Boomers: Twisting The Retirement Mindset

Leave a comment

From 1946 to 1964, 78 million new Americans were born. It was a population explosion, and this generation came to be known as the baby boomers.

The boomers’ hard work has fueled the rapid expansion of the U.S. economy over the last 50 years. Now this generation has reached retirement age. In 2011, the first set of baby boomers reached age 65, with 4 million baby boomers set to turn 65 each year after that for the next 18 years.

This huge population explosion changed the way we’ve come to think about retirement. Many of the safety nets that were in place for previous generations disappeared as the boomers neared retirement. A new income-generating strategy was needed, one that was very different from that of the boomers’ parents. In this article, we’ll review some of the reasons that retirement planning has shifted focus and discuss one possible solution.

Boomers Are Likely To Live Longer
Improvements in healthcare and lifestyle mean baby boomers who reached 65 in 2011 can expect to live an average of another 22.5 years. In some cases, retirement could last four decades or more. This longer life expectancy means retirement income must last longer than for any previous generation. With the increase in cost of living, boomers and those that come after them will likely need to save more than any previous generation to finance retirement. Compounding this situation is inflation, which has averaged about 3% per year in recent years and shows no sign of slowing down.

Lifestyle Changes May Mean More Expenses
Gone are the days when retirees were satisfied with just “getting by” in retirement. Now, boomers see retirement as an opportunity to pursue hobbies and live lifestyles that they put on hold because of work, or simply because they were cautious about depleting their nest eggs. For many, retirement is the time to buy trendy gadgets, take trips to favorite destinations and generally enjoy the fruits of their labor.

Boomers also want a more active lifestyle in retirement than previous generations. More travel, golf, tennis and volunteerism will mark the retirement activities of the boomer generation. More activity means more spending. And for many, buying that luxury car is an indulgence that can no longer be put on hold. This change in lifestyle will undoubtedly cost more than the low-key pre-retirement boomer lifestyle.

The High Cost of Health Care
A longer life expectancy also means increasing healthcare costs. Medicare premiums continue to increase each year as do the costs of private insurance. Employers are limiting their offerings of health insurance benefits for retirees. In the past, companies would provide health insurance for retirees and their families; now most larger employers are minimizing contributions to retiree healthcare insurance, or eliminating the benefit altogether. As boomers transition to retirement, many will be forced to finance their own healthcare. And with these rising costs, a lifetime of savings could be wiped out with one serious illness unless preventative measures are put in place.

Removing The Safety Net
In the past, the two primary sources of retirement were defined-benefit (DB) pension plans and Social Security. However, the number of defined benefit plans has been declining because many employers terminate the plans early. Also, few new employers adopt these plans.

Meanwhile, over this same period, the number of family heads participating in defined contribution (DC) plans, such as 401(k) plans, increased from 57.8% to 78.7%.

What does this mean? While DB plans are intended to provide guaranteed income for life, DC plans are intended to build wealth for retirement, with no guaranteed source of retirement income. Thus, boomers must learn how to convert savings into income that will last through retirement. The good news is boomers have contributed more to IRAs and Roth IRAs than all other generations combined. While these accounts are also intended to provide savings and wealth accumulation, they can be converted into income along with DC balances.

The other source of income, Social Security, currently replaces only about 42% of income, which is substantially lower than the 70-80% replacement rate that is believed and required to avoid a drop in the standard of living during retirement. The ever increasing drain on this pay-as-you-go system has created the real possibility that future Social Security benefits will replace an even smaller fraction of pre-retirement wages than they do today.

The New Retirement Problem: Converting Savings Into Income
In the past, baby boomers focused their efforts on wealth accumulation. The vexing problem with living off of your savings is that no previous generation has ever had to perform this feat. Previous generations had income from pensions and Social Security throughout the retirement years – any savings were considered a bonus. They didn’t have to “live on their savings” alone, so there’s really no past model to learn from when it comes to converting savings to income.

The question then becomes, how much of your savings should you spend each year? If you spend too much, you may find yourself living on Social Security benefits, which won’t buy very much of anything. Alternatively, if you spend too conservatively, you could deprive yourself of a desired lifestyle.

Create Your Own Personal Pension
To address the challenge of ensuring your income lasts throughout retirement, you may need to consider converting your savings into a reliable, guaranteed, steady income. In essence, you must replace the former company-sponsored pension with a “personal pension”. The solution is finding a lifetime income vehicle with a guarantee that it will at least keep up with cost of living and inflation. But how do you create this personal pension?

There are new and improved asset models that help you to create your personal pension. Learning what they are and whether they’d work for you will depend on the following factors:

  • Your life expectancy
  • Anticipated healthcare and long-term care costs
  • Cost of living and inflation
  • Taxes you will owe
  • The types of assets you own
  • Your lifestyle

Whatever income plan you adopt, it should be reviewed at least once each year to be certain it’s on track with your objective of providing you with an income you can’t outlive. It should also be flexible enough to accommodate changes in your life as they occur. For instance, if you become a grandparent, your financial objectives may change from a simple, guaranteed-income design, to one that will leave some of your wealth for your beneficiaries.

Conclusion
Change is brewing in retirement and income planning for the baby boomer generation due to unique factors such as a longer life expectancy and more savings than any other generation to date coupled with the need for new sources of guaranteed income.

How boomers adapt to these changes in developing personal pensions will determine the type and quality of the boomers’ retirement and, quite possibly, for the generations afterward.

Life Settlements: Fiction vs. Reality

Leave a comment

Many of us love a good book on a crisp autumn day or sitting on the beach —maybe the latest autobiography, a feel-good novel or a best-selling thriller. Of course, for anyone who enjoys books, we know the difference between fiction and non-fiction.

You may have heard about a new novel released this fall (The Carnage Account by Ben Lieberman) that revolves around a Wall Street financier who purchases life settlements that are based on multimillion-dollar life insurance policies. In the fictional world dreamed up by the author, the villainous lead character in the story covertly buys life insurance policies from people who are in need of funds and then dispatches them with his own bare hands in order to collect the death benefit for his “Carnage Account” fund.

The plot is intriguing and has attracted the interest of some readers, including a reporter for Time who recently wrote an article about life settlements that was based largely on the sensationalist drama portrayed by Lieberman’s novel.

But while novels can be fun to read, it’s important to separate fiction from non-fiction when it comes to the real-world life settlements marketplace. Here are just a few of the stark contrasts between the fiction portrayed in these recent stories and the reality of life settlements:

Fiction:   

Life settlements are common for people of all ages.

Reality:

Candidates for life settlements are typically age 70 or older, unless they have some specific health impairments. Professionals in the life insurance settlement industry are focused on informing and educating seniors about the life settlement option.

Fiction:  

Consumers pursue life settlements in order to get out of debt quickly.

Reality:

There are a variety of life circumstances that may lead someone to be interested in exploring the life settlement option, including: the life insurance policy is no longer needed or wanted; premium payments have become unaffordable; the senior is considering surrender or lapse of the policy; a change in estate planning needs; a change in the family’s financial circumstances; or changes in life circumstances, such as divorce or the sale of a business.

Fiction:  

Life settlements are based on insurance policies with a minimum of $5 million in death benefits.

Reality:

Life settlements are typically an option for seniors with a life insurance policy that has a death benefit (“face value”) of more than $100,000, but may be as low as $50,000. A settlement is possible any time the policy’s face value exceeds the cash surrender value, based on a simple analysis of the death benefit, the annual premium and the life expectancy of the policyholder.

Fiction:  

Individual investors purchase life settlements.

Reality:

As the voice of the life settlements industry, the Life Insurance Settlement Association (LISA) has adopted a position and stated publicly that this marketplace is not appropriate for individual investors acting on their own. The primary buyers of life settlements are institutional investors, such as pension funds, endowments, foundations and private equity funds.

Fiction:  

The life settlements marketplace is the Wild West of high finance.

Reality:

As of 2014, 42 states regulate life settlements, affording approximately 90 percent of the U.S. population protection under comprehensive life settlement laws and regulations. Of this group, 31 states have a statutorily mandated two-year waiting period before one can sell their life insurance policy, while 10 states have five-year waiting periods and one state has a four-year waiting period.

Fiction:  

Life settlements are open transactions where personal information attached to the life insurance policyholder is made public.

Reality:

Privacy of personal information in a life settlement transaction is protected carefully in accordance with federal and state privacy laws. In addition, LISA’s Code of Ethics and Standards of Professional Conduct requires all members to abide by all applicable laws and regulations regarding privacy of information. Seniors who wish to pursue a life settlement should work with life settlement intermediaries who are licensed and required to operate within the strict laws pertaining to procedure, privacy, licensing, disclosure and reporting.

So now if you happen to read The Carnage Account — or chat with someone who has — you may be struck by the far-fetched plot envisioned by the imagination of an author who writes fiction and the reality of a highly regulated marketplace that exists to provide seniors with an important financial planning option to consider in the golden years of their lives.

Is Maturing Unaffordable?

Leave a comment

Could you pay more than $200 a day for nursing home care? Around two-thirds of Americans over age 65 will need long-term care, either through at-home health care services, assisted living or a nursing facility.

Yet more than 90 percent of those surveyed in the Genworth Financial “2014 Annual Cost of Care” report haven’t talked about critical long-term care issues with their spouse, partner or adult children.

Genworth Financial asked survey participants how long-term care issues impact relationships, jobs, stress and anxiety for those in the circle of care — care recipient, primary caregiver, secondary caregiver and families involved.

Having a plan before there is a need is crucial.

Discussions about long term care issues often lead to patients experiencing less depression, less pain and less anxiety. Care recipients should talk to their loved ones about what their options are for care, how it will be financed and what family members might be involved in care giving. Genworth offers help starting the conversation.

Average costs:

The survey reveals the average cost of various services nationwide:

  • Homemaker services (hands-off non-medical care like cooking and running errands): $18/hr.
  • Home health aides (hands-on non-medical care like bathing and dressing): $19/hr.
  • Adult daycare (social, non-medical, community-based setting for some part of the day): $65/daily
  • Assisted living facility (single occupancy, 1 bedroom, hands-on medical care): $3,450/monthly
  • Nursing facility (semi-private room, 24-hr care): $207/daily
  • Nursing facility (private room, 24-hour care) $230/daily

Nursing facility care has increased more than $16,000 a year since Genworth’s 2008 survey. The cost of a private room in a nursing home has risen 4.45 percent annually, nationwide, since 2008, with this year’s median cost at $83,950 per year.

Assisted living facility costs vary dramatically by state. In Arizona, the average annual cost is $37,800, in Texas, $40,035 and in New York, 47,400.

However, home care rates have remained relatively flat over the past five years. One reason may be because homemaker and home health aides are considered unskilled labor and the organizations that provide these services do not have the expense of maintaining a stand-alone health care facility.

Find out the costs of care where you live.

How will you pay for long-term care?

Medicare is an option for those over age 65 or disabled. Home health services may be covered under certain medically necessary conditions. For care in a nursing facility, however, only 100 days are covered per benefit period after a three-day hospital stay (observation vs. admitted), 20 days are covered at 100 percent and days 21 to 100 require a co-pay.

Medicaid generally covers those with low incomes and limited resources and may cover some home services as well as facility care, but Medicaid limits the amount of assets you may own and the monthly income you receive before you are eligible for coverage. Eligibility varies by state and there are restrictions for transferring assets out of your name to receive benefits.

Self-insurance means you or a family member pay out-of-pocket for care services.

Long-term care insurance will pay for a wide variety of home and facility care up to the policy limitations. Many states participate in the Long Term Care Insurance Partnership Program, which allows patients to access Medicaid if they reach their LTC policy limits, while still retaining more assets than normally allowed under Medicaid. Generally, those who own a long-term care insurance policy that meet the partnership requirements may participate in their state’s partnership program.

Fear of Alzheimer’s

The Alzheimer’s Association reports that the cost of care related to Alzheimer’s, including health care, long-term care and hospice, will soar to a projected $1.2 trillion per year by 2050, depleting the financial reserves of many families, along with the nation’s Medicare funds.

In a study conducted by Age Wave on behalf of Genworth, 61 percent of respondents ranked having Alzheimer’s disease as their single greatest fear later in life.

The Alzheimer’s Association estimates that approximately 5.2 million Americans of all ages have Alzheimer’s disease. This includes an estimated 5 million people age 65 and older and approximately 200,000 people under age 65 who have younger-onset Alzheimer’s.

One in nine people age 65 and older and about one-third of people age 85 and older have Alzheimer’s disease. Yet 49 percent of survey participants had not considered the possibility of needing long-term care.

Other interesting statistics

Care recipients:

  • 34 percent are mothers receiving care from adult children.
  • 12 percent are fathers receiving care from adult children.
  • 9 percent are spouses receiving care from a spouse.

Who pays?

  • $14,000 paid by care recipient (excluding cost of facility).
  • $8,000 paid by family members (excluding cost of facility).

Eighty-eight of survey participants said household income was reduced 34 percent due to a long-term care event.

How they paid for care:

  • Dipped into savings/retirement funds.
  • Borrowed, took a reverse mortgage or sold home.
  • Reduced savings, vacation and family expenses.