L ong-term medical costs can be a scary thing to think about as you get older, so many people simply cross their fingers and hope they won’t have to deal with it. This can be a costly mistake both for you and your family if you encounter serious health problems in retirement, says Daniel B. Cotter, a Financial Consultant for Investment/Insurance Strategies at AXA Advisors, LLC.
“Most people say it won’t happen to me,” Cotter says. “But 72 percent of all individuals turning 65 will need some form of long-term care during their lifetime, according to the U.S. Department of Health and Human Services report, ‘Medicare & You 2015.’ It’s a reality. People think that Medicare and Medicaid will have them covered. It won’t.”
The national average for a one-year stay in a nursing home is $97,000, according to Lincoln Financial Group’s Cost of Care Survey, says Cotter. Very few people have the wherewithal to manage such an expense.
So what’s the answer?
“It’s important to save money, but we also need to face up to the fact that we’re going to live longer,” Cotter says. “You need to plan a stream of income that you can count on, no matter how long you live.”
Smart Business spoke with Cotter about steps you can take to reduce the risk of running out of money in retirement.
What are the risks everyone faces in retirement?
The No. 1 risk is longevity. The way these situations evolve is people get to a point where they need care and they believe that their investments and savings will be able to cover the costs. The problem is that this care could go on for several years and the expenses can spiral out of control. The prospect of long-term care is a difficult conversation to have and even people with a high net-worth worry about their spouse or the cost of nursing homes.
Other risks are inflation, the potential volatility of your retirement plan and the withdrawal rate of your money or securities. Again, how will what you have today look in five, 10 or 15 years?
When you don’t account for these factors in your retirement planning, it can lead to big problems.
What can you do to reduce your risk of running out of money in retirement?
The following are the most important steps you can take to protect your future:
- Have a plan — Develop a financial plan that is tailored to the realities of what you want to do in retirement. What are your hobbies? Where do you plan to go on vacation? What is your base income and your income from Social Security? Work with a trusted financial adviser to craft a plan that works for you.
- Understand how to maximize Social Security benefits — Talk to an experienced professional to understand the difference between taking Social Security at 62, 66 or waiting until 70. What is your break point? This is extremely important, especially with surviving spouse benefits.
- Calculate inflation into your plan — This is probably the most important. If inflation averages 3 percent and you need $10,000 a month to survive, that amount will double at some time in the future. Your savings plan needs to account for inflation as you determine how much you’ll need.
- Identify a source of guaranteed retirement income — The foundation of all retirement security and the elimination of emotion is securing some form of guaranteed retirement income. One strategy you can use is to use your life insurance to transfer wealth and take care of any shortfall that may occur. If you have a pension, that’s a tremendous advantage since most companies are moving away from pensions. You need a source of guaranteed income to account for unexpected costs. These sources can be derived from Social Security, pensions and annuities. All guarantees that come with an annuity are based upon the claims paying ability of the issuing company.
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Plan for long-term care costs — It’s a gray area since no one knows what the future will hold. Develop a plan and then be prepared to adjust as needed.
Securities offered through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Annuity and insurance products offered through AXA Network, LLC. AGE 123651 (2/17)(Exp 2/19)
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