Enacted in 1935, the Social Security Act was intended to pay retired workers aged 65 and over a continuing income. Back then, the average expected lifespan of women was 64 years and, for men, 60 years. Very few qualified Americans lived to see the average monthly payment of $58. In fact, there was little planning and preparedness needed to live in retirement since very few actually outlived their working years. In 2022, the average life expectancy for women and men is 79 and 73, respectively, and those with U.S. household incomes in the top 10% can expect, on average, to live until their late 80s. Moreover, if proper planning and preparation are absent coupled with an increase in longevity, then there is a real danger that savings for retirement can be outlived, especially if long-term care needs are added to the mix. At Cedar Point Financial Services LLC, our planning team is helping clients address a longer lifespan in four areas:
- Developing a picture of how later years will be spent
- Securing sufficient sources of income
- Protecting and transferring accumulated wealth
- Meeting long term care needs
How Will You Spend Your Time?
Researchers at MIT’s AgeLab have been studying aging for over twenty years. One recent study indicated that, when asked to identify their goals in retirement, people tended to paint an imagined future most often seen on retirement brochures. A future life characterized by sunny ambiguity that includes travel and time with grandchildren while typically showing little acknowledgment of the choices and changes they face ahead. Rather than leaving retirement to chance, with retirement being perhaps one-third of an adult’s life, longevity preparation requires not only setting goals, but also asking the practical questions of how you might actually live in retirement.
For example, where do you want to live in retirement? What kind of home will you want? If you want to travel, where do you want to go and for how long? Will you be contributing financial support to children and grandchildren? As you grow older, what types of “silver communities” or assisted care housing appeal to you? By answering these questions and creating future goals, Cedar Point Financial Services LLC is able to guide their clients and their advisors in developing a financial plan to make these goals a reality.
Income for Life
Some Baby Boomers were fortunate to have qualified for pensions or other defined benefit plans which pay a lifetime income. Such employer-guaranteed income is practically nonexistent today, with restrictive defined contribution plans taking their place. For Generation X and the age groups that follow, IRAs and 401(k)s, even maximum funded, are likely inadequate to meet the financial needs of a post-work period that could last thirty years or more. It is impossible to determine what the balances of those qualified plans will be in the future, let alone decide how best to use those balances without outliving them.
The same is true of savings from other sources like mutual funds, securities – even the sale of a family business. Money can be set aside and invested but no one can travel ahead to the future to see how much should have been saved and how it should be invested. Essentially, Americans are stuck either underfunding their retirement income needs or overshooting them by allocating unnecessary funds over the years.
Life insurance companies have recognized there is a need for not only a defined future income stream but also an income stream that is guaranteed for the life of one or more people. By allocating a portion of their savings to a deferred income annuity (“DIA”), annuity contract holders can be guaranteed a specific income that begins on a specific date after age 59 1/2 and lasts the rest of their lives.
Even those who have reached the age where they need income have the option to purchase a single premium immediate annuity (“SPIA”). A SPIA owner can receive payments monthly, quarterly, semiannually, or annually. At the time of purchase, you and an advisor will customize your fixed amount income stream. As a result, payments can then be made over the span of one or two lifetimes as guaranteed lifetime payments and can also include beneficiary protection for heirs. The payments may also be structured over a specific period of time, ten years for example, which is termed as a “period certain.” Each payment includes the premium plus a portion of interest.
Cedar Point Financial Services LLC can take the guesswork out of estimating how much income there will be in retirement by demonstrating how both qualified and nonqualified funds can be used to purchase different types of annuities with customizable features.
Protect Your Legacy
At death, one’s accumulated wealth can go to one of three places – the U.S. government (IRS), charity, or chosen heirs. Unless nearly all of an estate is left to charity, above any exemptions available at the time, the IRS is due their portion – up to 40%! This could erode a legacy intended for children and/or grandchildren. By establishing trusts and a plan for annual gifting, wealth transfer taxation can be mitigated. However, taxation is not the only concern for those planning for a longer lifespan.
By living longer, it is likely there will be sizeable expenses related to medical care, long-term care and critical illness. These expenses can chip away at legacies as much, or more, than taxation. Life insurance fits into longevity planning by providing a tax-advantaged solution that replaces the wealth which may be lost to taxation and the expenses related to living longer.
Cash value life insurance is a unique planning tool because its cash value grows tax-deferred but also can be accessed tax-free during one’s lifetime if structured properly. In addition, when the death benefit is paid, it is income tax-free and if owned outside of the estate, can also be tax-free of estate taxes. No other financial instrument has these tax attributes, and this is why those wishing to protect their wealth earmarked for the next generation typically take advantage of life insurance. The life insurance experts at Cedar Point Financial Services LLC can illustrate how life insurance can be positioned in a financial plan to keep wealth protected and in the family.
Expect Long Term Care Costs
In 1935, when Americans either did not live until retirement or died shortly thereafter, it was usually due to illness. Less than a century later, affluent Americans are living decades longer, and medical advances have contributed to experiencing most of these years physically enjoyable. Those same medical advances, though, have contributed to “the long good-bye” where an eventual physical decline can last years, and costs can soar from needing:
- Home health care
- Respite care
- Adult daycare
- Assisted Living
- Nursing Home
- Alzheimer’s and Dementia special care
- Hospice support
The cost of long-term care can place a burden on income and eat into retirement savings. Long term care insurance can alleviate the worry surrounding the impact of this expense. By purchasing either a traditional long term care insurance policy or by adding a rider to a cash-value life insurance policy, funds can be available to pay for any care required as listed above. Cedar Point Financial Services LLC will walk you through how long-term care insurance can be custom-tailored to suit your individual needs, including choices of a multitude of benefit periods, elimination periods, and inflation protection options.
Plan to Prepare
Most of us prepared for college, prepared for our careers, prepared (as best we could) for parenthood — why should retirement be different from any other life stage? Words and actions matter. At Cedar Point Financial Services LLC, we help our clients successfully prepare as well as plan for a long retirement.