Archives for May 15, 2019

One of the most important aspects of retirement planning is making housing plans. The reality is that you need a place to live in retirement and there are a lot of different options. Furthermore, even if you decide to just keep the status quo and age in place, there are a lot of factors to consider.

The home is often a retiree’s largest asset, with the median wealth in homes for a 65-year-old couple at $192,552, according to the U.S. Census data. This represents about two-thirds of the median retiree’s assets. Furthermore, the home comes with a cost, which is often the largest expense for retirees at nearly $20,000 a year. So let’s look at 10 different retirement housing options, ranging from aging in place all the way through nursing home care at the end of life.

Aging in Place

What is it: Roughly 83% of retiree homeowners want to stay in their current home for as long as possible.

Pro: The homeowner gets to keep consistency in their life. They know their house, understand the costs associated with it, have an emotional attachment to it, and know the surrounding area. In many cases this can be the most enjoyable and stress-free way to live in retirement.

Con: Often retirees have outgrown their current homes. Perhaps they raised a few kids and have a lot of extra maintenance, rooms and costs associated with keeping up the house. While it might work early in retirement, it could become a burden as they age. The current home also might not be friendly for aging in place. The home could have too many stairs, not a lot of senior amenities, and be far away from senior services like health care.

Home Sharing

What is it: For some homeowners, the desire to age in place is there, but the finances just don’t make sense, especially if the person is single. So one option is to take on a roommate. Home sharing is mostly engaged in by women in retirement, with over 4 million senior women sharing a home with at least two other women. There are home-sharing services that help pair up homeowners with potential roommates, both from a financial and compatibility standpoint.

Pro: Home sharing can be a great way for a homeowner to age in place, add companionship to their life, and improve their finances. The homeowner is able to charge rent and likely split utilities, which can add much-needed cash flow. Additionally, it allows the homeowner to have someone else live with them who is in a similar stage of life.

Con: Not everyone wants to share their home with a stranger or another person. Furthermore, the decision to bring someone into your home carries a bunch of risks. For one, you might not get along. Additionally, there can be a lot of headaches from renting a room if the renter is unable to meet their payments. It can be hard to evict a person, especially a senior.

Relocating/Downsizing

What is it: When you are working, living close to work is important for many people. However, once you retire, that need is gone. All of a sudden, location desires change. Additionally, the house you were living in might no longer fit your needs, so relocating to a better fit can make sense.

Pro: Relocating can help free up home equity and reduce expenses if the homeowner downsizes. It is also possible to move to an area with a lower cost of living or to a state that has lower taxes. Additionally, a benefit of relocating in retirement can be to move closer to family or to improve one’s quality of life by moving to warmer weather or closer to recreational activities.

Con: Relocating means getting used to a new area and home. Moving always has costs associated with it also, whether it is hiring movers, closing costs or just travel costs. Lastly, if the decision to relocate eventually does not work, it is very hard to undo.

Renting

What is it: If you are already renting this would be the status quo. However, for homeowners, one option is to sell the home and rent. In some cases you can engage in a sale-leaseback agreement and sell your current home and continue to rent it back. In other cases, you can sell and move to a new rental location.

Pro: By selling and renting, you can free up home equity for other needs and possibly reduce your expenses. Renting also provides more flexibility in that you can move more freely than if you owned. Additionally, renting can take some of the home upkeep and maintenance off the table. This can be very valuable to seniors as they age. While it might have been enjoyable to mow the lawn and take care of the property at an earlier age, as one ages it can become difficult and expensive to hire out, so renting can be a way of controlling the costs of living.

Con: One of the biggest downsides of renting is just that most homeowners don’t want to do it. A survey of retirement age homeowners found that only 5% wanted to sell their home and rent. For many Americans owning their home is part of the American dream, so renting just doesn’t fit their vision of a successful retirement, even if it is the best financial outcome for them.

Village Concept

What is it: The Beacon Community near Boston is often credited as being the first official “village model,” but communities taking care of seniors together have been around forever. The village model is about allowing seniors to age in place in their homes but with the support they need. In many cases, the village model is set up similar to a homeowners association where dues are paid into the “village” or “community,” which in turns provides services like transportation, events and some basic care.

Pro: The village model can help reduce costs as seniors share services and costs with others needing similar assistance. By allowing seniors to age in place for longer, they can avoid having to move into more expensive senior housing like assisted living facilities before they need to.

Con: While there are a few hundred village models in the country, that is not a lot of options. For many seniors there is no village model option in their area. Additionally, services are limited, so the retiree might still need to move as their needs for services grows. Furthermore, there is a cost associated with the village model, so that could impact cash flow.

Age-Restricted (Active Adult) Communities

What is it: Generally in the United States you cannot discriminate based on age, gender or race when it comes to housing options because of the Fair Housing Act of 1968. However, The Housing For Older Persons Act of 1995 allows for communities to restrict housing options to older individuals as long as certain parameters are followed. Essentially, there are two forms of age-restricted housing options. The first requires that at least 80% of the occupied units have at least one person who is 55 or older living in the home. The other type is a bit more restrictive as it requires all residents to be at least age 62, including both spouses.

Pro: One of the biggest benefits is companionship. Seniors decide to live near and around those going through a similar part of their life and retirement. The communities often provide a variety of services, clubhouses and recreational activities.

Con: There can be additional costs associated with living in such communities, so it is not always the cheapest housing option. Furthermore, with a 62-and-over community, adult children cannot move in if they don’t meet the age requirement. Additionally, for spouses with large age gaps, they can be prohibitive also.

Continuing Care Retirement Communities

What is it: Continuing Care Retirement Communities (CCRCs) offer a continuum of care throughout retirement, often starting with independent living. Most of these communities require the senior to move in when they are in good health and can live independently. Over time, the senior can stay in the same community but receive different levels of care and senior housing, ranging from assisted living to long-term care to end-of-life care.

Pro: CCRCs allow a senior to age in place in the same community but receive services and long-term care as their needs change. This is also a way to control and, in some cases, prepay your long-term care costs. The communities also often provide food, transportation and recreational activities.

Con: The biggest concern with CCRCs is whether the entity will be able to fulfill its promises over time. CCRCs are typically for-profit businesses that can run out of money and go out of business. Additionally, many require down payments in the hundreds of thousands of dollars. So, if the entity goes bankrupt, seniors could lose these down payments.

Assisted Living

What is it: Assisted living offers a combination of housing and care services. Typically when someone moves into an assisted living facility they need help with some activities of daily living and are in the early stages of needing long-term care services. However, the person can still live mostly independently.

Pro: For many, assisted living facilities offer the care required to maintain a standard of living desired by the senior. They could need some help with bathing, dressing, mobility or cooking.

Con: Cost. According to 2018 numbers in Genworth’s Cost of Care Study, the average assisted living cost is roughly $48,000 a year. Furthermore, Genworth predicts that this cost will balloon to roughly $86,000 a year by 2038. Additionally, it can be hard to choose the right facility. Plan ahead to determine how you will pay for assisted living and the type of facility and care that you want.

Nursing Home

What is it: Nursing homes provide housing and full-time care for individuals needing significant levels of long-term assistance. Nursing home care is less about making a housing decision and more about receiving the level of care you need.

Pro: Care can be significant and help the person live a better lifestyle than they would if they tried to manage alone at home. Additionally, nursing homes can provide skilled care services that might be difficult for family members to provide or expensive to hire out for at home.

Con: Nursing home quality ranges significantly, and so does cost. Furthermore, most people do not look forward to or choose to move into a nursing home, but instead, it is typically driven out of necessity. According to Genworth, a private room in 2018 cost over $100,000 a year on average. Plans for how to fund your care should start well before retirement.

Charity

What is it: Charity housing can mean a few different things. First, there are charities and religious organizations that provide free or reduced-cost housing options for low-income seniors. Another form of charitable housing can come from family members. Many will take in relatives to help them out.

Pro: Charity is going to be in many cases the cheapest form of retiree housing. When it comes to family members taking in a senior, it can also be a great way to spend time with family.

Con: Most people do not want to rely on family members or charities for their housing or other needs. The desire for most people is to live independently. However, living with family and using charitable housing is a viable option for millions.

You’ve worked hard, socked away savings, and may even have some retirement goals in mind — whether it’s climbing Kilimanjaro, spending more time with your family or moving to that cottage by the sea you’ve dreamed about during conference calls. Regardless of your goals, it’s important that your finances are on track to help you fulfill them.

In the five years preceding retirement, making sure these bases are covered can help ensure you’re truly ready for retirement, without any last-minute scramble. Here, seven things every pre-retiree should check off their list in the years leading up to retirement.

Create — And Stick To — A “Pre-Retirement” Budget

“It’s a cliche because it’s true: You can never save too much for retirement,” says Diane Oakley, executive director of the National Institute for Retirement Security (NIRS). A 2018 report by NIRS found that 77 percent of Americans fall short of conservative retirement savings targets for their age, based on the expectation of working until age 67. One way to assess whether your current retirement savings will meet your needs is to live off your retirement budget now — even if you’re years away from retiring. “This can help you assess what your lifestyle will be like and where you may need to pad your retirement savings,” says Oakley, who adds that it’s important to factor in the occasional expenses — car repairs, gifts, one-off vacations — into that overall number. Working with a financial advisor can help you come up with a reasonable budget for you — and can give you the opportunity to sock additional funds into retirement savings.

Add Extra Funds To Your Retirement Accounts

If your retirement funds aren’t as full as you’d like — and when it comes to retirement, experts agree there’s no such thing as saving too much — you may be able to pad it during the years prior to your retirement. The IRS caps how much you can contribute annually to each plan (in 2019, the maximum amount you can contribute to a 401(k) is $19,000), but once you turn 50, individuals are allowed to make what’s known as “catch-up contributions.” The maximum amount varies depending on plan: For example, as per the IRS, catch-up contributions can go up to $6,000 for a 401(k), up to $3,000 for a SIMPLE IRA or SIMPLE 401(k) and up to $1,000 for a traditional or Roth IRA. This amount is beyond the annual contribution amount.

Understand Your Future Financial Contribution To Medical Coverage

“Many retirees assume all [medical expenses] will be covered by Medicare and are surprised that’s not the case and that they’re responsible for premiums,” says Oakley. There are two primary elements to Medicare you’re likely to consider as you plan for retirement: Medicare Part A (hospital insurance only) and Medicare Part B (medical insurance). Enrollment begins three months prior to your 65th birthday. While it’s recommended that all eligible enroll in Medicare Part A, you may wish to hold off on Medicare Part B if you’re still working and are covered by your current employer plan. Still, says Oakley, it’s smart to make sure you understand what your potential Medicare contribution will be once you’re on Medicare. Most people don’t pay premiums to Part A (although there are deductibles and coinsurance costs), but there is a monthly premium to be covered under Medicare Part B. You may also want to consider supplemental insurance to pay for things not covered by Medicare, which will drive up the price you’ll pay in health insurance.

Research Your Insurance Options

Even if you feel confident in the nest egg you have, considering the worst what-if scenarios will help you suss out whether your savings are sufficient and what there might be left to do to reach your target. For example, a 2015 study by the Urban Institute found that the average American turning 65 today will incur $138,000 in future long-term care costs — which are often not covered by Medicare. If you wouldn’t easily be able to cover the expense of long-term care out of your retirement income budget alone, it may make sense to look into long-term care insurance policies, says Oakley. Similarly, if you still have outstanding expenses, such as a mortgage, or have dependents, like grandkids, it may make sense to consider life insurance.

Consider A Financial Gift Now (Rather Than Later)

If you’re thinking about your legacy or had plans to help your adult children financially, through gifting money, helping to pay for a house or subsidizing their child’s college fund, it may make sense to discuss the considerations around giving now, rather than leaving the funds in your estate plan. While these sorts of gifts should not come at the expense of your own retirement, speaking with a financial advisor about your wishes can help you arrive at a smart strategy to incorporate gift-giving into your retirement plans. While the $15,000 gift tax exclusion is an oft-cited number, there may be paths that allow you to give more, depending on your financial situation. For example, grandparents married and filing jointly can take advantage of a special election that allows them to give up to $150,000 into a tax-advantaged 529 plan over a five-year period and categorize it as a gift. Now that 529 plans include private K-12 education as well as college, it may be a path that makes sense for your family.

Explore Passive Retirement Income Streams

In the sharing economy, it’s tempting to consider downshifting with an eye toward buying an additional home to be used exclusively as a source of rental income. While renting out a property has appeal, it’s smart to think about the logistics and costs of how this action might play out in terms of expenses and management, says Oakley. Would the property truly become cash flow you could count on, or would it become a money pit? How would hiring a property manager play into your plans? Speaking with people who’ve done it can help you determine whether it’s a realistic move for you.

Similarly, networking with colleagues to begin to look for part-time or consulting opportunities you can take on once you retire may also be a smart move. Many retirees take on lower-stress post-retirement gigs to supplement their savings. Another reason a second career may be appealing: While required minimum distributions must be taken at age 70 ½, that requirement is waived if you’re enrolled in a 401(k) plan with a current employer.

Decide How And When You’ll Use Social Security

Before you focus on how you’ll make use of your nest egg, it’s smart to consider how your social security funds (which could be partially taxed) will play into your overall financial strategy. While many individuals facing retirement depend on these benefits to survive, it may be advantageous for high earners to have a plan for when they’ll apply for benefits and how they’ll use them as well.

“I’ve seen plenty of high-earning executives wondering how to maximize their benefits. They’ve paid in, and now they want a maximum return,” explains William Arone, CEO of the National Academy of Social Insurance. While people become eligible for social security benefits beginning at age 62, the full retirement age to be eligible to receive 100 percent of the retirement benefit is 66 (67 if born after 1960). But you can wait until you’re 70 to take the benefit.

“The rule of thumb has always been to wait to take benefits if you can, but, sometimes, people make the decision to take the benefit earlier, depending on their financial picture,” says Arone. For example, some couples may make a decision for one partner to take early retirement benefits while the other partner waits until they are 70. The decision of when to take social security can be complex, so speaking with a financial planner well before you’re required to make these decisions can help you determine the best strategy for your situation.

Exploring these topics now can help you avoid a crunch during the year you retire. These decisions may also determine your retirement timeline as well as give you a realistic idea of what to expect, financially, when you retire. Taking the time now to create a plan, take action where appropriate and make decisions regarding your financial future can help you enjoy and make the most of retirement once the time comes.

If you get a sinking feeling in your stomach when you think about your retirement finances, you’re not alone. In fact, 75% of Americans report feeling only somewhat confident or not confident at all about their future financial health, according to a Fidelity survey. Respondents said they worry about outliving their assets, rising healthcare and living costs, and having to adjust their lifestyle to a fixed-income budget. There is a simple way to avoid this fate and to reduce your financial stress, but few people are doing it.

Only 18% of Americans have a written retirement plan, according to Fidelity. The remaining 82% either don’t think a plan is necessary or have not yet created one because they’re overwhelmed and don’t know where to begin. But the longer you wait to create a plan, the more difficult it is to achieve your retirement goals.

The problem with winging your retirement

Studies have shown that when people try to estimate how much they need for retirement without creating a true plan, they’re usually way off base. Gen Xers and baby boomers both said they think they’ll need to save $500,000 in order to feel financially secure in retirement in a Transamerica survey, while millennials said they’d only need $400,000. But neither amount will probably be enough.

The average household headed by an adult 65 years or older spends around $46,000 per year today, according to data from the Bureau of Labor Statistics. Multiply that by the average 18-year retirement to get an average retirement cost of $828,000. Even that’s likely to be too low for most working adults today because inflation will continue driving up living costs. Further, people are living longer which means retirement becomes longer too. An 18-year retirement is just the average, many folks end up spending 30 years retired. Couple that with rapidly rising medical costs and the uncertain future of Social Security and today’s workers have a tough mountain to climb.

It’s tempting to look for an easy, arbitrary measure to help you figure out how much you need to save for retirement, like building a $1 million nest egg or saving 15% of your salary every year. Working toward one of these goals is certainly better than having no plan at all, but it tells you nothing about your unique situation. If you want to stay on track for a comfortable retirement, you need a customized plan.

How to create a retirement plan you can count on

The first step in creating your retirement plan is to figure out approximately how many years of living expenses you’ll need to cover. Estimate your life expectancy based on your lifestyle and family health history, but figure high so you’re better safe than sorry. One in three 65-year-olds today will live past 90 and one in seven will live past 95. Subtract from this your ideal retirement age to estimate the length of your retirement, but be prepared to adjust that in case you determine your original plan is not feasible.

Next, add up your expected monthly living expenses in retirement. Don’t include things you’re paying for now, like a mortgage or childcare, if you don’t expect to carry those costs into retirement. You should also bear in mind that other costs, like healthcare, may rise as you get older. Once you have your estimated monthly expenses, multiply this by 12 to get your estimated annual expenses. Then, multiply this amount by the number of years in your planned retirement, factoring in an additional 3% per year for inflation. A retirement calculator can make it simpler, but it will ask you to estimate the annual rate of return on your investments to determine how much you need to save each month to hit your ultimate goal. Use 5% or 6% to be conservative. Your investments may grow faster than this, but you can never be sure.

Your calculator should tell you the total amount you need to save overall and per month to cover your living expenses in retirement. It may also enable you to subtract any amount you expect to get from Social Security, a pension, or an employer 401(k) match, which is income you don’t have to provide yourself with. If not, subtract this amount yourself to determine how much you need to save on your own. You can estimate your Social Security benefits at different ages by creating a my Social Security account.

If you cannot afford to save as much as you need to each month, adjust your plan until you find a solution that works for you. If you can’t get the numbers to align with your given framework, consider delaying retirement, cutting your spending today, or boosting your income by working overtime or starting a side hustle so you have more money to save. Start saving as much as you can afford and start increasing your contributions by 1% per year until you reach your goal. You should also reevaluate your plan every few years to make sure your retirement goals haven’t changed.

Planning for retirement can be overwhelming, but having a clear pathway to your goal can help. If you haven’t created a retirement plan already, do so today, or consult with a financial advisor if you need assistance creating a personalized plan.

While younger Americans may be forcing their parents to tap their retirement savings for financial support Opens a New Window. , new research shows they should not follow their parents’ retirement Opens a New Window. savings strategy.

In a recent report titled “Reimagining Retirement: Generational Strategies for 21st Century Challenges” researchers from the Wells Fargo Investment Institute detailed how retirement strategies should differ among generations of American workers, from millennials through baby boomers.

One common thread? Forty percent of people say they will need to work longer or lower their cost of living to meet retirement expenses. Overall, however, a majority of people expressed confidence about having enough money in retirement.

Here’s a look at some of the other ways Americans of all ages can boost their savings:

Baby Boomers

Delay Social Security: A recent study found that the average retiree claimed Social Security benefits at the age of 62 Opens a New Window. – which lowers their lifetime income stream. Researchers instead recommend that those who have not yet claimed, delay until age 70 in order to maximize benefits. Full retirement age is 66 for those born before 1959, and 67 for those born after 1960.

It could also help to delay taking retirement account distributions. Required minimum distributions begin at age 70.5.

Move: It’s an often pointed to pattern that retirees flee to Florida, a state with no income tax. But moving to a location with a lower income tax rate and/or cost of living can help people manage retirement expenses. Retirees may also want to consider consulting a professional about their tax obligations, after the onset of the new tax changes.

Get a job: Older Americans can consider part- or full-time employment to supplement their retirement income. As previously reported by FOX Business, a majority of Americans are likely to continue having to work throughout their retirement.

By 2026, the Wells Fargo Investment Institute expects 21.8 percent of individuals 65 and older will have a job.

Generation X

Take advantage of match plans/catch-up contributions: If your company offers a match in a 401(k) or 403(b) plan and you are not taking advantage of it, that is one thing to consider changing.

Additionally, after the age of 50, people are able to make “catch-up” contributions to IRA and 401(k) accounts, which allow eligible individuals to stash extra money away in these accounts. Information from the IRS can be found here.

Retirees should also avoid borrowing from retirement accounts to meet expenses.

Invest for growth: Researchers recommend favoring equities for growth, but being prepared for a downturn by remaining diversified. They also recommend holding between six to 18 months of living expenses in cash.

Millennials

Start saving: All experts recommend starting to save for retirement as early as possible. Millennials should also take advantage of employer-matched plans, and remember to look into keeping that account when switching employers.

Wells Fargo Investment Institute researchers also recommend considering putting assets in a Roth 401(k), which is funded with after-tax dollars – ideal for people who will be in a higher tax bracket when they plan to withdraw.

Student loans: Don’t delay saving for retirement until after you have paid off your student loans.

Investing: Younger workers should consider taking more risks with their asset allocations, while also remaining diversified.