Paul O. Dillon, Attorney at Law

What Don’t I Know About Retirement?

Investopedia’s recent article, “6 Surprising Facts About Retirement,” writes that if you think most people are saving more in order to prepare for their long-term needs, you’d be incorrect. The article provides us with some of the more startling truths about retirement in the U.S.

1. Retirement May Be Longer Than You Think. The average American will retire at age 66 and live until about 79. However, many will see their retirement last much longer than 13 years. A 65-year-old woman has a 50% chance of making it to age 85, and a 65-year-old man has a 50% chance of reaching age 82. This is why younger people need to plan for 20 years or more of income in retirement. For current retirees, an ultra-conservative portfolio composed solely of bonds may not give them sufficient growth, especially with interest rates so low.
2. Social Security Doesn’t Do It By Itself. Many experts suggest replacing 80% of your usual income once you hit retirement. However, for many, Social Security payments alone won’t be nearly enough to hit that target. In 2019, the average monthly Social Security benefit is just $1,461. That’s just $17,532 per year.
3. We’re Waaaay Behind on Savings. Americans are quite far behind on saving for retirement. When the American workplace turned away from pension plans, workers needed to be responsible for securing their retirement funds. We’re not doing it: according to thestreet.com, in 2019 a typical couple in the 56-to-61 age bracket without any retirement accounts had just $17,000 in savings. For many, that’s not enough to live off for a year, let alone a whole retirement. However, the mean retirement savings of working households age 32 to 61 is $95,776, according to the Economic Policy Institute. 35% of workers have $100,000 or more saved for retirement.
4. Just Half of Americans Have a Retirement Plan. Today, the median annual pension amount for the fast dwindling number of Americans who have the old-fashioned defined-benefit plan is less than $10,000, according to CNBC.com. However, many of us aren’t replacing those pensions with a contribution plan, like a 401(k). Almost half of the population (43%) has no workplace savings vehicle of any kind in 2019, according to Bloomberg.
5. Many People are Staying in the Workforce. Because so many Americans are behind in their savings, it may not be surprising that many remain in the workforce well after reaching Social Security eligibility. Almost 19% of people 65 or older were working either full- or part-time, as of 2017. Consider this: about 20% of workers overall say they’ll never be able to retire!
6. Medicare Doesn’t pay for Assisted Living. Nearly 70% of individuals who reach age 65 will require long-term care at some point. What many seniors don’t know, is that Medicare doesn’t pay for most long-term care costs. It only covers 100 days of care at a skilled nursing facility, and only if it was preceded by a hospital stay of three days or more.

Begin your analysis, by looking at the amount of money you’ll need for retirement, based on your current spending and the standard of living you want. Then look at your savings balances and how much you’re saving regularly.

Roughly 55% of Americans build their nest eggs with a regular savings account. However, that might not be good enough, because of the low interest rates. Savers should consider other investment vehicles.

Be sure that you’re maxing out contributions to your 401(k) or 403(b) if you have one, or at least, saving enough to get the company match. If you don’t have a plan through your work, or you’re lucky enough to max out your plan each year, you can supplement your savings with an IRA. For 2019, you can contribute up to $6,000 a year to an IRA, or $7,000 if you’re age 50 or older.

Reference: Investopedia (September 27, 2019) “6 Surprising Facts About Retirement”

Does Your Retirement Plan Include Long Term Care Insurance?

Roughly 60% of those turning 65 can anticipate using some form of long-term care in their lives, according to the U.S. Health and Human Services Department. It may be a nursing home, assisted living, or in-home care.

CNBC’s recent article, “Not having long-term care insurance can be ‘the single biggest devastator’ of your financial plan,” reports that over 8 million Americans have long-term care insurance. However, the cost of that insurance is rising. This increase is because of several factors, including the fact that companies underpriced their policies for years and misjudged how many would drop coverage.

Because of those rising premiums, some individuals may choose self-insurance. That means saving a pool of money to earmark for long-term care. Coverage is also available through Medicaid, which has eligibility requirements.

Even with these increases, you should purchase some form of coverage. This is because not being insured can be the biggest devastator of a financial plan.

The rule of thumb has been to buy LTC coverage at age 55. However, it really depends on your situation. The big unknown is health, and the odds of being able to qualify for coverage at age 60, compared to age 30 or 40 is vastly different.

A traditional LTC policy will cover the costs of care for a certain period of time, generally up to six years. The amount of coverage is based on the average cost of care for your location. Most insurers offer it in the form of a monthly benefit, and possibly with some inflation protection.

There’s also a hybrid policy that covers long-term care costs but becomes life insurance paid to heirs, if it’s not used. Of the 350,000 Americans who purchased long-term care protection in 2018, 85% chose the hybrid coverage. It’s also called combo or linked-benefit. The big difference is price: you’ll pay more for the hybrid policy.

Medicaid is another option, particularly if you don’t have a way to save. To be eligible, you must deplete your assets. You can also work with an attorney to find out how you can shield your assets, before you need care. Medicaid also looks back five years into your finances, so if you have given away any money during that period of time, it will be subject to penalty.

Reference: CNBC (October 14, 2019) “Not having long-term care insurance can be ‘the single biggest devastator’ of your financial plan”

What Types of Senior Care is Available for Veterans?

The U.S. Department of Veterans Affairs offers some funding programs that can help offset the cost of some types of senior care.

U.S. News & World Report’s recent article, “Veteran Benefits for Assisted Living,” explains that many senior living companies try to help many veterans maximize their benefits, which in some cases can significantly reduce the cost of senior living.

Note that the VA won’t pay for a veteran’s rent in an assisted living facility. However, VA benefits may pay for some of the extra services required, like nursing assistance, help with bathing and toileting, and possibly meals.

There are a variety of benefits that may help, based on a vet’s specific service history and eligibility. The most commonly used benefits are the Aid & Attendance Pension. Another common benefit is the Survivor’s Pension for spouses of a deceased veteran with wartime service.

The VA’s Aid & Attendance and Housebound program is part of the pension benefits paid to veterans and survivors. The VA says these benefits are paid, in addition to monthly pension. A vet must satisfy one of the potential conditions, including:

• Requiring the aid of another person to perform personal functions, like bathing, dressing, eating, toileting, or staying safe from hazards;
• Being disabled and bedridden, above what would be thought of as recovery from a course of treatment, such as surgery;
• Being a patient in a nursing home due to physical or mental incapacity; and
• Having very poor eyesight (5/200 corrected visual acuity or less in both eyes) or a field of vision limited to five degrees or less.

Vets may qualify for these benefits, which are added to the standard monthly pension, when he or she is “substantially confined to your immediate premises because of permanent disability,” the VA says. Eligibility for the program is based on a case by case basis and involves a review by the VA.

It’s important to begin the application process early, rather than waiting for a crisis to occur. Ask an experienced estate planning or elder law attorney to help you and to discuss your options.

Reference: U.S. News & World Report (August 12, 2019) “Veteran Benefits for Assisted Living”

Can I Deduct Long-Term Care Expenses on My Tax Return?

If you need long-term care, you may be able to deduct some of the costs on your tax return. If you purchased a long-term-care insurance policy to cover the costs, you may also be able to deduct some of that. Retirement planning entails long-term care, so it’s critical to know how these tax deductions can help offset overall costs.

Kiplinger’s recent article, “Deduct Expenses for Long-Term Care on Your Tax Return,” explains that you can deduct unreimbursed costs for long-term care as a medical expense, including eligible expenses for in-home, assisted living and nursing-home services. However, certain requirements must be met. The long-term care must be medically necessary and can include preventive, therapeutic, treating, rehabilitative, personal care, or other services. The cost of meals and lodging at an assisted-living facility or nursing home is also included, if the main reason for being there is to get qualified medical care.

The care must also be for a chronically ill person and given under a care plan prescribed by a licensed health care practitioner. A person is “chronically ill,” if he or she can’t perform at least two activities of daily living—like eating, bathing or dressing—without help for at least 90 days. This condition must be certified in writing within the past year. A person with a severe cognitive impairment is also deemed to be chronically ill, if supervision is needed to protect his or her health and safety.

To claim the deduction, you must itemize deductions on your tax return. Itemized deductions for medical expenses are only allowed to the extent they exceed 10% of your adjusted gross income in 2019. An adult child can claim a medical expense deduction on his own tax return for the cost of a parent’s care, if he can claim the parent as a dependent.

The IRS also permits a limited deduction for certain long-term-care insurance premiums. You must submit an itemized deduction for medical expenses, and only premiums exceeding the 10% of AGI threshold are deductible in 2019. Further, the insurance policy itself must satisfy certain requirements for the premiums to be deductible. For instance, it can only cover long-term-care services. This limitation means the deduction only applies to traditional long-term-care policies, rather than hybrid policies that combine life insurance with long-term-care benefits. The deduction has an age-related cap.

These deductions are typically not useful for people in their fifties or sixties but can be valuable for people in their seventies and older. That’s because income tends to drop in retirement, so the deductions can have a greater overall impact on tax liability. As you age, you’re also more likely to have medical expenses exceeding 10% of AGI. Those deductions could move your total itemized deductions past the standard deduction amount. The chances of satisfying the medical necessity requirements for the care costs deduction also increase with age, and the cap for the premium deduction levels off after age 70.

Reference: Kiplinger (September 4, 2019) “Deduct Expenses for Long-Term Care on Your Tax Return”

What Are My Estate Planning “Must Have’s”?

(In addition to reading this article, listen to my radio interviews with Tom Obey of WHCF-FM88 which are linked on the homepage of my website www.pauldillonlaw.com.)

Many people think that having an estate plan just means drafting a will or a trust. However, there’s much more to include in your estate planning to be sure all of your assets are transferred directly to your heirs at your death. A successful estate plan also includes provisions allowing your family members to access or control your assets, if you become incapacitated.

Investopedia’s recent article, “6 Estate Planning Must-Haves,” provides us with a list of items every estate plan should include:

• A will and/or a trust;
• Powers of attorney;
• Beneficiary designations;
• A letter of intent; and
• Guardianship designations.

In addition to these documents and designations, a thorough estate plan also should consider the purchase of insurance, like long-term care insurance, a lifetime annuity to generate some level of income until death and life insurance to pass money to beneficiaries without probate.

Let's look at each item on this checklist to make sure you haven't left any decisions to chance.

Wills and Trusts. A will or trust should be one of the primary parts of your estate plan, even if you don't have a lot of assets. Wills make certain that your assets are distributed according to your instructions. Some trusts also help limit estate taxes or legal challenges. Talk to an experienced estate planning attorney about wills and trusts.

Power Of Attorney. A durable power of attorney (POA) allows an agent or a person you assign to act on your behalf, if you’re unable to do so yourself. A healthcare power of attorney (HCPA) designates another person to make critical healthcare decisions on your behalf in the event of incapacity.

Beneficiary Designations. Some of your assets will pass to your heirs without being mentioned in your will, such as 401(k) plan assets. Therefore, maintain a beneficiary and a contingent beneficiary on these types of accounts. Likewise, insurance plans should have a beneficiary and a contingent beneficiary, because they also pass outside of a will. Your beneficiaries should be over 21 and mentally competent.

Letter of Intent. This is simply a document for your executor or a beneficiary to define what you want done with a particular asset after your death or incapacitation. Some letters of intent also contain funeral details and other special requests. A letter of intent isn’t legally binding. It helps inform a probate judge of your intentions and may help in the distribution of your assets, if the will is declared invalid for some reason.

Guardians. If you have minor children or are considering having kids, naming a guardian is very important. Be sure the person(s) shares your views, is financially sound and willing to raise your children. You should also name a backup or contingent guardian.

Without these designations, a court could order your children to live with a family member you wouldn't have selected, or in some instances, the court could instruct that your children become wards of the state.

A will is a great place to start, but it's only the starting point.

Reference: Investopedia (July 16, 2019) “6 Estate Planning Must-Haves”

How Much Will Long-Term Care Cost?

The recent article from MarketWatch, “This is how much long-term care could cost you, and don’t expect Medicare to help,” reports that most people over 65 will eventually need help with daily living tasks, like bathing, eating, or dressing. Men will need assistance for an average of 2.2 years, and women will need it for 3.7 years, according to the U.S. Department of Health and Human Services’ Administration on Aging.

Many will rely on unpaid care from spouses or children, but over a third will spend time in a nursing home, where the median annual cost of a private room is now more than $100,000, according to insurer Genworth’s 2018 Cost of Care Survey. Four out of ten will choose paid care at home; the median annual cost of a home health aide is more than $50,000. Finally, more than 50% of people over 65 will incur long-term care costs, and 15% will incur more than $250,000 in costs, according to a study by Vanguard Research and Mercer Health and Benefits.

Note that Medicare and private health insurance typically don’t cover these “custodial” expenses. This means that such costs can quickly deplete the $126,000 median retirement savings for people age 65 to 74. People who exhaust their savings could wind up on Medicaid, the government health program for the indigent that pays for about half of all nursing home and custodial care.

People who live alone, are in poor health, or who have a family history of chronic conditions are more likely to require long-term care. Women face special risks, since they typically outlive their husbands and, as a result, may not have anyone to provide them with unpaid care. If husbands require paid care that erases all of the couple’s savings, women could have years or even decades of living on nothing but Social Security.

The earlier you start planning, the more choice and control you’ll have. Let’s look at some of the options:

Long-term care insurance. The average annual premium for a 55-year-old couple was $3,050 in 2019, according to the American Association for Long-Term Care Insurance. Premiums are higher for older people, and those with chronic conditions might not be eligible. Policies typically cover part of long-term care costs for a defined period, like three years.

Hybrid long-term care insurance. With life insurance or annuities with long-term care benefits, money that isn’t used for long-term care can be left to your heirs. These products typically require you to commit large sums or are paid in installments over 5 to 10 years, although some now have “lifetime pay” options.

Home equity. People who move permanently into a nursing home may be able to sell their houses to help fund the care. Reverse mortgages may be an option, if one member of a couple remains in the home. This type of loan lets them use their home equity. However, it must be repaid if the owners die, sold, or they must move out.

Contingency reserve. People with a great deal of investments could plan on using some of those assets for long-term care. Their investments can produce income, until there’s a need for long-term care, and then can be sold to pay for a nursing home or home health aide.

Medicaid spend-down. Those who don’t have much saved or who face a catastrophic long-term care cost that cleans out their entire savings, could wind up applying for Medicaid. Ask an elder law attorney about ways to protect, at least some assets for your spouse.

Reference: MarketWatch (July 19, 2019) “This is how much long-term care could cost you, and don’t expect Medicare to help”

What are Some of the Hidden Risks in Retirement?

Knowing the risks that may be found in retirement and the ways in which they can harm financial security is critical to making important modifications in a retirement plan. Sometimes without those changes, the effect of unfavorable and unpredictable events can be far worse.

The Bay City (TX) Tribune’s recent article, “5 hidden risks in Retirement” says that once you have a retirement plan in place, it’s not etched in stone. Circumstances change, and you may add or lose family members, your retirement objectives may shift, the economy may create new considerations and financial innovations may present new opportunities.

Be sure that your retirement plans (and beneficiaries) are current. Review these at least once a year.

Retirees and those making retirement plans should know about these five risks:

• Running out of money before you die, is a primary concern of most retirees. This is even a greater concern, as the average life expectancy has increased.
• Be certain that both you and your spouse are protected from the unexpected, such as the financial impact of the loss of one spouse. The surviving spouse will only get the higher of your two Social Security checks. Life insurance and estate planning are important to protect survivors.
• A longer life expectancy could result in high costs in a long-term care facility. Look into long-term care insurance.
• Know that a 50% gain doesn’t let a portfolio recover from a 50% loss. It takes a 100% gain to restore a 50% loss. Common stocks have substantially out-performed other investments over time and are usually recommended for retirees, as part of a balanced asset allocation strategy.
• Finally, plan on prices for food, goods, and services to increase during retirement, which reduces your buying power incrementally because you’re living on a fixed income. You must factor that in.

Knowing what the potential post-retirement risks are and considering them in the retirement planning stage, will help you be sure that they are mitigated and managed properly.

Reference: The Bay City (TX) Tribune (July 19, 2019) “5 hidden risks in Retirement”

What Do I Need to Know About Long-Term Care Insurance?

Long-term care policies are available from insurance companies. Federal employees can also obtain them through the federal FLTCIP program. LTC (long-term care) policies offer a wide variety of features.

Some policies may pay for care not only in a nursing home but also in an assisted living facility or at the home of the person who requires care.

Policies may also include cost-of-living adjustments, which will increase future benefit payments.

Some companies also offer LTC policies that cover both spouses at a discounted rate, rather than having to purchase two separate policies.

Fed Week’s recent article, “Selecting among Long-Term Care Options to Hold Down Costs,” explains that there also are life insurance policies that double as LTC insurance.

Therefore, if these policies cover long-term care expenses; the policy’s death benefit will be reduced.

However, if long-term care is not needed, the insured individual’s beneficiary eventually can receive the full death benefit.

Remember also that the ongoing premiums will be lower, compared with policies bought when a person is older.

When you’re shopping for LTC insurance, there are some tactics that can reduce your policy cost. Here are just a few:

• Reduce benefits. A policy that pays benefits as long as you need long-term care can be very expensive. However, a policy with a five-year maximum payout will be less expensive. There are not many people who will need more than five years of long-term care.
• Wait longer. You can reduce costs, by extending the period before you collect benefits. A policy with a 90-day waiting period will be less expensive than an LTC policy with a 20-day wait. Of course, this is only a bargain, if you can afford to pay for 90 days from your own resources.
• Avoid automatic inflation increases. A policy that increases your benefit each year from $100 a day to $105 to $110, etc., will be very costly. You can go with a “future purchase option.” This will let you to buy more coverage, if you need it, even if your health has declined.

Reference: Fed Week (June 27, 2019) “Selecting among Long-Term Care Options to Hold Down Costs”

What Should I Know About the MERP (Medicaid Estate Recovery Program?)

An adult child may get a bill from the state for his mother’s Medicaid nursing home care.

You’ll never get a notice that Medicaid (let’s say in the State of Texas) is calculating a bill for mom’s entire healthcare tab that Medicaid paid. However, you may get a notice that says the state wants mom’s house. That’s because Medicaid is asking to be reimbursed for over $125,000 that was spent for the mother’s care and her prescriptions.

The document may come from the Medicaid Estate Recovery Program (MERP) that says the state Medicaid program wants the money used for her care, because his mother owned the house.

The Houston Chronicle’s recent article, “Is Medicaid a good long-term care option?” emphasizes that we should all know about the MERP (Medicaid Estate Recovery Program), especially if it seems that our aging parents may need to apply for Medicaid for long-term care.

A Medicaid attorney can answer questions from adult children who are shocked when they find out the state has put a lien on their parent’s house because of long-term care health-care cost for which the specific state paid. Medicaid long-term care can be care can be provided at home, at an assisted living facility, or personal care at home or in a nursing home. It also doesn’t matter when the Medicaid system has paid for the mom’s care.

Medicaid can recover any and all medical expenses, which include any hospital services, prescription drugs and even Medicare cost sharing expenses which are Medicare premiums (Part A—hospital insurance, Part B—medical insurance), deductibles and coinsurance amounts that the state’s Medicaid has paid.

Any claims against an estate—including MERP claims—must be paid prior to the property being distributed to heirs or beneficiaries, as instructed in mom’s will. The state doesn’t require an heir to sell the deceased recipient’s house, if the Medicaid claim can be paid with other funds. However, if it can’t, then the adult child may have to sell the house, or the state will file a lien against the house. That may be the case, even if he’s still living there.

Talk to a Medicaid or elder law attorney for assistance with proper Medicaid planning.

Reference: Houston Chronicle (May 29, 2019) “Is Medicaid a good long-term care option?”

How are Baby Boomers Doing with Their Retirement Planning?

The baby boomers—those born between 1946 and 1964, ages 55 to 73—have about half (47%) of their group already in retirement.

CNBC’s recent article, “Baby boomers face retirement crisis—little savings, high health costs and unrealistic expectations,” says that the Insured Retirement Institute’s annual report, Boomer Expectations for Retirement, highlights the fundamental issues of too little savings, underestimating healthcare costs and unrealistic expectations of how much retirement income they’ll actually need.

Too little savings. The three "legs" of the retirement "stool" are Social Security, private pensions and personal savings. These aren’t in great shape, as the average Social Security check is $14,000 a year, and just 23% of boomers ages 56-61 expect to receive income from a private company pension plan, with only 38% of older boomers expecting a pension. Most boomers haven’t saved nearly enough in their personal savings, with 45% of boomers having absolutely nothing saved for retirement.

Underestimating health care costs. Retirees frequently underestimate health expenses, especially long-term care costs. Many people don't understand the system: half of the survey respondents say they haven’t calculated the cost of long-term care insurance, because they say they’ll rely on Medicare. However, Medicare has no coverage for long-term care. Just eight percent of boomers say they have purchased a long-term care policy.

Underestimating retirement income. The average amount spent by Americans 65-74 is $55,000 annually. However, most baby boomers don't believe they’ll need near that amount. To that point, about 60% say they will need less than that on which to live. Their backup plan is to downsize, go back to work, or ask their children for help.

Of those who aren’t confident they did an adequate job preparing for retirement, the top two things they wish they’d done differently were to have saved more (63%) and to have started saving earlier (58%).

Reference: CNBC (April 9, 2019) “Baby boomers face retirement crisis — little savings, high health costs and unrealistic expectations”