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May 30, 2009

Retired & Broke: Don't Use Retirement Funds To Pay Debts

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.

Let's start with what not to do. First on the "no-no" list should be invading 401(k), IRA or other retirement funds to pay credit card or most other personal debt. The reason is simple: Money in these funds is exempt by law from being grabbed by creditors to pay debt-related court judgments for the very good reason that lawmakers have gone out of their way to reserve these funds for your retirement needs. Or, put another way, if you invade your retirement funds to pay personal debt, you voluntarily hand over funds that in most instances can't otherwise be touched.

And money in retirement funds isn't the only property that's exempt from being grabbed by creditors. In most states, under "homestead laws", considerable equity in your house is also exempt from being grabbed by credit card companies or others to whom you owe personal unsecured debts. For example, in California, the homestead exemption is $150,000 for people over 65 (or 55 for many low-income residents).

In addition, many states have a long list of other exempt property that is yours to keep no matter what your debt level.

So again, the larger point is that if you are a retiree facing a true debt crisis, it's key to understand debtor protection laws before you get stampeded into making poor decisions -- one of the poorest being to take fully protected retirement funds to pay off credit card debt. For the information necessary to come up with a debt workout plan that will fit you like a glove and not a handcuff, see Nolo's Solve Your Money Troubles, by Robin Leonard & Margaret Reiter, a book that's likely to save you at least 100 times what you pay for it. Now there's the best deal you've been offered in many a day.
May 25, 2009

What Does A Good Long-Term Care Policy Look Like?

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.
May 21, 2009

Is Long-Term Care Insurance A Good Value?

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?

For the poor and affluent the answer is clearly no, albeit for different reasons. But for middle- income people, depending on several factors -- most importantly whether they are single or coupled -- the answer may be yes.

First, let's consider people with low to lower-middle incomes and savings levels. Given that the premium for a care policy with even mid-level benefits can cost over $1,000 annually at age 55, and upwards of $2,000 at 65, people in this group simply can't afford it.

In my view, it's better to spend the money affording a decent life now, relying on Medicaid to cover care costs later should they turn out to be necessary.

The affluent should usually say no to long-term care insurance for a different reason. Given that the majority of seniors will never enter a nursing home and of those who do, only 25% will stay more than a year, simply paying the cost out of pocket is likely to end up being less than 30 years of premiums which, of course,could otherwise be invested.

And even if an affluent person spends two or three years in a nursing facility, it won't be a financial disaster, since Social Security and other income will cover part of the cost, and receipts from the sale of the person's house or condo will easily cover the rest.

But long-term care insurance can make more sense for middle-income Americans with moderate savings, especially single people. The fact of being single is important since it raises the odds of needing long-term care. That's because, with a couple, when the first spouse begins to need help, the other often provides it at home.

And single or married, middle-income Americans with savings in the $200,000 to $400,000 range may want to purchase long-term care insurance for economic reasons. On the one hand, provided you're willing to scrimp a little. And on the other, should one or both members of a couple be unlucky enough to be in the small group who needs institutionalized care for many years, the money will be there to provide it.

In my next post, I'll discuss what kind of policy, assuming you are interested in looking into the purchase of long-term care insurance.
April 24, 2009

Budget-Busting Long-Term Care: Is It Inevitable?

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".

The article, like many of its type, then goes on to present a mix of horror stories about at-risk seniors unable to afford the care they'll inevitably need, along with scary statistics about how expensive it is to purchase long-term care insurance.

Too bad there isn't a word about the many low-cost steps people can take to greatly decrease the likelihood that they'll need long-term care in the first place. For example, many of us fear that diseases of the brain like Alzheimer's will sentence us to spend our last years in a nursing home. Actually, it is far more likely that we will be institutionalized because of broken bones -- most commonly, hip fractures. Most of these injuries are the result of bone loss or osteoporosis.

Twenty-five million Americans, 80% of them women, suffer from osteoporosis. This horribly debilitating disease results in well over a million annual skeletal fractures of which as many as a third are hip fractures. The good news is that osteoporosis -- and the height loss, pain and high risk of bone fracture it causes -- can largely be prevented. The keys are to get enough vitamin D and calcium daily and to engage in regular weight-bearing exercise.

Type 2 diabetes is a second huge and highly preventable condition that in all its unhappy manifestations, such as increased risk of heart attack and stroke, results in millions of people needing long-term care. And as you probably know, sedentary, obese people are at much higher risk of developing Type 2 diabetes in mid- or later-life than are adults who maintain a healthy weight, exercise daily, and eat sensibly.

Finally, as anyone who has ever spent time in a care facility knows, depression is yet another reason why older people can no longer function independently. And while depression can affect anyone, health professionals have known for years that people who exercise regularly and vigorously are less likely to be depressed than are those who are sedentary. At least part of the explanation seems to be that exercise, like Prozac and other anti-depressant drugs, releases the brain chemical serotonin, a natural mood elevator.

So think about it: If frequent exercise and a good diet can greatly reduce the need for long-term care by at least 50%, doesn't it make far more sense to head for the gym than it does to turn on the T.V. and listen to yet another news item about how you're likely to spend years in a poverty-level nursing home?

Still, you might be thinking, "What about buying long-term care insurance?" I'll discuss that one in my next post.
March 23, 2009

Post-Retirement Income (Part 3): How Much Income Will You Need to Replace?

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.

But there is another huge and crucial factor that means you'll spend far less than you probably imagine. In a word, it's AGE. 85-year-olds almost always spend far less than 65-year-olds, something that all by itself vitiates the retirement calculators that predict you'll need to replace 80% of your income until the day you die.

Think of it this way: How much clothing, travel, entertainment, consumer electronics, furniture, vehicles and other gee gaws of modern life does your average 85-year-old consume? Typically, a fairly modest amount -- and almost always far less than the same person consumed at 65. What about medical care? Even here, the combination of Medicare and decent Medigap insurance means that costs should be fairly steady over the years.

Indeed, I know a number of reasonably frugal (but not self-denying) 80-year-olds who spend very little beyond taxes and maintenance on a house or condo, utility bills, groceries, and fuel for a decent car that they, don't drive that much anyway. In addition, some of these people spend significant money helping younger family members, but this, of course, is a discretionary expense. 

But what about the possibility of needing big bucks for expensive long-term care? I'll deal with this in detail in a future blog (or you can take a look at the entensive treatment in my book Get a Life: You Don't Need a Million to Retire Well (Nolo)), but, statistically at least, this is far less of a potential financial tsunami than you might imagine. Among the several big reasons for this is that, at least for people who are partnered, the first mate to die rarely spends much time in a care facility, preferring to remain at home as long as possible. And assuming the second partner (or a single person) does need extended care, any house or condo they own is usually sold, providing a source of needed funds.
March 20, 2009

Post-Retirement Income (Part 2): Finding Your Figure

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?

Start with what you know rather than guesstimates about the future, which, like most fantasies, are unlikely to have much of a relationship to reality anyway. Ask yourself: How is my financial health today? If you're currently living within your income and possibly saving a little to boot, you have a good start for estimating how much income you'll need to maintain a similar lifestyle after retirement.

Now it's time to subtract the current expenses that will diminish or disappear later. In Part 1 of this exercise, I pointed out that for many people who no longer need to pay a mortgage or bear the costs of raising children, they'll enjoy the largest post-retirement savings, together often netting at least 40% -- and often more.

And, unless you're a shopaholic for whom more free time necessarily means more spending, there are a whole host of other possible savings. The most obvious are related to the job you no longer need to perform -- for many people, the top of the list is the cost of commuting, followed by work-related clothing and food. For example, a woman who drives 20 miles to work, maintains a wardrobe of business-appropriate clothes, and buys lunch and coffee now and then can easily save five thousand dollars per year simply by staying home!

Many other potential post-retirement savings fit into what I call the "time is money" category. The equation is simple: The more free time you have, the easier it is to maintain an equivalent lifestyle at a lower cost. For example, instead of patronizing the pricey but convenient corner store, you'll have plenty of time for a once-weekly trip to Costco. And when it comes to taking a vacation, you'll now be able to travel at off-peak times, taking advantage of significant savings in transportation and lodging.

But what about the so-called retirement experts who, to quote the Associated Press reporter Dave Carpenter in his recent article "Retirement: Test Your Financial Planning IQ", say that "people tend to spend more money when they have more time." Perhaps, if we remember that these are the same retirement experts, for the most part, who recommended buying mutual funds when the DOW was over 13,000, we can put their "you can never save enough" advice into perspective.

Finally, don't forget the savings you'll achieve by taking advantage of senior discounts. For example, an excellent public golf course near me lets seniors play as much as they want on weekdays for $80 per month. And the local rapid transit systems discount senior fares by up to 70%. And then, of course, there are America's national parks which offer free admission to those over 60.

But what about medical costs and other things that may be more costly after you retire? Medicare will cover most of these costs, but especially if you have or develop a chronic illness, you'll be out of pocket some cash, either by paying for a medi-gap insurance policy or directly for uncovered fees and drugs. If you are reasonably healthy and do the kinds of things necessary to stay that way, you might sensibly guess that adding back a few thousand dollars per year makes sense. And, for anyone who feels the need to be more precise, I recommend Social Security, Medicare & Government Pensions, by Joseph Matthews (Nolo), which will provide the tools you need to make a far more accurate estimate.

In Part 3 of this series, I'll discuss the final big piece of your retirement spending conundrum: how your spending patterns will change as you age.
March 9, 2009

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

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?" »

February 17, 2009

Your House As a Piggy Bank

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?

Okay, even assuming you agree that striving for more money shouldn't be anyone's first life priority, I'm happy to concede that financial comfort is nevertheless something that most of us would love to achieve. Or as Sophie Tucker put it, "I've been rich and I've been poor: Rich is better."

So the question becomes: If you suddenly don't have enough money to comfortably support yourself, how do you get more?

For those of us who own houses, home is a good place to look. Though you may not choose to treat your house as a piggy bank in prosperous times, there are, nevertheless, a number of ways to shake cash out of this major asset. Here are the big ones:

  • 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.
October 8, 2008

When Your Retirement Nest Egg Breaks

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.

So what should you do? Well, I don't claim to be a financial wizard, but aside from eliminating my worst-performing fund and putting the proceeds in one that has done far better, I'm sitting tight with a majority of money in stocks. That's because history tells me that no matter how exaggerated the panic, stocks will eventually go back, something I won't benefit from if I move all my money to cash or bonds. Especially for younger workers who have plenty of time before they need their money, this seems like the most sensible course.

I think it's also good to consider the idea that "you are not your retirement account". And just because you may have less money later in life does not mean you will be miserable. For example, many studies show that more people think they retired too early than believe they waited too long, meaning that a decision to keep your job a few years more or transition to a part-time one may actually make you happier.

And how about treating the financial meltdown, as miserable as it surely seems, as a wake-up call to do more of the things that really make retirement fulfilling? That is, to get more exercise, adopt healthy eating habits, and spend more time with friends, family and doing things that truly interest you. Or put another way, this is a great time to put that old adage into practice: Money can't buy happiness.
August 31, 2008

For Women Only: Plan for the Long Haul

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.