A reader in her early 60s recently asked about decisions she (“Karen”) and her husband (“Bob”) should make to deploy their net worth in the years leading up to their retirement. Given how common her situation is and that so many readers could gain insights from a discussion of it, I’ve dedicated two previous articles to answering her question.
Karen and Bob have many important issues to consider. The first two articles discussed strategies to address their short-term needs for deploying their net worth and how to use their retirement savings to build a portfolio of lifetime retirement income. Now, we’ll look at what they can do to prepare for their frail years, how they can deploy their home equity and ways to look for professional financial advice, if they need it.
Developing strategies for their frail years
Many baby boomers have seen their parents need help when they get too frail to use the bathroom or shower, shop for food, prepare meals, administer medications and carry out other normal activities of daily living. And they’re surprised to learn that Medicare and most medical insurance policies don’t pay for help with these activities.
The next unpleasant surprise is learning how much it costs to pay these expenses out of pocket. Costs can range from a few thousand dollars per year for occasional visits from a caretaker to more than $100,000 annually for a nursing home, with many possibilities in between.
Boomers who have experienced this situation with their parents are often motivated to learn how they can address this risk for themselves when they reach their 80s and 90s, thereby minimizing the burden on their children and other relatives. One possibility is to purchase long-term care insurance, but not many people do this. Other possibilities include:
- Keeping home equity in reserve and not tapping it to generate retirement income. If they need long-term care, they can take out a reverse mortgage, take out a home equity loan or sell the house to get access to the home equity.
- Using a very conservative withdrawal strategy for retirement savings that preserves principal, such as taking out just interest and dividends.
- Buying a qualified longevity annuity contract (known as a QLAC) that begins paying a monthly income at an specified advanced age, such as 80 or 85.
It’s possible that Karen and Bob could experience high costs for long-term care and that the above steps may not be adequate. The most effective solution is usually long-term care insurance, but the premiums are very expensive, and several insurers have recently left this market.
Karen may want to determine whether her employer offers this coverage using group purchase rates. Unfortunately, inexpensive, comprehensive solutions to address the threat of long-term care don’t exist, and people just need to do the best they can, keeping in mind that doing something is better than doing nothing.
Deploying home equity
Karen and Bob have substantial home equity, with a remaining mortgage of $70,000. Possibilities for using this home equity include:
- Downsizing to a smaller house that’s less expensive to maintain, thus eliminating mortgage payments in the process.
- Staying in their current house and considering accelerating their current mortgage payments to pay off the loan by the time they retire or shortly thereafter. This will reduce their basic living expenses in retirement, thus easing the need for .
- Maintaining the home equity as a reserve for long-term care.
- If they’re really strapped for cash, they could consider renting out a room or two to earn extra income.
It would be smart for Karen and Bob to start thinking about their living needs as they age into their later years. Some people benefit by moving out of an isolated home in the suburbs to a smaller home or townhouse that’s within walking distance of shopping, recreational activities and public transportation.
Finding professional help
In her original email, Karen lamented that “it seems that most retirement advisers want all of our assets in the market.” Indeed, many of them focus on accumulating savings for retirement by emphasizing investment strategies. They aren’t always trained in the complexities of building retirement income portfolios or coordinating with long-term care risks.
Recently, a few professional organizations have developed curriculum and credentials that concentrate on these strategies, and Karen and Bob may want to seek advisers with these credentials.
When shopping for a financial adviser, Karen and Bob will also want to ask how the adviser is paid to make sure conflicts of interest don’t bias the adviser’s guidance. Some specialize in selling insurance or investments, and are paid on commission, which can influence their recommendations.
Karen and Bob will want to find advisers who can build a retirement income portfolio for them that’s balanced between optimizing Social Security, investments and annuities, and who won’t be influenced by the manner in which they are paid.
Finally, Karen and Bob may want to find an adviser who will serve as a fiduciary and will make recommendations with their best interests in mind.
All of the steps mentioned in all three articles responding to Karen’s request will take a lot of time and effort to implement. But it’s a good use of the couple’s time in the next few years to explore all their options for deploying their net worth to enhance their retirement security, given that they’re planning for the next 20 to 30 years or more.
When they reach their 80s and 90s, they’ll be glad they did their homework and are no longer worried about running out of money.