The longer we live, the more expenses we rack up, and the further our retirement dollars need to stretch. Married couples have the longest life expectancy, with a 72 percent chance that one person will live to age 85 and a 45 percent chance that one will live to age 90.
So to ensure you have enough money in your golden years to cover those costs and not pass on the responsibility to your children, take these five steps now.
1. Don’t sacrifice your retirement funds to help your kids (or grandkids).
The student loan debt crisis isn’t just affecting young adults fresh out of college. According to Marketwatch, families who took out parent PLUS loans and had with a student who earned a bachelor’s degree in 2016 owed about $32,596 in parent PLUS debt. That’s close to a 20 percent increase over the class of 2012. And people can be carrying the burden of student loans even as they hope to head into retirement: A whopping 2.8 million borrowers over the age of 60 owed student debt in 2015.
The problem with parent PLUS loans, in particular, is that they don’t offer borrowers the same protections as federal student loans, such as income-driven repayment plans and loan forgiveness tied to public service. The same goes for private loans, which are notoriously inflexible when it comes to assistance for borrowers who struggle to make their payments. And parents don’t enjoy the return on investment of their child’s degree ― they’re simply saddled with debt that bites into their retirement income.
Taking out educational loans is just one way parents overextend themselves to help out their children. A study by Merrill Lynch found that parents in the U.S. spend $500 billion every year on their adult children, twice what they put away for their own retirement.
“Some parents just want to be super generous to their children or grandchildren and they start wanting to make gifts, whether it’s funding a grandchild’s 529 plan or helping a child become a doctor or a lawyer,” said Quentara Costa, a certified financial planner and founder of Powwow LLC.
Though such generosity is understandable, “there’s not a lot of time to recoup that money if they’re thinking they’re retiring soon or they’ve already retired,” Costa said.
2. Prepare for the major cost of medical care.
“Health care is a bigger expense than just about anybody plans for,” said Sean Gillespie, a fee-only financial advisor with Redeployment Wealth Strategies. In fact, Fidelity estimates that the average couple who retires today at age 65 will need $280,000 to cover health care and medical costs in retirement.
Many people count on shifting over to Medicare at age 65. But what they don’t understand is “you’re going to pay for your Medicare ― it’s not something that you just pay for out of your paycheck all your life along with Social Security and then stop paying for,” said Gillespie. “You actually have Medicare premiums when you hit 65.” And there’s no real benefit to not signing up for Medicare until you really need it because there are penalties for that.
The $280,000 figure also includes out-of-pocket costs such as deductibles, cost-sharing requirements for drugs and certain services, and devices that Medicare doesn’t cover, such as hearing aids.
“It’s not uncommon to spend more on medical care in the last year of your life than you did in every year of your life combined [before that].”
– Sean Gillespie, a financial planner
Worst of all, that estimate doesn’t include long-term care, which is another major expense that older people should be ready to shoulder.
“We tend to do a great deal of our spending on medical care in the last year of our lives. And for a lot of people, it’s not uncommon to spend more on medical care in the last year of your life than you did in every year of your life combined [before that],” Gillespie said.
3. Consider a long-term care insurance policy.
You don’t buy home insurance expecting your house to burn down. But you know that’s a possibility ― and if something like that did happen, you’d be in a pretty bad place financially without the policy.
The same goes for long-term care insurance. Research shows that after age 65, there’s a 50-50 chance you’ll require long-term care at some point. And in most cases, Medicare won’t cover it. Considering that average long-term care costs amount to about $140,000, failing to insure yourself is like heading to Vegas and plunking down your life savings on black. It’s a gamble you really shouldn’t take if you can help it.
“If you don’t have some sort of insurance policy to help cover those costs, it’s coming out of your pocket,” Gillespie said.
There are many options in long-term care policies and the devil is in the details. For instance, most plans have a 90-day elimination period, which means you pay out-of-pocket for the first 90 days before the benefits kick in. You can find others with no elimination period, but prepare to pay a higher premium. And if you encounter a policy that doesn’t offer any inflation protection, “walk away,” Gillespie said.
4. Have a Social Security strategy in place.
It can be tempting to grab your Social Security benefits as soon as you become eligible. After all, you paid into the system for decades and who knows if you’ll be around tomorrow. Why wait any longer to get your money?
The fact is that waiting as long as possible to claim Social Security benefits can pay off in the long run. First, the system credits you for delaying retirement (up to a point). Second, Social Security payments are based on mortality tables that haven’t been updated since 1983, according to CNBC, but Americans have longer life expectancies today. So the system actually credits you for delaying retirement more than it probably should. “The difference between age 62 and age 70 is remarkable,” Gillespie said.
For example, if you wait until your full retirement age of 66 (or 67, depending on when you were born), your benefit will be 25 percent higher than if you claimed it as early as possible. And if you wait even longer, that benefit increases by an additional 8 percent each year until you reach 70. On the other hand, if you claim Social Security benefits at age 62, “you are accepting a permanent reduction to those benefits,” Gillespie said.
But what if you’re not around much longer than that?
You can play all kinds of math games with this: If somebody who was born the same day as you were and had earned identical Social Security benefits began claiming them at age 62, and you waited until you were 70, that person would pull more dollars out of the system until you both reached age 82. After that point, you would come out ahead.
The bigger issue is what happens to you if you reach 82, need Social Security to meet your bills and didn’t hold off to get the larger benefit.
“At that age, our biggest financial risk is not if we do die, but if we don’t,” Gillespie said.
5. Plan for the possibility of divorce.
Thanks to longer lifespans, shifting attitudes and diminishing stigma around the idea of divorce, older adults are splitting up more than ever. In fact, over the last 25 years, the divorce rate among those age 50 and older has about doubled. And those 50 and older who are married for the second time are twice as likely to divorce as those who’ve only been married once.
“I’m seeing that more often, people at an older age are getting a divorce because they stay together for the kids. And now that the kids are off to college or through college, they’re saying, ‘Hey, this is my time,’” said Costa.
The problem? Their combined income remains the same and their assets remain the same, but now they have to fund two separate sets of living costs. “So now it’s cable times two and electric times two. What was affordable when they were together as a couple may now not be affordable,” she said.
So if divorce could be a possibility in the future, you may want to set aside savings for the added expenses.
When’s the right time to start planning?
According to Costa, the best time to plan for your elder years is around age 50.
“You’re through a lot of the initial milestones that may be coming your way,” she explained. “There’s not as much short-term goal planning where you’re just trying to get through the next month. You’re at a point where you’ve reached a kind of stasis for your mortgage payment, your career, etc.”
Plus, Costa warned, your 50s are often the last call to purchase things like long-term care or life insurance. If you wait too long, those options come off the table.
“If you choose not to do it, that’s perfectly fine, but allow that to be your decision, not the decision because you waited a month too long and now it’s become unaffordable,” Costa said.