Money can be a tough conversation across generations. That talk can be even more delicate as longer life spans and market volatility strain retirement and extended-care planning.
Senior citizens and the baby boomers who need more money to fund retirement than past generations are worried about being financial burdens on their families. A 2010 survey of 2,151 adults conducted by Age Wave and Genworth Financial found that, on average, respondents would ideally like to live to age 92, believe maintaining good health is twice as important as any other factor that comes with a long life, and are more than five times more worried about being a burden on their family than dying.
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Crucial family money talks don’t have to be an agitated debate, just a fact-finding discovery between adult kids and their parents. Ideally, the discussion takes place as both parties are fully engaged in their respective savings and investing pursuits — and long before any financial or medical crisis pushes everyone into emergency action. The goal is to reveal expectations about which generation will cover the other and in what circumstance.
“Baby boomers are getting better about it, but for the World War II and Korean Conflict generation, they were almost pathological with regard to avoiding talking about money. Families have had to change that,” said Linda Leitz, certified financial planner for Pinnacle Financial Concepts in Colorado Springs, Colo. “The reality is that most of today’s seniors will live long enough to reach a point where they can’t live independently, and thus there is planning involved.”
According to U.S. Department of Health and Human Services data, roughly 70 percent of adults 65 and older will need some type of long-term care during their lifetime. The average 65-year-old couple may spend $200,000 on health care in retirement. If one of them heads to a nursing home, that bill could top $500,000.
Costs are greatly outstripping incomes, putting added pressure on savings and investing. Genworth’s 2011 Cost of Care Survey reveals that the median annual cost of care in a private nursing home room is at $77,745 nationally, up from $60,225 in 2005.
Are there steps to ensure you’ll remain financially independent well into your golden years?
Hard-working portfolio. One of the first myths financial planners like to debunk is the notion that you have to go super-conservative with your portfolio nearing and in retirement. More conservative than earlier? Yes. Ultraconservative? No. These days, most planners advise clients to remain in diverse assets that offer a fighting chance against inflation. To better take on a lengthy retirement funding challenge, separate your portfolio into the “lifestyle” category (the necessities) and invest this portion in tax-advantaged and lower-risk options, such as 401(k)s, bonds, annuities and nontraded real estate investments, said Erin Botsford, CEO of financial planning firm Botsford Group. Then dedicate a portion of your portfolio to “hybrid” investing — budgeting for what you plan to spend each year on leisure, perhaps travel. This is the money you can afford to keep in slightly riskier and potentially better-performing assets, which might include master limited partnerships (MLPs), dividend-paying stocks, bonds and a variety of alternative investments. Botsford suggests that you consider keeping a sliver of your holdings in daring growth assets, such as commodity ETFs, and keep emergency funds in cash (such as checking or savings accounts).
Consider other resources first. If you need to borrow money, consider all available resources (your own bank account or your own portfolio) before turning to family members in order to avoid the emotional cost of a loan or gift. Pinnacle’s Leitz said retirees and advanced seniors often don’t keep their assets liquid enough for easy access. They’re not empowered then to deal with their own financial road bumps, raising the odds that they will need a quick or short-term loan from family members. Leitz advises clients to have enough liquid holdings (in cash or investments readily converted to cash) to cover three to five years’ worth of expenses. Some retirees have too many assets tied up in a home that they’ve paid off, she said. In this case, the homeowner might consider a modest mortgage. This is not a reverse mortgage or a second mortgage; it’s borrowing anew on the equity of the home. For instance, a retiree might draw out $50,000 to $100,000 on a home worth $750,000 and invest that loan in a higher-performing but liquid portfolio. They make the loan payments, which are steady and easy to budget for, deduct the interest on their income taxes, and collect the interest on their investment. It then serves as an income generator and a cash stash to access in case of emergency. Again, this does pull out equity, and should be considered carefully. If pulling value out of your home isn’t an option, under dire circumstances, retirement funds can be tapped for what’s considered a hardship withdrawal. Rules apply and all plans may not qualify. A hardship withdrawal isn’t a loan. You can’t repay it, and you lose the tax and retirement-income advantages of the money. You’ll have to pay income taxes on the withdrawal. In most circumstances, if you’re under 59 1/2, you’ll also pay a 10 percent early withdrawal penalty.
Know that you’ll be making a potentially big sacrifice. Someone over 59 1/2 who’s in the 25 percent federal income tax bracket would have to withdraw more than $13,000 to have $10,000 left over after taxes have been paid. Someone under 59 1/2 would have to withdraw more than $15,000 to net $10,000 after taxes and penalties. Many plans do allow loans, which is different than a hardship withdrawal and can be repaid over time. If you have a Roth IRA, you can withdraw your contributions (but not earnings on your contributions) without having to pay taxes or penalties. Also, whole life insurance policies typically have a cash value pool that you can borrow.
Retirement-light. Treat yourself to a miniretirement or “practice” retirement. This involves keeping your job but starting to splurge a little, say, in your late 50s and 60s. Take big trips, start new hobbies. Your physical condition is likely to be better than deep into your retirement anyway, and you’re drawing income and delaying having to collect Social Security benefits and crack your nest egg. According to T. Rowe Price, a person who saves 15 percent annually and retires at age 62 with a nest egg worth $584,000 would have an annual retirement income of $52,000, including Social Security, and would be withdrawing about $20,000 from the portfolio each year. The same person who continues working until age 70, but stops saving in their 60s, would retire with $1 million in assets with an annual retirement income of $88,000, including Social Security. That person withdraws $35,000 annually from his or her portfolio.
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