Retirees fear running out of money more than death itself, suggests a recent study performed by Allianz Life. Today’s low-interest-rate environment combined with excessive risks inherent within our financial system leaves retirees feeling stressed out and overwhelmed with the probability that they will outlive their nest egg.
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For the majority of Boomers and existing retirees, protecting all that’s been accumulated is a priority, along with earning a reasonable rate of return and having enough income to plan for retirement’s uncertainties and needs. With interest rates near historic lows and stocks and bonds near historic highs, how do risk-averse Boomers accomplish their income needs for not only today, but 20 years from now?
1) Work with a Retirement Specialist: In the medical industry, doctors have areas of specialty. Pediatricians work with children. Doctors of Internal Medicine work with adults and have a special focus and training on disease prevention and treatment. If you were 60, you wouldn’t visit the pediatrician if you have high blood pressure. This logical concept often goes overlooked when dealing with retirement and selecting the appropriate financial advisor. The repercussions of entrusting the wrong financial specialist can threaten your financial health; much like choosing the wrong medical specialist can be detrimental to your physical health.
All financial advisors are not created equal. Each has different areas of expertise, levels of education, client experiences, and specialized training. It is critical to work with the appropriate financial advisor for each phase of your financial life cycle. For example, once your paychecks stop and you become dependent upon your savings and Social Security, your investment mentality must shift to protecting the assets that you’ve accumulated during your working years. It is critical to work with a financial advisor that shares this same mentality. This is the time to thank your accumulation financial advisor for helping get to retirement. Next, seek the guidance of a retirement specialist (distribution phase advisor) to help you get through retirement.
It is their duty to help you determine which accounts to distribute from, the effective taxation of those withdrawals, and how to guarantee your retirement income doubles every 20 years. In addition to inflation-protected income planning, retirees must plan for out-of-pocket medical costs and skyrocketing long-term care costs due to increased longevity. Simply allocating amongst stocks and bonds and holding your breath for 8% annually while withdrawing 4% per year with modest inflation adjustments is not retirement planning; it’s retirement hoping.
2) Understand Your Choices Outside of the Stock Market: The financial services sector of the life insurance industry has developed a strategy to pool longevity and withdrawal rate risk through actuarial science. The industry offers guaranteed financial contracts designed specifically for Boomers and retirees, which provide 100% principal protection that come with additional benefits such as guaranteed growth, long-term care protection, lifetime income, and inflation protection, all without medical underwriting or market risk to your principal.
Not all of these contracts are created equal. Some of the guaranteed growth rates for income planning purposes are currently in the 5-7% range. But the growth rate is just one of the determining factors in finding the appropriate contract. The guaranteed lifetime withdrawal rate must also be taken into consideration.
For example, a contract that is guaranteed to grow at 7%, and then provide an annual lifetime withdrawal rate of 5%, may not produce as much income as one that grows at a lesser rate but allows you to withdraw much more per year. Working with a retirement specialist will enable you to navigate the arena to find the appropriate contract for your growth and income needs. The average fee for these contracts is between 0.40%-0.95% annually and the growth rate is net of fees.
One of the more recent developments in the industry is what’s known as a Home Healthcare Doubler. If having long-term care insurance is important to you, but you don’t want to pay the annual premiums, you should consider looking for one of these features within your contract. If your guaranteed growth and income contract provides you with a $50,000 annual income for life, and down the road you need long-term care services, your income will double to $100,000.
Typically, the income will double for a maximum of 5 years and then your income will revert back to the original $50,000 and be guaranteed for the rest of your life.
The evolution of financial strategies offered through the life insurance industry provides safe alternatives for risk-averse Boomers seeking growth and income in our current low interest rate and high-risk era.
3) Maximize Your Social Security: Married couples who both qualify for Social Security have tens of thousands of different possible combinations of how and when to elect Social Security. Making the wrong choice can cost you upwards of $200,000 in retirement income. Some quick rules of thumb to consider without a professional analysis are as follows:
a) Deferring Social Security until Full Retirement Age (66-67, depending on your birthday) will pay you more lifetime income than taking it at 62 if you live past age 75.
b) Deferring Social Security until age 70 will pay you more lifetime income than taking it at Full Retirement Age if you live past age 79.
Any financial advisor who wants to work with your retirement savings should provide a detailed Social Security analysis, which integrates your optimum Social Security election strategy into your overall retirement income plan. With interest rates so low, maximizing the amount received from Social Security is an excellent, low-risk strategy to increase retirement income over the course of your life.
4) Understanding the new, innovative long-term care strategies: In order to find the most appropriate and cost effective strategy for long-term care protection for your family, you must first understand a few of the ongoing dynamics currently in play. First, you must realize the current cost of care. In 2008, the median annual rate for a private nursing home room was $67,525, compared with the 2013 median annual rate of $83,950. This is about a 4.5% annual increase in the cost of care.
Secondly, we have 10,000 Boomers retiring each day in this country who all have a longer life expectancy than their parents, who may currently be receiving this type of care.
Thirdly, the number of skilled care practitioners, therapists, and doctors will decrease as a major portion of the current workforce enters retirement. This increase in future demand combined with shrinkage of supply is expected to add significantly to the cost curve.
A healthy 65-year-old couple today has a 50% chance of one spouse living until age 92 or beyond. This does not account for any future developments in medical science, drugs, technology etc. If the inflation rate of LTC cost were to stay the same over the next 20 years, which would be a miracle, that same private room in a nursing facility that costs a median annual rate of $83,950 today will soar to $202,463 per year in 2033.
The insurance industry has been hard at work to solve this dilemma. Here are a few of the latest solutions available that you will only be able to learn more about through an advisor that specializes in retirement planning:
a) Asset Based Long-term Care: This option allows you to make a single deposit, with guarantees of no further cost increases. At any time you can get your deposit back without penalty. No cost, no fee, no strings attached. If you need long-term care your deposit will often double or triple (depending on your age and gender) tax free to pay for those needed services. If you never need the care, your benefit amount will pass as a tax-free death benefit to your heirs like a life insurance policy.
b) Life Insurance Accelerated Death Benefits: Today’s life insurance policies are equipped with special features that allow you to access your death benefit, before you die, to pay for long-term care costs. If you bought your policy more than a year or two ago, you almost definitely don’t have this feature in your policy. How many people do you think in the country today have life insurance, but don’t own long-term care insurance? Millions.
c) Home Health Care Doublers: As mentioned above in item number three, many of the guaranteed lifetime income contracts available come with these features which guarantee your income will double for a maximum of 5 years if you ever need long-term care.
d) Indemnity vs. Reimbursement: Ideally, you want a strategy that pays an indemnity benefit as opposed to reimbursement. With indemnity, the insurance company simply writes you a check for the promised benefit once you qualify. The qualification is usually a letter from your doctor stating you are unable to perform 2 out of 6 activities of daily living. You can use the money any way you choose. You can even compensate a family member or someone from your church for their time spent helping you with daily activities.
Reimbursement usually requires a state approved, licensed practitioner be utilized and only pays you back after you’ve first paid the expense out of pocket. You must keep receipts and risk having expense reimbursements denied if you get caught up in the fine print.
Shifting some money today out of risky investments into a sound long-term care strategy can go a long ways towards preserving your estate and income for a surviving spouse or other heirs.
Ensuring your family has enough income inside a comprehensive retirement plan can be accomplished in a low interest rate and high-risk era, but it starts with finding the appropriate advisor. As you can see, there are many safe, proven financial strategies available which are designed for people in or approaching retirement. And as economic growth tepidly moves along, political divides grow more intense, and stock market volatility increases, you can now rest a little more easily knowing that stocks, bonds and mutual funds are not the only options available to risk-averse Boomers.