, you'll want to do careful homework to make sure that you are purchasing a mortgage that truly fits your needs and you're paying a reasonable price. To get basic questions answered, check out the HUD and AARP websites.

As of October 7th, 2008, Americans have already lost 2 trillion dollars on IRA, Keogh, 401(k) and other retirement plans, estimates Julie Hirschfield Davis of the Associated Press. And the stock market is likely to continue to sink.

In 2006, USA TODAY highlighted some of the ways that single women preparing for retirement are -- unlike their male counterparts -- hit with a double whammy: not only do they typically have smaller retirement savings than men, they also live longer. Here are some of the ways this plays out:

• Women often quit working earlier than men. The average woman retires at age 62, the average man at 63. Married women tend to stop working once their husbands retire, even though the average woman is younger than her husband and will outlive him and have a longer retirement. But by working longer, women could contribute more to retirement savings plans and significantly boost their Social Security benefits.
• Divorced women too commonly give up shares in their husband's pension plan. Some women's number one priority in a divorce is keeping the family house -- but they often give up more valuable shares of their ex-spouse's pension or retirement savings in exchange. So before signing off on the divorce decree, obtain as much information as possible from your husband's employer about the pension plan's long-term value to make sure it's a fair trade. You have a right to this information, but many pension plans won't provide it without a letter from your lawyer, according to Women's Institute for a Secure Retirement. (You should also tell the pension plan administrator that you're in the process of getting a divorce. That will prevent the plan from paying out your share to your husband before the divorce is final.) Bottom line: In some cases, the financial benefits of the pension may outweigh the home equity. If you do choose the pension, you'll need a separate court order -- called a qualified domestic relations order -- which recognizes your right to part of your ex-husband's pension.
• Women invest timidly. Because women tend to have less money to invest, they're often more fearful of taking losses. But they live longer than men, which means they have longer retirements -- and more time to ride out the market and take full advantage of riskier investments, which typically return more over the long term. Because most women can expect at least 20 years in retirement, at least half their assets should typically be in stocks.
• Women rent instead of own. Women approaching retirement age are more likely than male counterparts to rent housing. But there's a good reason to aim toward owning your own home in retirement: it's cheaper. For women, who typically have less retirement income and live longer, that's essential. Housing eats up 33.6% of the income of seniors who rent and are in the lowerst 25% income bracket, according to the Joint Center for Housing Studies at Harvard University. But those who own their own homes use an average of only 18.3% of income to pay housing costs. The reasons are fairly simple: If you rent, your rent is likely to rise year after year, and you have no chance of recovering any of that money; if you own, mortgage will probably be a fixed amount, and, over time, you could pay it off entirely. Even if you're buying just a small condo, you'll build up equity which you may eventually tap by using loans or a reverse mortgage. The trick is finding a house or condo you can afford. To do that, you might have to move to a part of the country where housing prices are lower, or settle for a smaller living space.