Let’s say you’re a few years out from retirement, or maybe a few months. When you picture yourself engaged in your retirement lifestyle, what images come to mind? Many might think of those long-delayed trips they’re planning to take, once they no longer have to punch a clock. Others might be envisioning leisurely days spent reading or engaging in a favorite hobby or pastime. Some may be looking forward to volunteering for a favorite cause or even starting a small side business they’ve been planning.
It’s less likely that we think of the later years of retirement—after we reach our late 80s, 90s, or beyond—when the advanced medical conditions, physical frailty, or even cognitive challenges that often accompany advanced age begin to come to the forefront of daily concerns. It is tempting for many to even dismiss the idea of living long enough to be worried about such things.
And yet, statistically, persons who are reaching retirement age in the next ten to fifteen years can expect to live thirty or more years in retirement, putting the needs and challenges of advanced age very much in focus. While it is true that the average life expectancy of an American male is about 77 years and that of an American female is about 80 years, it also seems to be the case that after a certain age, remaining life expectancy begins to lengthen. Thus, a person who has reached the age of 80 could reasonably expect to live another 7–9 years, and perhaps even longer.
Planning for the Later Years
Clearly, the convergence of two factors—increasing longevity and increasing healthcare costs—complicates the financial planning aspects associated with the later retirement years. Effective retirement planning should account for maintaining quality of life, not just in the early years of retirement, but throughout the retirement life cycle. And yet, the steadily increasing costs that can be anticipated with heightened medical needs and, in many cases, long-term care, require proactive planning in order to ensure the maintenance of a desirable lifestyle.
- Financial implications of longevity. Often, when mapping out a financial plan for retirement, we utilize actuarial tables to establish assumptions for length of life and, by implication, funding needs (i.e., how long the money needs to last). As suggested above, people are living longer than they used to. To understand the truth of this, one need only recall that when Social Security was established in 1935, the average life expectancy for an American male was 61. Today, it is 77.
So, what’s the “price tag” for living longer than actuarial assumptions? For someone retiring today at full retirement age (currently 67 for those born in 1960 or later), providing an annual income of $75,000 for the average expected life expectancy of ten years would require a nest egg of $660,563 (assuming an annual rate of return of 5% and an inflation rate of 2%). But if this individual lives ten years longer than the actuarial assumption, an extra $494,337 would be needed to provide the same income for the additional ten years. And that assumes that the person does not require additional income to cover increased costs for later needs such as specialized medical treatments or long-term care. Obviously, extending the period of need to account for an even longer lifespan would result in the necessity of a larger pool of savings.
- What about long-term care? When we think about the needs of the “oldest-old,” we should also consider the potential need for long-term care. By this term, we mean care that provides for assistance with activities of daily living (ADLs) such as preparing meals, personal hygiene, getting into and out of bed or a chair, and other such activities. Many do not realize that the cost of long-term care is functionally not covered by Medicare. In other words, those who need long-term care services, whether they are provided by a home-health aide, a nursing home (“extended care facility”), or some other source, must provide or pay for these services themselves, unless they have depleted their assets, at which time Medicaid can be utilized.
What is the likelihood that a retiree will need long-term care? According to the US government’s Administration for Community Living, someone turning 65 currently has about a 70% chance of needing long-term care at some point in their retirement years. Women tend to require about 3.7 years of long-term care, while the average for men is just over 2 years. Long-term care may also be provided by a friend or family member, though the emotional and physical toll of doing so can be considerable. The average cost of a home-health aide is around $5,000 per month, or $60,000 per year. The average cost of a nursing home is between $302 and $339 per day, depending on whether it is a semi-private or private room. Given the potential expense, long-term care insurance (LTCI) may be advisable. Long Term Care Insurance (LTCI) policies, like other types of insurance, vary in the benefits offered and the premiums payable. They are regulated by each state’s department of insurance, and premiums also vary by region. Generally, the younger and healthier you are, the less the premiums will be. LTCI can be a valuable funding tool as you develop your longevity plan, but you should compare plans carefully to determine which plan offers the best balance between expense and benefits for your particular situation.
Your Longevity Plan: Better to be 2 years too early than 2 minutes too late
With potential costs like these, it becomes clear that having a personalized longevity plan is a crucial component of responsible retirement planning. A key question that must be asked is: How prepared are you for the expenses of “outliving the odds”? Another point for consideration involves the legal implications of advanced age. Let’s take a look at some areas that should be considered as you develop your own, personalized plan for longevity.
- Age in place or move into a retirement community? Most seniors state that they would prefer to stay in their own homes as long as possible. It’s not hard to see why: familiar surroundings, longtime friends and neighbors, and greater independence can be powerful motivators. But as we get older, aspects of our homes that were taken for granted can become hazards. Loose rugs can create a fall risk; stairs can become harder to negotiate; steep driveways can become danger zones. If you choose to age in place, you should consider the potential costs of remodeling your home to incorporate aging in place design and create a safer environment for someone with decreased mobility.
There is a wide landscape for senior care and senior independent living. If aging in your home is not what you want, there are many options to consider. One option growing in popularity is the continuing care retirement community (CCRC), facilities that offer a range of living arrangements for retired persons, from those who can still enjoy a relatively independent lifestyle to those who require advanced care, up to and including medical services. This is an important option to consider if you do not want to age in your home because it can provide a safe environment, a continuum of care, as well as a sense of community. Depending on the specific arrangements and types of care available, a CCRC can cost anywhere from $3,000–5,000 per month, in addition to an entrance fee that can be as much as $400,000. Typically, the more care you require—either now or at some point in the future—the more expensive the arrangement will be.
With so many options available, deciding on and communicating your preferences to your family members and other trusted advisors should be a central part of your longevity plan.
- Longevity and legal planning. What will happen if the day should come when you are no longer able to make or communicate your own decisions? While estate planning—to include, at minimum, a valid will, powers of attorney, and a healthcare directive—is vital for anyone, it is doubly so as a part of your longevity plan, and best coordinated with the assistance of an elder care attorney.
As you consider aging, it is critical to properly document your preferences as thoroughly as possible and ensure that your healthcare proxy, financial power of attorney, and executor (who may or may not be the same person) are advised of the important details. If appropriate, you should discuss and document your wishes for guardianship and conservatorship. You may even wish to retain the services of a specialist such as an elder care attorney to ensure that your longevity plan takes all the most important matters into consideration.
The Bottom Line: Planning puts you in control.
By now it should be clear that your longevity plan is not something to be put off for “someday.” The potential costs and multitude of options make it advisable to begin having conversations and considering alternatives as early as possible. Perhaps the best way to get started is by scheduling a meeting with a professional, fiduciary advisor to focus on this topic. It’s also a good idea to begin conversations with family members, with the goal of informing them about your preferences. Finally, if you don’t have those essential estate planning documents in place, you should make an appointment with an estate planning professional as soon as possible. Even if you do have an estate plan, you should review it at regular intervals to make sure it still meets your needs.
What is your image of your later retirement years? At Curio Wealth, we understand that asking the right questions is the only way to learn what our clients really need. Is it time for you to start building your longevity plan? Why not contact us today?
