Retirement Daily Guest Contributor
Jun 2, 2020
By Chris Orestis
Seniors have been the most vulnerable population during the coronavirus pandemic. They have been especially hit hard by the health impact of the virus, as well as the financial turmoil that the virus has unleashed. But financial security is a concern for seniors during the best of times, too. There are a number of factors that come into play as people deal with the unique challenges of aging and declining health. Compounding these challenges is the fact that most people do not adequately plan for the financial realities of retirement and the expense of long-term care.
Most people are not well informed about the variety of financial vehicles available to them to plan for retirement. Even more so, seniors tend to be unaware of, or don’t fully understand, the variety of readily available financial instruments that are specifically designed to meet their needs and can actually become more beneficial to them as they get older or more infirm.
Financial models suggest that a person would need about 70% of their peak earning level to maintain their lifestyle. To do this you would need to have saved at least 10x your annual income. That means if you earned on average $100,000 during your work years, you would need to have saved at least $1 million in order to generate $70,000 a year to live on in retirement. But the reality is not many Americans will retire with that kind of money in the bank, so what are options to address financial needs in retirement?
Financial options most readily available to seniors can be divided into three categories: Entitlements, Insurance, and Age-Based Funding.
Entitlements
What you need to know about Social Security
Social Security provides a financial safety net for elderly Americans, the disabled, and the survivors of a deceased spouse/parent. Eligibility starts at age 62, but the longer you wait to collect benefits the more you will receive. For example, if you start collecting at age 62, you might only be eligible for 70% of the amount you have earned. If you wait until your “full retirement age” (which is 67 if you were born in 1960), you would receive 100% of your benefit. If you delay collecting past your full retirement age, you will actually earn credits that will increase your benefit up to 8% if you max out at age 70. The average age of people collecting Social Security is 73. But remember, Social Security is not designed to be a full replacement of your income, and will probably only replace about 40% of your peak earnings. It is important to keep generating as much income as possible to an age range of 67-70. By continuing to build up your savings, assets, and investments you can add another 30%-40% to get you closer to what was once your working income. To help you predict the Social Security benefit you could receive, use these helpful Social Security Calculators to project possible benefit amounts, ideal retirement ages, and life expectancy.
What you need to know about Medicare
Starting at age 65, Medicare provides a number of health benefits including hospital care, skilled nursing facility, hospice, lab tests, surgery, home health care, doctor care and outpatient services, prescriptions, and preventative services. It is always best to enroll in Medicare as soon as you are eligible at age 65. Open enrollment is required on an annual basis from October 15 – December 7. It’s very important to make sure you and your spouse continue to evaluate your needs and make the right selections during the annual Medicare Open Enrollment period to make changes to your coverage.
Medicare coverage is divided into four parts plus supplemental coverage:
- Part A covers hospital (inpatient, formally admitted only), skilled nursing (only after being formally admitted to a hospital for three days and not for custodial care), and hospice services.
- Part B covers outpatient services including some provider’s services while inpatient at a hospital, outpatient hospital charges, most provider office visits even if the office is “in-hospital,” and most professionally administered prescription drugs.
- Part C is an alternative to traditional Medicare enrollment called Medicare Advantage. This allows patients to choose private health plans with at least the same or more service coverage as Parts A and B, usually the pharmacy benefits of Part D, and always an annual limit to out-of-pocket costs. A beneficiary must enroll in Parts A and B first before signing up for Part C.
- Part D is simply coverage for your medication needs. You pay a monthly premium to an insurance carrier for your Part D plan. In return, you use the insurance carrier’s network of pharmacies to purchase prescription medications.
- Medicare Supplement Insurance (Medigap) is offered by Medicare-approved, private health insurance companies as a supplement to, but not a substitute for, Medicare coverage. It is designed to help pay what original Medicare does not, such as copays, deductibles and coinsurance.
What you need to know about Medicaid
Medicaid gives low-income persons and the disabled (and dependents) access to healthcare and long-term care support and services. Recipients must be U.S. citizens or qualified non-citizens, and may include low-income adults, their children, and people with disabilities. Medicaid provides health benefits to qualified applicants such as doctor visits, hospital expenses, nursing home care, home health care, and long-term care costs.
Medicaid is available only to people with limited income and assets. Income from work, investments, and entitlements such as Social Security all need to be reported by the applicant. Assets such as cash, stocks, bonds, trusts, annuities, real estate, vehicles, and life insurance all must be reported and calculated for eligibility. If a state determines that an individual has transferred assets for less than “fair market value” inside the mandated five year “lookback period,” they may be ruled ineligible for Medicaid coverage for a specified period of time. If a transfer of assets for less than fair market value is found, the state must withhold payment for nursing facility care (and certain other long-term care services) for a period of time referred to as the penalty period.
In addition to financial eligibility, states determine if an individual meets the functional criteria by assessing the limitations in an individual’s ability to carry out activities of daily living (ADL) and instrumental activities of daily living (IADL). Individuals who incur high medical costs may “spend down” into Medicaid eligibility because these expenses are deducted from their income. Spending down may bring their income below the state-determined income eligibility limit.
What you need to know about Senior Health Planning Accounts (SHPA) for Long Term Care
In 2020, the United States Congress introduced H.R. 5958, the “Senior Health Planning Account Act” which is a bipartisan bill that provides a tax-free way for seniors to roll over their proceeds from an LTC-Life Settlement into a senior health planning account” (SHPA), which would be dedicated to paying health care costs for themselves and their spouse. If passed, the Long-Term Care Benefit Account (LTC-HSA) will be a bank-trust account funded tax-free by an LTC-Life Settlement set up to make monthly payments towards any form of senior living and long-term care services the owner wants. Any form of…