For the next few weeks we will be addressing the proverbial elephant under the throw blanket in most of our financial housing - the Cost of Aging. If we do not take these points into consideration our golden years could become tarnished.
This week - Housing: The cost of available options - courtesy of Bendix Anderson.
Aging senior citizens often face difficult decisions about where they want to live. Most – more than 90 percent – want to stay in their
current homes as they grow older, according to research from AARP.
Remaining in a single-family home can involve expensive renovations, as seniors become more frail, and potentially even more-expensive home health care services.
Moving to a seniors housing community, like an assisted living property or a nursing home, may be even more expensive. Many seniors lack the financial resources to pay for it, though homeowners typically have more financial reserves than elderly renters.
Selling a single-family home may help finance a move to a seniors housing community – and home prices have recovered much of the value lost in the crash. Most older Americans owned homes in 2012, including 78.4 percent of people older than 80, according to Census data.
Selling a home may also help pay for a move to rental housing, though the cost of an apartment has also risen faster than inflation in many markets. Seniors may also struggle with the transaction costs of selling a home and moving.
Even selling a home may not pay for a nursing home for very long. The typical homeowner aged 65 and over has enough wealth to cover the cost of a nursing home for just 42 months – less than four years, according to the Joint Center for Housing Studies.
Private insurance policies cover 60 to 70 percent of the cost of long-term care – but the cost of premiums are much more expensive than what many older adults can afford, averaging more than $4,100 per year for persons over 75 years old. Just 11 percent of households aged 65 and over had private long-term care insurance in 2010, according to the Congressional Budget Office.
Medicaid is the default option without financial assets or long-term care insurance to pay for long-term care. That includes two-thirds of nursing home residents aged 65 and over, according to the CBO. To qualify, individuals must spend down or otherwise dispose of their assets. Home equity may be excluded for a time, but Medicaid eligibility criteria include home equity limits and most states will try
to recover expenses from beneficiaries' estates, according to the Joint Center.
When you are ready to make some of these decisions give me a call. As an Accredited Financial Counselor (AFC) I am able to assist in your budgeting so that you won't run out of money. Also, As a Certified Aging In Place Specialist (CAPS) I can help you to decide how best to spend some reverse mortgage proceeds on home remodeling so that you can safely stay in your home.
(This is not an all-inclusive list, however, it is a good start)
Topics that often put people on edge are Estate and end-of-life planning. Many people may become uncomfortable or anxious on such topics or these topics may seem too overwhelming and complicated to think about. It does not have to be this way.
Here are a few suggestions that could minimize the discomfort of Estate and end-of-life planning:
1) Make or update a complete list of all assets or interest in assets that you or you and your spouse own, including description, how title is held, location and approximate value.
Additionally, if you have a trust, make sure those assets that should be in your trust have been correctly transferred and are held in the same name of your trust.
2) Make or update a complete list of all your usernames and passwords for digital accounts and close down any accounts that are no longer used.
3) Review any assets for which you have made or should make beneficiary designations (bank accounts, insurance policies, retirement plans, etc.) and make sure you have a copy of the most recent form. Review these designations to determine whether you want the trust, or an individual listed and be sure to list alternate beneficiaries so that the asset does not go to your estate and possibly cause a probate.
4) Make sure you have a copy of the most recent deed to your house and any other property you own and if you have a trust, make sure that these properties are in your trust (Please note that real estate properties held in a corporations, LLC and/or
partnerships should not be in your trust, but your interest in that entity should be in that trust.
5) Review all estate plan documents, including your Will, Advance Health Care Directive, Durable Power of Attorney and Trust to determine whether you need to change beneficiaries, agents, successor trustees, custodians for minor children, and nomination of conservator of your estate or person if that should become necessary, because of death, incapacity, age, marriage, change in your relationship with that individual.
Additionally, review how your estate is to be distributed upon your death to ensure it is still appropriate. Consult your attorney regarding previous documents before shredding them.
6) If your attorney has not reviewed your documents in the last few years, you may want to call your Estate Planning Attorney to discuss the need to possibly revise your documents due changes in law. For example, many older trusts that provide for the trust to be split into a survivor’s trust and a bypass trust may no longer be suitable plan for many couples today.
7) Lastly, if you don’t have a Will, Durable Power of Attorney , Advance Health Care Directive and possibly a Trust you may want to call an Estate Planning Attorney to discuss the need for you to have such documents.
The National Academy of Medicine (NAM) is currently conducting a study over the next decade to encourage “breakthrough ideas, research, and technologies that could extend health and well-being into later life.”
According to NAM, “Aging will be a defining challenge of our time, the rapidity of population aging will change the ways in which families, communities, societies, industries, and economies function. Multidisciplinary, innovative solutions are urgently needed to support and engage our older populations and maximize their years of good health.”
This challenge “will require policies, socioeconomic infrastructure, and innovations that enhance the health of older populations while creating sustainable, health-promoting systems that support longer lives,” the NAM stated “[All sectors will need to] collaborate to promote the lifestyles, behaviors, services, supports, and infrastructure that are critical to fostering effective, affordable, and equitable outcomes.”
While NAM is hopeful for concise data to establish the structure for these goals, there still remain some specific issues facing the aging cohort. Many are outliving their money in retirement due to uncertainty in the retirement planning that was done. In particular, retirement dates and estimated retiree longevity. Advisers need to recognize that their clients don’t necessarily have control over their retirement date, and to plan accordingly.
According to David Blanchett, the head or retirement research of Morningstar, “Ignoring retirement age uncertainty can potentially have a significant impact on potential retirement outcomes.” Furthermore Blanchett states, “Financial planners should consider showing clients the implications of an early retirement to potentially get them to save more than they would using a more traditional approach where retirement age is treated as certain.”
In reference to Blanchett’s award winning paper,“the Rule of 61”,“Individuals targeting a retirement before age 61 tend to retire later than expected,” Blanchett states. While, “Individuals targeting a retirement age of 61 retire when expected; and those targeting a retirement age after 61 generally retire approximately a half-year early for each additional year of work planned past age 61.”
Not only do advisers need to anticipate the risk factors for clients as they approach retirement—sequence risk, market risk, inflation risk, health risk, and longevity risk, etc — but also, the likelihood that a client might retire two years earlier or later than planned.
Clients who retire a few years earlier than expected could result in significant negative implications on his or her retirement savings target. Factor in a shorter saving period, a longer retirement, and a smaller Social Security benefit, an early retiree might need to save 25% more than expected to enjoy the same level of retirement security.
“If the “average investor” is assumed to be seeking a 4% initial withdrawal rate (i.e., a moderate success target) and wants to retire at age 65,” Blanchett wrote, “the impact of retirement age uncertainty would require approximately 25% more savings than suggested by traditional models (28.29% to be exact).”
“Half of your clients will retire earlier than expected. About 24% of those who retire early do so because they can afford to. About 10% retire to pursue other activities. The remaining 66% retire because of ill health, layoffs or the need to care for an ailing spouse,” he said.
Those who can afford to retire early, such as highly educated professionals, tend to work longer and retire later. However, those who need to work longer, who have earned and saved less prior to retirement, are often the ones who are forced to retire early because of poor health or job loss.
Blanchett’s projections varied from person to person depending on several variables, including, health, gender, education, marital status, housing wealth, savings, occupation, income, and remaining years to retirement. His findings are largely based on the Health and Retirement Study, a long-term population study by the Rand Corporation, the Social Security Administration, and the Centers for Retirement Research. Participants in the study have been interviewed every two years since 1992.
Recessions can be hard to predict, but that’s not the case today. The COVID-19 pandemic sweeping the globe has pushed the U.S. economy into recession, with GDP falling 4.8% in the first quarter. While the drop was sizable, an even more pronounced decline is in store for the second quarter, as broad swaths of the country remain shuttered. With the U.S. feeling the sting of a sharp reduction in consumer spending and industrial production, there are five realities to keep in mind.
1) We’ve been here before (sort of).
The largest post-1950 quarterly GDP decline was 10% in the first quarter of 1958.
This sharp drop came amid the 1957–1958 recession, which resulted from a confluence of factors, including a flu pandemic. While the makeup of the present-day economy is much different, the U.S. is not unfamiliar with pandemic-related economic turmoil. The U.S. economy bounced back strongly in the late 1950s, with growth surpassing 5%.
As parts of the U.S. look to ease restrictions, I believe that a bounce back in activity could begin as early as June in some sectors and more broadly in the third quarter.
2) Recessions have tended to be short; the subsequent expansions have been powerful.
The good news is that recessions generally haven’t lasted very long. While this time may be different, a Capital Group analysis of 10 cycles since 1950 shows that recessions have ranged from eight to 18 months, with the average lasting about 11 months. For those directly affected by job loss or business closures, that can feel like an eternity. While there's no way to minimize that feeling, investors with a long-term investment horizon should try to look at the big picture. The average expansion increased economic output by 25%, whereas the average recession reduced GDP by less than 2%.
3) It’s about the consumer.
The U.S. consumer accounts for approximately two-thirds of the economy. With unemployment claims skyrocketing — although many may be temporary — and consumers staying in their homes, a weakening economy is no surprise. The $2 trillion stimulus package will help support some levels of consumer activity, but employment uncertainty is likely to keep many consumers in a frugal mindset.
4) Lower oil prices may be a tailwind for the economy.
A precipitous decline in crude oil prices has put pressure on the energy sector. May oil contracts turned negative in April as producers scrambled to find storage for bloated supply stores, exacerbated by consumers’ sharp reduction in vehicle usage and gasoline consumption. While the negative impact of lower oil prices is likely to be felt in U.S. oil fields, lower energy prices can provide a tailwind for consumers and transportation-heavy industries.
5) Timing may not be everything.
Waiting for the all-clear may leave investors missing out on market gains. Since World War II, in recessions with a corresponding equity correction, the S&P 500 has bottomed, on average, three months before the end of each recessionary period. It’s little solace to investors who have endured market volatility, but even as the economy weakens, there are opportunities to invest in great companies at a discount.
While the adage that the stock market is not the economy is true, market volatility tends to be captured, with a lag, in economic data. So even as financial markets are on a path to recovery, it may take time for the economy to catch up. Focusing on long-term investing can help investors navigate short-term volatility.
Written by Darrell Spence, an economist and research director with 27 years of investment experience, all with Capital. He earned a bachelor's degree in economics from Occidental College and is a CFA charterholder.
With thanks to Dean Catalano, SVP, Capital Group. firstname.lastname@example.org
Marc has 36 years in financial services and 6 years in teaching.
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