Retirement Financial Unpreparedness Pose Risks for Senior Savers
As individuals approach retirement age, it becomes increasingly important to plan for potential financial challenges that may arise, such as care home costs and long-term illness. Here are six effective strategies for older savers to prepare for these financial hurdles.
**1. Anticipate and budget for healthcare and long-term care costs:**
Older adults should anticipate significant healthcare expenses, including Medicare premiums, supplemental insurance, and out-of-pocket costs. A reasonable estimate for coverage aside from long-term care is between £5,000 to £7,000 annually per person in today's dollars. It's crucial to remember that around 70% of people over 65 will require some form of long-term care, which can be extremely costly—averaging £5,000 to £10,000 per month or more, especially for private nursing home rooms.
**2. Consider insurance options, especially long-term care insurance:**
Long-term care insurance can help cover the high costs of nursing homes and assisted living, protecting retirement savings from being depleted. Purchasing long-term care insurance in your 50s is advisable as premiums are more affordable and eligibility is higher. Waiting until your 60s can result in premiums that are two to three times higher. Hybrid life insurance policies with long-term care riders offer an alternative, providing benefits if long-term care is needed or death benefits if not used.
**3. Incorporate home equity and diversified assets into your strategy:**
Using home equity, such as through a Home Equity Conversion Mortgage (HECM), can provide liquidity and income to help pay for long-term care. A multi-asset retirement plan that integrates IRAs, annuities, and home equity can help smooth income variability and cover unexpected expenses like care home costs.
**4. Self-insure only if you have substantial assets:**
Individuals with £2 million or more in investable assets might choose to self-insure, budgeting and saving enough to cover possible care costs without insurance. This approach requires strong asset protection strategies to preserve wealth.
**5. Establish an estate plan with healthcare directives:**
Having a comprehensive estate plan—including wills, updated beneficiary designations, power of attorney, and healthcare directives—is essential to manage long-term illness and care decisions, and to avoid legal complications and financial stress for loved ones.
**6. Create separate saving strategies for predictable premiums and uncertain out-of-pocket expenses:**
Pay insurance premiums through steady income sources like Social Security or pensions. Maintain a dedicated savings account or pool of assets to cover unpredictable out-of-pocket medical and care expenses, replenishing it periodically as needed.
By integrating these strategies—early insurance purchase, asset diversification including home equity, realistic budgeting for healthcare and long-term care costs, and careful estate planning—older savers can better protect their retirement portfolio against the significant financial risks posed by care home costs and long-term illness.
It's also worth noting that parents can transfer their National Insurance credit over to their grandparents, but this only works if the grandparent is under state pension age. Additionally, you can claim National Insurance credits if you take time out of work to look after young children by applying for Child Benefit. To buy an annuity which pays a specific income each year, you would need a pension pot worth roughly £432,000.
Younger savers should not overlook the importance of retirement planning either. They have a longer investment horizon, but still need to consider simple steps like filling gaps in their National Insurance record or topping up their private pension. Semi-retiring allows you to generate income while making time for hobbies and interests, but accessing your pension triggers the Money Purchase Annual Allowance, reducing the amount you can contribute.
[1] AARP. (2023). Long-Term Care Planning. Retrieved from https://www.aarp.org/caregiving/long-term-care/ [2] Investopedia. (2023). Long-Term Care Insurance. Retrieved from https://www.investopedia.com/terms/l/longtermcareinsurance.asp [3] U.S. Department of Housing and Urban Development. (2023). Reverse Mortgages. Retrieved from https://www.hud.gov/program_offices/housing/sfh/hecm/hecmloan [4] Forbes. (2023). How To Save For Healthcare Costs In Retirement. Retrieved from https://www.forbes.com/sites/nextavenue/2021/08/24/how-to-save-for-healthcare-costs-in-retirement/?sh=5a6c909e3c62
- Older individuals should divert a portion of their pension income towards a dedicated savings account, earmarked for covering unpredictable out-of-pocket medical and care expenses in retirement, while keeping up with insurance premium payments.
- Personal-finance planning suggests that, in addition to traditional assets, integrating home equity, such as through a Home Equity Conversion Mortgage (HECM), can be a beneficial strategy for meeting long-term care costs, hence safeguarding retirement savings.
