We hear a lot of talk today about retirement planning, but who should be planning for the future?  Everyone who does not anticipate generating regular income during retirement years should be setting funds aside today for retirement.  Whether you are just beginning a career path or about to finish one, retirement should be a primary financial focus.  As more and more individuals edge closer to retirement age, retirement planning has taken on significant importance.  According to industry sources, employer sponsored retirement plans have become the number two-desired employee benefit after health care plans.


Planning for retirement is a challenge for everyone.  The earlier you begin planning for retirement, the more time you will have to accumulate assets and take advantage of compound interest.  Time is one of the most important advantages of retirement plans.  The power of compounding potential future returns can’t be overstated.  According to the 2001 Retirement Confidence Survey, seventy one percent of Americans have begun a formal retirement savings plan. 


Financial industry experts have described sources of retirement income as the three legged stool:  Social Security benefits, company retirement plan benefits and personal savings.  However, in light of the future concern over Social Security, reductions in employer sponsored benefits and the extremely low personal savings rate, it appears that the three legs of the stool may require a fourth leg – paid employment after retirement.


As you contemplate your retirement, please consider the following issues.


  1. Longer Life Spans:  As Americans live longer, care must be taken to make sure that you don’t outlive your retirement savings.  According to a recent survey, life expectancy, at age 65 in the United States, has reached 85 years of age.


  1. Increasing Prices:  Due to rising inflation, today’s retirement dollars will have less purchasing power in future years.


  1. Declining Social Security Benefits:  It appears that Social Security will be playing a diminishing role in retirement funding.  Social Security was never designed to be the foundation on which retirement was built; it was only meant to be a supplement to retirement.


  1. Personal Savings:  There will be an increasing importance on personal retirement savings during working years.


The bottom line is that you can’t rely on the government and your employer to finance your retirement.  Personal savings and investments will generate a major portion of your retirement income.  The “key” is to begin a retirement savings strategy early and stick with it.


Why do you need to consider retirement planning?  In years past, retirement planning did not involve a major lifestyle change.  People did not often expect to live much past their sixties.  However, due to the advances in medical science, people are living much longer and need to plan for their retirement years.


What is retirement planning?  It is a comprehensive process to help determine the amount of money an individual will need when he or she retires.  In addition, it helps an individual identify the best ways to save for retirement.


There are two components that are critical to retirement income planning: personal planning and financial planning.  Personal planning is important because it helps determine your satisfaction with your retirement lifestyle.  For example, do you want to travel, go back to school, start a business, take up that special hobby, move to a warmer climate, etc.?  These lifestyle questions are important factors to consider when planning for retirement.  Financial planning is important because it identifies your sources of income and expenses and establishes your retirement budget.  Will you have enough funds to enjoy the lifestyle you envision at retirement?  You will most likely derive retirement income from three sources: social security, employer sponsored qualified retirement plans and personal investments.


There are four steps to retirement income planning:


1.      Identify your sources of income and expenses to determine any potential shortfalls and surpluses.

2.      Review and analyze the various retirement income strategies.

3.      Review and compare the retirement income options available.

4.      Develop and constantly monitor an action plan.


In addition, there are four issues that need to be addressed in any retirement planning analysis.


1.      Increased life spans.  People are living longer and healthier lives.

2.      The impact of inflation. Cost of living increases must be addressed.

3.      Understanding your employer sponsored retirement plan.  The responsibility of saving for retirement has shifted from the employer to individuals. 

4.      Social Security.  In 2001, Social Security benefits only provided on average 38% of income for retirees (a much lower percentage for affluent retirees).


One critical area of retirement planning that is often overlooked is long-term care planning.  In fact, long-term care planning is commonly referred to as “the missing link in retirement planning” or “asset protection.”  Retirement planning involves a lifetime of accumulating assets for the “Golden Years” and long-term care planning addresses the conservation of those assets.


According to The New England Journal of Medicine, 43% of individuals age 65 or older will spend some time in a long-term care facility.  The cost of long-term care services can be a considerable threat to your retirement savings. 


The problem arises because:



Long-term care means that an individual, due to illness, accident, disability or cognitive impairment (such as Alzheimer’s Disease), needs assistance performing several of the so-called activities of daily living, or ADLs.  These daily activities include bathing, dressing, toileting, eating, transferring and continence.  If only one of these activities is needed, a spouse, relative, neighbor or other caregiver can usually provide it.  However, if several of these services are required, they can be provided by a nursing home, assisted living facility or a professional home health care agency.


Many individuals are under the misconception that their private health insurance will pay for the costs associated with long-term care.  In reality, most medical health contracts do not cover long- term care expenses.  Another misconception is that the government will pay for long-term care expenses.  Medicare only covers the expenses for the first 20 days for skilled care only.  From the 21st through the 100th day you must pay a substantial co-payment.  After the first 100 days, Medicare pays nothing for long-term care.  Medicare should not be relied upon as a source for long-term care coverage.


Medicaid is a federally subsidized program for the poor, which is administered on the state level.  It will assist people with the costs for long-term care if they have little income and very few assets.  However, anyone with an income or substantial assets would have to spend down those assets before they would be eligible for Medicaid benefits.


If health insurance, Medicare and Medicaid won’t pay for long-term care expenses, then who does?  The burden of paying for long-term care expenses falls on you and your family.  The logical choices are to pay with cash (self-insure) or purchase long term care insurance.


However, most people generally don’t self-insure because of the potential large loss.  Any excessive losses could be devastating to a family.   This is the very principle upon which the idea of insurance was founded: pay a premium (which is relatively small) and pass the risk (which is relatively large) to an insurance company.


Long-term care insurance protects your hard-earned assets from the costs of long-term care and, similar to life insurance, preserves assets.  And just like life insurance, the premiums are relatively small compared to the potential benefit.  Instead of using assets to pay for long-term care costs you preserve assets and the growth of those assets for future generations.  Transferring the risk of long-term care costs to an insurance company is an approach many clients should consider.


Generally, people consider the purchase of long-term care insurance for the following reasons:


1.      They do not want to be a burden on their family.

2.      They want to have complete access to quality health care.

3.      They want to protect and preserve assets for future generations.

4.      They want to maintain control over their lives and remain independent.

5.      They do not want to give away assets and have the stigma of being on welfare.

6.      Peace of mind.


The choice between self-insuring for long-term care costs and purchasing long-term care insurance is a value judgment that everyone must make.  More and more adult age children are purchasing long-term care insurance on their parents as an effective estate conservation strategy.


Long-term care insurance is an important financial planning tool designed to help you protect your assets and preserve your independence.  It is a logical extension of your retirement planning.    The risk of financial ruin from long-term care expenses is a real one.  In essence, you could double your budget with no increased benefit.  Additionally, the emotional and physical drain on the caregiver spouse can be just as severe as the financial burden when one of the spouses requires assistance while the other remains relatively healthy.  However, with a little foresight and common sense planning, you can protect the assets you have worked so long and hard to accumulate and enjoy the retirement lifestyle you deserve.