Step 1: Ensure That You Have a Source of Lifetime Income
As retirement expert Tom Hegna has argued, in order to retire happy, you need a basic level of guaranteed, lifetime income. At a the most fundamental level, this sort of income is provided by Social Security (on which, more below).
However, Social Security should not be the sum and total of your retirement plan. For one thing, there are grave doubts about the solvency of the Social Security system. For another thing, many people find that their benefits under Social Security are insufficient – in and of themselves – to provide them with the sort of retirement that they would like to have.
If you are lucky enough to have been employed by a company that still has a defined-benefit plan, then this will be another piece of your retirement plan. These defined benefits, or pensions, are literally gold for those who have them. However, in today’s work environment, they are (unfortunately) a bit like the fabled chimera.
In most cases, therefore, it is necessary to create your own pension by purchasing one or more annuities. Simply put, an “annuity” is a financial instrument that protects a person against living too long. It is any vehicle – like pensions and Social Security – that have a pay-in period (during which a person puts money into the annuity) followed by a pay-out period (during which a person receives payouts – possibly for the rest of his or her life).
There are numerous sorts of annuities: fixed, equity-indexed, and variable. Each type has its own potential risks and benefits. But the long and short of it is that one essential piece of the happy-retirement puzzle is not having to worry about your income stream. And annuities, of one kind or other, play a huge part in delivering that sort of peace of mind.
To really explore what products and solutions might be right for your situation, you will need to consult with a licensed insurance agent in your area.
For more general information, see Tom Hegna’s print book, Paychecks and Playchecks (Boston: Acanthus, 2011), or his audio book of the same title.
Step 2: ‘Buy out’ Your Heirs… Early
There are two main worries that people have about spending all of their money during retirement. Some people worry about spending all their money because then they’ll run out of it for themselves! Pretty straightforward. This is where the idea of guaranteed lifetime income comes into play (see above).
But others worry about spending all their money because they want to be able to leave something on to their kids or grandkids.
So, as Tom Hegna humorously puts it: These people don’t buy the boat, join the country club, take the vacation, etc. And, indeed, they manage to leave some money on to their kids. And what do the kids do? They promptly buy the boat, join the club, take the vacation…!
Does this mean that you should not leave a legacy? Absolutely not! By all means, leave a legacy. But do it smart. Don’t leave cash; leave life insurance.
The reason is a simple matter of dollars and cents. Literally. Cash left on is dollar-for-dollar, at best. This means that if you put one dollar aside for your heirs, they will get one dollar – in the best-case scenario. In the more usual scenario, for every $1.00 you leave on in a tax-qualified account, like an IRA, your heirs will get about $0.75 (assuming a 25% tax bracket). So if you leave $100,000 in your 401(k), your tax liability would be in the vicinity of $250,000.
But life insurance can be purchased for pennies on the dollar (when you consider premium outlay versus death benefit). Put it this way: for every $1.00 you spend on life insurance premium, your heirs might get $1.50, or $2.00, or $3.00 – depending on your age, health, and overall risk classification.
With life insurance, your dollars go further. But, that’s not all. Life-insurance proceeds are also tax-free to your beneficiaries.
Consider a hypothetical case. Suppose that you’re dead and that you’re surviving spouse later dies, leaving $100,00 of unspent money in an IRA. The kids are the designated non-spousal beneficiaries. Let’s make an assumption and say that they’re in the 25% tax bracket. This means that, of the $100,000, the Internal Revenue Service will take $25,000 right off the bat, leaving only $75,000 to go to the kids. While few people would turn their noses up at $75,000, still, you had to leave $100,000 in order to give them $75,000.
With life insurance, you have two options. Maybe you want to hold fixed the fact that you have $100,000 taxable dollars to spend on your legacy. So, after tax, you take your $75,000 and purchase a single-premium life-insurance policy. Conservatively (and the details depend on your age, health, and overall risk classification), that $75,000 deposit will likely buy you between $100,000 and $175,000 in death benefit. And the death benefit is tax-free to your beneficiaries.
On the other hand, if you wanted to hold fixed that your heirs actually received $75,000. In this case, you might put $35,000 to $60,000 into a life policy and expect that you could get the desired $75,000 death benefit. But, contrast this outlay of money with the IRA illustration. In the case of the IRA, recall, you had to leave $100,000 in the account in order to give your kids $75,000. With life insurance, you might only have to spend between $35,000-$60,000 to give them the same $75,000. So, the obvious question is: Would you prefer to spend $100,000 to get $75,000 to your kids, or would you rather spend $35,000 to $60,000 to accomplish the same end?[1]
Think of life insurance as a legacy-building “coupon.”
Step 3: Maximize Social Security and Medicare
For some people who are fully paid into Social Security (SS), the payable benefits throughout retirement could approach $500,000 (for a single person).[2] That’s a considerable chunk of change. Do you know how to maximize and protect your SS benefits?
You need to learn about – and, as I said, learn to maximize – your SS benefits.
For example, for a lot of people, SS payouts double between the ages of 62 and 70. It can really pay (literally) to wait to elect benefits – especially for the primary breadwinner.[3]
But, do you have the financial resources to wait until 70 to elect SS benefits? Wouldn’t that mean that you would have to postpone retirement until age 70? It depends.
The Two Bridges strategy might be the answer.
It is possible to plan so that you have an alternative stream of income from 62 to 70. So, suppose you retire at 62. You’re no longer earning income through regular employment. But, you also realize that you should wait until 70 to elect your SS benefits.
The first bridge is a way to get you from 62 to 70, without your having to take your SS payments early (thus leaving a lot of money on the table). If you had an annuity in place – with, say, an 8- to 10-year payout schedule – you could live off the annuity while you waited to collect your full retirement benefit from SS.
Note carefully that, for a married couple, only the greater of the two SS payouts is retained after one person’s death. The lesser payout is lost.
The second bridge, therefore, has to do with getting from the death of the first spouse to the death of the other. What do you need? You may have guessed it: another annuity. Though, this one will have to have longer than a decade-long payout schedule. This one is going to have to be a big one – to provide you with guaranteed income for the remainder of your life.
Do you see a recurring theme? You cannot depend on SS alone. And, as Hegna stresses, it’s not about your assets, per se. It’s about guaranteed lifetime income. If you’re lucky enough to retire from a company that still has a defined-benefit (or pension) plan, fabulous! But, if you’re like a growing number of retirees, pensions are like dinosaurs. They don’t exist anymore. It’s up to you.
Step 4: Make a Provision for Private, Long-Term Care Coverage
To protect yourself against the possibility that Alzheimer’s Disease might decimate your retirement savings requires that a few more pieces be put into place.
You need to have some sort of provision for long-term care (LTC). I have written about this at greater length, HERE. But, suffice it to say that LTC isn’t cheap. If you wonder how you can afford LTC insurance, I’d submit that you should give at least some thought to how you could afford not to have it.
After all, LTC costs can average $100,000 per year, nationwide. Nursing home residents might stay between 2-4 years, on average. That means that the average cost of care could run between $200,000 to $400,000 – per person. A married couple, both of whom need care, might spend upwards of $400,000 to $800,000. Memory care often costs significantly more. And these are just averages.
There are only three ways to pay for nursing-home expenses. You either: “private pay” from your own resources; go through the dreaded “spend down” in order to qualify for Medicaid; or utilize long-term-care insurance.
Neither health insurance nor Medicare cover long-term or “custodial” care costs. Both health insurance and Medicare cover doctor, hospital, and skilled-nursing costs – up to certain limits.
But what is envisioned by “long-term care” is what you will need when you can no longer toilet by yourself, or if you were unable to transfer in and out of bed by yourself.
If you are able to perform any of these “Activities of Daily Living” (ADLs), on your own power, then you would require long-term – that is, custodial – care.
What’s your plan for that?
If you are counting on your children caring for you, the obvious first question is: Have you had that conversation yet? Wiping your butt or feeding you is a lot to put on a child – who might have other dependents of his or her own. God forbid that there is a memory or behavioral problem in addition. I speak from experience.
I was sometimes in the unhappy situation of having to correct or restrict my dad, Jim (read his story, HERE), when he would engage in an activity that posed a danger for him or others. Unfortunately, usually, he remembered that he used to perform these activities. He also remembered that he used to discipline me. So, he resented my efforts and resisted them – at every turn – as unwelcomed intrusions.
He and I would clash, therefore. And the dynamic – especially since I was also caring for two young (4- / 6-year-old) children – cast a pall over the home environment. I was physically ill several times because of the stress.
And I had no one to turn to. The Alzheimer’s Association representative recommended that I call the police when my dad got out of hand. On one occasion, I did so. The police were dumbfounded as to why I had called them and asked, plainly vexed, “What do you want us to do?” I confess that I had no good answer.
But my family had no back-up plan. When Jim became too difficult to deal with, and when his meager financial resources were depleted, Medicaid was the only game in town.
The government took everything that my dad had – including his Social Security check – and forced my mom to spend down her own retirement account to virtually nothing (about $30,000).
My dad’s experience with Alzheimer’s was harrowing. But my mom is the one who now has to live with the financial repercussions. As of this writing, she is 66 years old and has insufficient resources to retire – period. Realistically, she will have to work until she dies, or need long-term care herself.
There’s a saying that it is well to bear in mind. “People seldom plan to fail; they fail to plan.” There are no two ways about it. You need some provision for long-term care.
Resources
See my article:
“Alzheimer’s-Proof Your Retirement With Long-Term-Care Insurance.”
See Tom Hegna’s books:
And…
Notes:
[1] On the assumption that you came in between $40,000 and $60,000 for a $100,000 death benefit, you would be free to spend the remaining $60,000 to $40,000 yourself. And you would have still secured the $100,000 legacy. That’s the power of buying your heirs out early.
[2] That’s around $1,000,000 for a married couple.
[3] The reason is the larger of the two payouts will be retained after the death of one spouse. So, as Tom Hegna puts it, in effect, the larger payout will cover “two lives” – the life of the primary breadwinner during retirement, and the life of the surviving spouse after one person’s death.