None of us likes to think about aging. We’d prefer that our parents stay young enough to be healthy, fun, and able to provide free babysitting. We’d prefer that we stay young enough to not snap, crackle, and pop in the morning so we can still slip the surly bonds. But the reality is that as my dad used to say “ain’t none of us getting out of this place alive.”
Our parents will age and we’ll be in medium to long trail. You’re probably too young to think about the financial planning issues of seniors for yourself, but there’s a decent chance that you’ll need to help mom and dad at some point. This article is at best a primer on the types of issues you might want to know exist, so you’re not as shocked when the klaxon sounds off and you need to launch on an advise and assist mission with your parents.
Entire bookshelves are devoted to this topic, but here’s the condensed FOGO-ready headlines you should know about.
Medicare—Medicare is the government-funded, (sometimes) privately executed health insurance plan for those over 65. We all pay for it with the various Medicare taxes (1.45% of all wages from you and another 1.45% from your employer; .9% more of amounts over $200/250K (single/married), and another 3.8% of capital gains on the highest earners). Coverage is automatic when turning 65 IF already receiving Social Security, but otherwise you must apply and should not delay unless you like paying penalty taxes. Our entire healthcare system in America assumes that we all shift to Medicare at 65 and your parents’ other health insurance likely ends at that point. Medicare has four parts.
Part A is hospital insurance. Enrollment in this part is automatic with enrollment in Medicare and for most people, there will be deductibles for hospital stays, but not premiums.
Part B covers doctor appointments and tests. The premiums increase with your income and for some services, there are no caps on cost-shares, so it can clobber your finances.
Part C, often called Medicare Advantage is actually an HMO-like replacement for Parts A, B & D. It’s administered through private insurers. While you’ll pay extra for it, it may very well save money and time.
Part D is prescription drug coverage. As you’ve no doubt seen at the base pharmacy, the retiree set max performs the use of prescriptions. Part D can be expensive, but not as expensive as the street price of many drugs.
Medigap is a supplemental policy for those that have A, B and (maybe) D, but not C. It’s meant to help defray cost-shares.
Tricare for Life is for military retirees and integrates Tricare benefits with Medicare benefits. The result is that military retirees maintain excellent coverage but will have increased expenses.
Medicaid—Medicaid is health insurance for the poor. We frequently confuse it with Medicare, especially since many of our seniors live at or near poverty. The reason for mentioning it here follows…
Long-Term Care—(LTC) The major cost that Medicare essentially doesn’t cover at all is LTC. Estimates suggest that 70% of us will need nursing home care, assisted living, memory care or similar skilled care to help us with the Activities of Daily Living (ADL) at some point in our senior years. LTC can bankrupt a family in a heartbeat since monthly costs range from $50K to $105K+ per year and inflate faster than many other expenses. Medicare does not cover long-term care!
Long-Term Care Insurance is not cheap, but makes a lot of sense when entering your 60’s, maybe even late 50’s. If you retired from federal service, you’ll want to know about the Federal Long-Term Care insurance program.
Like all insurance, you’ll want to buy it before you need it, because then you can’t buy it. If your nest egg is more hummingbird than ostrich, both Long-Term Care and insurance for it may be unaffordable.
Medicaid can cover nursing care. There are probably three things to remember about relying on Medicaid for LTC:
The available facilities will not look like the Ritz Carlton…
Medicaid only pays when you’ve largely exhausted your financial resources. The program actively combats fraud since many try to out-maneuver it by transferring resources to family members to hide wealth. It generally looks at transfers up to 5 years back to recover attempts to evade paying for care.
The available facilities will really, really not look like the Ritz Carlton… so truly, planning to avoid a Medicaid nursing home situation is very worth the time and effort if possible.
The good ol’ third rail of American politics can be thought of as the (insufficient) pension that almost everyone gets. Like Medicare, you and your employer pay 6.2% each out of the wage base ($147,000 in 2020). Social Security can provide payments to young widow(ers) and their children, as well as the disabled, but let’s focus on seniors. Social security payments can be taxed for higher income earners.
Age 62 is the youngest age most can start receiving social security. If you start taking Social Security before your “Full Retirement Age” (FRA) then the amount is permanently reduced by as much as 25%.
Age 67 is the FRA for those born after 1960. The age may be slightly younger for those born before 1960. Payments are not reduced at FRA.
Age 70 is the latest anyone should delay taking Social Security since payments no longer increase after age 70. Payments increase 8% per year after FRA and are about 25% higher at age 70.
Social Security is meant to provide about 40% of a senior’s needs. If your parents are planning on living only on Social Security, the Master Caution Light should be on. Social Security payments go up with a COLA, but rarely at a rate that beats inflation. E.g., the COLA was 5.9% from 2021 to 2022 but inflation is currently pegged over 7%. Your parents will need to apply to start claiming Social Security—enrollment is not automatic.
Required Minimum Distributions (RMDs)
RMDs are a favorite boogieman of the headlines targeted at seniors, but most will never have to worry about RMDs. When you accumulate retirement savings in a Traditional 401(k), 403(b), TSP, IRA or Roth 401(k) Roth 403(b), you must eventually start taking money out. What you do with the money is up to you, but if it’s coming from a tax-deferred account (the Traditional accounts) then Uncle Sam wants you to finally start paying income tax on those dollars.
If the money comes from a Roth TSP/401(k)/403(b), he wants you to get the dollars in circulation so someone will pay one of our many taxes on them. An RMD is a defined percentage of these retirement accounts that must be taken out each year after turning 72. (It was age 70.5 until 2020). For example, if you turn 72 in 2022, your RMD is about 4% of your applicable accounts.
Since most Americans have woefully under-funded retirement accounts, they’ll need much more than 4% to cover their expenses. The RMD percentage increases as you age beyond 72, but again, most retirees withdraw more than the minimum required amount to cover actual living expenses. Thus, the media fear-mongering over the burden of RMDs is a red herring for most.
A Roth IRA is a special unicorn among tax-advantaged retirement accounts. There are no RMDs for Roth IRAs (but there are for Roth 401(k) and the like). If a retiree doesn’t need the money, s/he can let it grow and spend more later or give an appreciated amount away to heirs. Converting or rolling over funds to a Roth IRA prior to age 72 is a key wealth-management strategy. Even if your parents are rolling in dough, they will want to consider Roth Conversions in order to make their money last longer.
!!! WARNING !!!
If you are required to take an RMD, but fail to do so, the tax is 50% of the RMD! This is an enormous penalty and should be avoided at all costs.
When I talk to people about financial planning, many expect the conversation to go directly to investing. Investing is a lifetime activity and almost never hinges on quick, urgent action. But since none of us knows our final moment, having estate documents in place truly is urgent.
Estate documents should always include a will, healthcare power of attorney, and an advanced directive a.k.a. living will. It’s usually prudent to include either a general or special power of attorney in case you become incapacitated. There are many types of trusts, but a basic revocable living trust is an excellent tool to work alongside a will to manage cost, privacy, precision, and speed of asset transfer at death.
Death is one of our society’s semi-taboo topics, but it creates a real mess when families don’t take a lead turn. Even if it’s not a good fit to talk about the contents of your parents’ final wishes, it would be very helpful to know where their estate documents reside so that you can help their executor (a.k.a. personal representative) find the documents and get started on estate administration.
If your parents don’t have estate documents in place, consider this an emergency and start working your Jedi mind tricks, armchair psychology, behavioral economics or other magic to try to get them to put them in place. Online legal services combined with a notary at the local shipping store can get a minimum viable product in place for a few hundred dollars—maybe less. Most base legal offices will provide free documents to retirees if your parents served.
Helping your parent’s get these issues in order can be a love note to your whole family.
Shoring up the Defenses
You’re likely aware that elder abuse and scams against senior citizens are both high-threat and prolific. Seniors have to defend their mailbox, front door, phone, email inbox, and internet use against the onslaught of tactics designed to separate them from their money.
At the same time, none of us likes to give up our freedom and sense of autonomy or even admit that we might not be up to the challenge of guarding against relentless fraudsters. If you’re going to help your parents, you’ll probably need to start planting some of these seeds long before you need them to sprout. But, if you’re successful, you may be able to help your parents with things like:
Access to their email so you can keep an eye on what they’re seeing.
Duplicate account statements so you can monitor their money flow.
A mail management service to turn paper into electrons that you can both see.
Avoidance of phone calls with unrecognized caller ID (they can leave a message). Services like Google Voice can turn those messages into an email that you can help with.
Online access to all bills, financial accounts, etc. This can greatly ease the load of monitoring parental defenses.
Credit freezes to prevent fraudulent account openings.
A video doorbell to help back them up on handling door-to-door solicitors.
Familiarity with screen-sharing and other remote access programs to help you help them with their computer issues.
Trusted Contact listing on financial accounts so that institutions can contact you if they detect abnormal transactions or behavior.
This list is a starter, but you’ll probably need to keep digging to help your parents stay ahead of the threats.
It’s possible your parents have purchase life insurance, annuities, long-term care insurance, or even hybrid long-term care insurance. While these products are specifically designed to address end-of-life needs, they can also be complex, expensive, and often forgotten.
Cash value life insurance such as Whole Life, Universal Life, and Variable Life have premiums that may not be affordable for seniors, especially widow(er)s. It’s one of the key reasons why over 70% of such policies lapse before paying out. Knowing what policies your parents have allows you to make sure that either the premiums are still being paid or helping with the decision to cancel the policy to free up cash for other priorities.
Annuities are essentially self-funded pensions purchase from and administered by insurance companies. Many seniors buy them as a form of longevity insurance. They’re also popular for those who cannot stomach or afford the volatility of the stock and bond markets. Like life insurance, there are endless variations of annuity features. They usually can be surrendered if they’re inappropriate, but at great cost.
Exchanges. Life insurance products and annuities can generally be exchanged tax-free. For example, if a widow(er) has a Whole Life policy with sizeable cash value, but doesn’t need life insurance then exchanging the policy for an annuity can turn the policy into available funds for current consumption needs.
Long-term Care insurance was discussed above, but the insurance industry’s version of innovation is usually finding ways to strap bells and whistles onto existing products. Hybrid long-term care insurance is essentially life insurance that converts to long-term care insurance if needed. The upside is that one of two needs can be met, but the downside will be higher cost for the same level of coverage on each product.
Reverse Mortgages allow house-rich, cash-poor seniors to take a loan against their home in order to free up equity for spending. Upon death, the home is sold to pay the loan and any remainder flows to the estate. Reverse mortgages are heavily sold but often very expensive with fees and interest. They are a common last resort for the under-saved.
Cleared to Rejoin
Age brings wisdom, discounts, and hopefully the fruits of a life well-lived. We’ll all need help one day to navigate the nexus of aging and financial issues, but your parents will probably need that help soon. This article scratches the surface of the challenge at best, but hopefully you’re armed to start talking about the issues and helping those who helped you.
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