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Health & Fitness

Income Pitfalls in Retirement

Avoid financial pitfalls in retirement through thoughtful planning.

 

 

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When helping a client plan for retirement the most common question I used to hear was “How much money will I need in retirement?” Now the question is “How do I make sure that my money will last?”

 

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Back in the “olden days” my parents were very secure in retirement thanks to the two pensions that my father received from his former employers. He also had really good Medicare supplemental insurance. Unfortunately, that was the good old days. Now you can’t even count on the full pension that you had been counting on.

 

I have a friend who took early retirement from a major airline.  He received part of his money in a lump sum, which he rolled over into an IRA. The rest he received in monthly payments. Several years later his monthly benefit was slashed more than half because the company had filed for bankruptcy. Other retired employees who had not taken a partial rollover (lump sum) had their monthly benefits cut by 80% or more.

 

This is not the way retirement is supposed to be. Now, even a company pension and possible Medicare and/or Social Security may not provide the safety net that a lot of people have come to expect.

 

Two major pitfalls that can affect retirement income:

1) Longevity

2) Long-term care needs

 

Neither of these events is predictable.

 

Longevity – You may live to over 100, at the current US life expectancy age for males of 76 and 81 for females, or much sooner at a below average age. Almost all of my Italian relatives (male and female) lived to over 90 years of age.

 

It would be much easier to plan if you could answer the question “When do you plan on dying?”

 

Long-term Care Needs - With longevity comes a higher probability of needing long-term care. It may come in the form of ill health, dementia or Alzheimer’s. With the former, the average length of stay in a long-term care facility is approximately 4 years. For dementia and Alzheimer’s patients, care may be needed for many years.

 

According to Forbes.com (Dodge the Long term Care Insurance Mess, March 29, 2013,) the Long-term Care insurance industry has changed significantly over the last few years. Many of the dominant companies have either dropped out of the business or increased their rates from 45% – 85%.

 

It is a use-it or lose-it proposition. When you put these two concerns together, purchasing a traditional LTC policy becomes almost untouchable for anyone with a suspect health history.

 

The good news is that insurance companies who specialize in annuities have stepped up to help solve both of these problems, sometimes within the same product.  Annuities have also changed much over the years, but in this case the changes have been for the better. A typical annuity once “annuitized” turned into what resembled a pension (a monthly stream of income for life). But this too was also use-it or lose-it product.

 

Now you can find an indexed annuity that may can provide a guaranteed income for life and the potential (if you qualify) for an increase in income while receiving long-term care for a specific period of time.  It may also increase as inflation increases. The guaranteed income is not “annuitized”.

 

I cannot discuss specific products here, but don’t loose hope. There are solutions to your needs in many cases. Of course every situation is different, so speak with you financial advisor to find a product that fits your needs.

 

 See more by Lynn on EVE.

 

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