In our final section, we will examine two more misconceptions that often hinder people from properly preparing for retirement: 1) Believing that the world is the same today as it has always been, and 2) Ignoring the very real probability that at least one spouse may require long-term care.
#4 Misconception: I can be comfortable in retirement on less than I make now.
You have three choices for retirement income: More than you need, the right amount, or not enough. Sadly, of those who do plan, most try to figure out what they will need and come up with some figure less than they need now. Sorry, wrong answer.
This is a unique time in history. You are facing challenges today that Americans have not faced for many generations, if ever. The good news is people are living longer, living healthier and are more active later in life than they’ve ever been. The bad news is that because people are living longer there is a mounting financial crisis. Many people—thousands who think they’re okay today—may have incomes that expire before they do.
There is a confluence of forces at work: a population that’s living longer than any generation in history, the hardly perceptible erosion of purchasing power by inflation, low interest rates, increased stock market volatility, a Social Security system that cannot be sustained in its current status and fewer employer-sponsored pension and healthcare benefits in retirement.
All this is transpiring just as the largest generation in the history of this country is beginning to retire: the baby boomers. Although the effects aren’t visible today, these forces are welling up like a tidal wave in the middle of the ocean. The effects on the shore aren’t seen until the forces converge there … and then it’s too late.
If you think you can get by on less, guess again.
#5 Misconception: I don’t need to worry about long-term care
Do you have long-term care insurance? Most people don’t. And why is that? There are basically two answers I have to that question. Number one: “It” will never happen to them. Number two: It’s too expensive. Let’s talk straight, look at the facts and then decide what makes sense.
When you think about the threats to your retirement savings plan, most people usually think about market losses. Oftentimes, it is not market related events but catastrophic life events, like illness, that wreak havoc on retirement savings. If you had a spouse or family member that needed healthcare, how much of your retirement would you be willing to spend to help that person? All of it? I would, too.
When it comes to dealing with healthcare risk late in your life, you have two choices. Those are your only two options. You can hold the risk yourself or you can spread the risk around. If you don’t have long-term care insurance, you have to ask yourself an important question: Can you afford to foot the bill out of your retirement nest egg? Would there be any financial strain if your expenses went up $60,000 or $90,000 or even $120,000 per year over what you anticipate? If you haven’t taken care of the matter, no one else will pick up the bill for most long-term care.
Think it won’t happen to you? Well, hopefully not. But in a study done by the MetLife Mature Markets Institute in Westport, CT, it is estimated that anyone over 65 years of age will have a 43% chance of spending some time in a nursing home. Seven in 10 couples (65 and older) can expect one spouse to need long-term care. And yet, in a recent survey by the American Healthcare Association, 76 percent of the people surveyed said they do not expect to need long- term care in the future. There is a tremendous disconnect between the expectations and the facts.
What about the argument that long-term care is too expensive? Well, all insurance is too expensive if we never use it—but a bargain if we do. In any case, you can reduce the cost of long-term care insurance by tailoring it to your unique needs. This is done by adjusting one of the four main components of a traditional long-term care policy:
- Elimination Period—How long from the time you start needing it until it starts paying?
- Coverage Period—The length of time the coverage will pay benefits.
- Benefit Amount—How much it will pay per day or per month?
Riders—These can range from inflation riders (how much the amount of coverage will go up each year to cover increases in cost of living), to indemnity (to cover additional costs of medication), to a return of premium rider (which may return what you paid to your heirs in the event you don’t use the benefit in your lifetime), as well as many others.
By adjusting the amount of coverage in any one or more of these four components, you may be able to create a long-term care insurance policy that fits both your risk tolerance and your budget.