The Baby Boomer generation is experiencing increased longevity. As many of them provide hands-on care, and sometimes even financial support, for their parents, they’re also discovering that the cost of aging may be more than they expected or prepared for. Thus, they may be worrying about how they will finance their own care as they advance in years.
The Cost of Elder Care
One of our clients, Daniel, has a friend whose parents had hired someone to help them at home. Initially, the parents needed assistance with bathing and food shopping, but the tasks and the time commitments grew. Daniel was stunned at the cost of their care. It made him think about his mother and her ability to pay, as well as how he should be planning for his own aging future.
This story presented an opportunity for Daniel to open a discussion with his mother about her ability to pay for such care, should she need it. Daniel’s sensitive approach allowed his mother to feel comfortable sharing her finances for the first time. He realized that his mother would not be able to afford round-the-clock care for very long, should she need it. They agreed to explore financial approaches for managing the expenses of aging.
Their situation is not unique.
Most people underestimate the cost of longevity. According to Ramsey Alwin of the National Council on Aging, “There’s a myth that Social Security and Medicare miraculously take care of all of people’s needs in older age.”
A better understanding of the costs associated with aging will help people improve their financial retirement strategies. Social Security benefits cover only a fraction of the average recipient’s monthly expenses. Moreover, Medicare does not cover long-term care expenses.
While the rising cost of everyday expenses is currently in the news, there has always been a budgetary pinch from costs related to aging. Expenses that are often higher than expected include:
- Prescription drugs
- Medical devices (hearing and vision aids) and equipment
- Dental care
- Home health care
- Home modifications
- Medical insurance
- Assisted Living
So, how do retirees pay for the high cost of aging?
Thinking Ahead
We have seen considerable variations among our senior clients in their ability to support elder care costs, even long-term medical care.
Some of the strategies that our more financially stable clients pursued in their earlier years include:
- Emphasized savings during earning years
Financing retirement generally requires contributions from portfolio income to supplement Social Security benefits and pensions. - Balanced retirement savings with after-tax savings
While a sizable retirement account seems desirable, be mindful of the tax consequences of required minimum distributions (RMD) for you and your heirs. Required distributions from retirement accounts, whether or not needed for living expenses, are fully taxed. Distributions from after-tax savings (including ROTH IRAs) may face smaller or no tax costs. RMD income may also push up Medicare premium costs. - Did a realistic cost/benefit analysis of purchasing long-term care insurance
Analysis should help determine the ability to pay out of pocket for care over an extended number of years; the ability to pay the accumulated cost of insurance premiums; what the expected lifespan may be; etc. - Waited until maximum retirement age (currently 70) to begin claiming Social Security benefits
This generated the maximum monthly payout. Exceptions are warranted when there is a high probability of a shortened lifespan. - Earned employment income for as long as possible and sometimes had a part-time job in retirement
This minimized the reliance on investment income and allowed Social Security benefits and pension income to be added to savings. - Took investment risk earlier
Invested funds tend to grow in value over an extended period and can help offset the erosion in spending power from rising prices.
Dealing With Current Situations
Even in challenging financial situations, there may be steps that seniors can take to mitigate problems. In collaboration with other professionals, we have helped clients achieve a financial lifeline through creative strategies. Some examples are:
- Selling assets, such as art, collections, and real estate
- Scouring details of retirement plans and investments for possible sources of income and benefits that may have been neglected or forgotten (for example, activating pensions or annuities)
- Reviewing life insurance policies and investigating life settlements to determine if the policy value could be better used to finance care
- Evaluating whether the home can be tapped to generate monthly income (through a reverse mortgage, a second mortgage, renting a portion, etc.) or sold to finance an alternative living arrangement
- Exploring an intra-family loan that would be repaid upon the owner’s death when the cost basis of long-held investments (family home and/or financial assets) will step up to date-of-death value, thereby avoiding taxes on the sale of assets during the owner’s lifetime
- Scaling back or eliminating financial contributions to grandchildren’s educational or medical expenses
So, as you gather with family for the holidays, take note of changes in your aging relatives, such as decreased mobility, declining cognition, impaired vision, etc. If evaluating whether at-home care or a senior residence might be beneficial, be aware that such assistance comes at a significant cost. It’s essential to explore and address these caregiving needs and financial demands for your loved ones and for yourself – as far in advance as possible.
(Find helpful ideas and information about sharing the holidays with your elderly loved ones in these articles: The Best Gift to Give Your Aging Loved Ones this Holiday Season and Communicating with Aging Relatives during the Holidays.)