Biggest Challenges to Retirement, Part 1

The following is an excerpt from READY FOR PRETIREMENT: 3 Secrets for Safe Money and a Fabulous Future.

The book, as you might imagine, is about "pretirement." What is pretirement? The book's definition:

PREtirement: Noun. 1. The act of preparing early for retirement. 2. Planning ahead to avoid probate, Long Term Care and the Great Recession and making sure your money lasts as long as you do. 3. P = Plan, R = Retirement, E = Early. 4. PRE-plan before you are tired. The PREtirement plan provides the following benefits:

• protects your assets from catastrophic illness and nursing home costs
• earns more interest on your money with depression-proof safety
• lowers or eliminates taxes on Social Security and interest income
• moves your 401(k) or IRA without cost so you can afford to retire

Later on the book has a very nice chapter on the biggest challenges to pretirement (their words) and retirement (what many of the rest of us would say, or perhaps "early retirement.") and what to do about them. I will be running this excerpt as a series over the next couple of weeks. Today is part 1.

Challenge 1: Being Part of the Sandwich Generation

What is the Sandwich Generation? It’s a relatively new phrase, but one now included in the latest editions of Oxford English Dictionary and Webster’s Collegiate Dictionary. It’s the demanding time when people are coping simultaneously with their growing children and their aging parents, while thinking about their own retirement. Deciding which has the highest priority can tear a marriage—or an individual—apart.

An estimated 25 percent of the American population is classified as the Sandwich Generation, meaning they are parenting their own children and taking care of their parents at the same time. Some estimates show that nearly two-thirds of the baby boomer generation will be taking care of an elderly parent in the next ten years. As the Sandwich Generation grows, the need to understand aging dynamics and family relationships increases dramatically.

It’s not easy to become elderly or a parent to your parent(s). After all, society believes adults should be able to take care of themselves. But as more people live well into their 80s and 90s with their families dispersed across the country, everyone will be involved in some way in elder care—if not today, then tomorrow.

You may take some comfort in knowing that you are not alone. You now have a new role on the stage of life, for which you can never rehearse. Currently, the typical American Sandwich Generation caregiver is in her mid-40s, married, employed and cares for her family and an elderly parent, usually her mother. But, more and more men are finding themselves in a caregiving role. Many are in rural areas, with very limited access to such resources as senior centers, or even Meals on Wheels. Many of these couples face major stress in their finances, emotions, and relationships. What happens to a couple's dreams for slowing down, with a secure retirement and a chance to travel?

Any parent knows that taming an active two-year-old can be a full-time job. But caring for an elderly parent as well can be overwhelming. Mrs. S. was not only taking care of her grandchildren, she was also caring for her mother, a formerly active 75-year-old who had been harmed by toxic side effects of a prescription drug and now needed full-time care. Mrs. S. was so busy that her husband moved out. She had never imagined such problems! With her daughter having to work two jobs to provide for her family, there was no end in sight. Then we talked and helped her find a way to improve the family situation in the short term.

We were able to roll her IRA, which had lost 40 percent in the market, into an equity index annuity with income. That way she was able to have more income and be able to help her daughter. Among other suggestions, I told her whom to contact so her mom could go to the senior center where they have an elder day care program. Now her mom can hang out with other seniors and play bingo at no cost while Mrs. S. works.

Challenge 2: Dealing with an Unexpected Catastrophic Illness and Long Term Care

My 20-year-old niece was a straight-A student, star of her class, attending Boston University on scholarship. A perfect beauty in great health, she was an up-and-coming theater star. One day during vacation, she fell into a coma for no apparent reason. I’ll never forget seeing her in the hospital bed, surrounded by her friends singing and holding her hand. It’s one of those situations that you cannot imagine until it actually happens to you. There were so many conflicting emotions, so much uncertainty about whether she would ever wake up. It was so hard on everyone to feel so helpless.

And then, in the midst of all that emotion, the practical questions arise: What if she stays in a coma? Who will take care of her? How would her parents be able to care for her if they need to work full-time? How much would health insurance pay—if any—to cover a convalescent stay? Sadly, my niece died shortly after becoming ill and her parents didn’t have to deal with these issues. But how would you PREpare for this kind of situation?

Another client, age 39, was running on a treadmill when his iPod slipped off the machine. He reached down and fell, hitting his head and sustaining a brain injury that has left him incapacitated. His wife works full-time; they have three kids and a mortgage. His insurance doesn’t cover the kind of care he needs.

In addition to all the emotions and the financial worries, you need to consider the legal issues when someone is unable to voice their preferences for care. Remember the case of 26-year-old Terri Schiavo of Florida. She certainly didn’t anticipate slipping into a coma in 1990 and then having her husband and parents fight over her medical care and her ultimate wishes for the next 15 years.

Planning for medical emergencies is a must for everyone and should include the signing of two important legal documents: a living will and an advance medical directive. Make sure that your directive includes language that satisfies the federal HIPPA (Health Information Privacy and Portability Act) law or your medical records cannot be released to the people you want to make health care decisions for you when you cannot. If you are out of the country on business and your spouse is at home trying to sell the house, or if you are in an accident and expected to fully recover but will be in the hospital for a while, then you will also need a durable power of attorney to allow your spouse or another person of your choice to manage your finances and sign legal documents on your behalf.

And what about long term care? Today, 20 percent of people under age 65, and 70 percent seniors over age 65 in the U.S. will end up using convalescent care, home health care, custodial care, intermediate care or respite care. Given the statistics, nursing home residency could well be in your own future. And it’s unlikely that Medicare or Medicaid will cover these costs. That’s why two-thirds of married people and one-half of single people will end up in bankruptcy within 13 weeks of entering a nursing home. Monthly costs average $6,000 to $15,000 without including medical expenses and drugs. With only 10 percent of people over age 65 in the U.S. today having long term care insurance, it’s not uncommon for people to go into bankruptcy as they help care for their elderly parents. You may find that you’re drawing on your savings, retirement plans, home equity line of credit or credit cards.

If you’re young and healthy, you probably can’t imagine that you would ever need long term care. Even if your parents are older, you may not want to envision them in less than perfect health. But sticking your head in the sand on this subject is just foolish.

Obviously, you need to do serious—and advance—planning, knowing that you’ll be responsible for most of your long term care expenses. To protect your assets when dealing with medical “spend-down,” your options include long term care (LTC) insurance, which pays some or all costs of nursing home care for those who qualify, modified endowment life insurance, which is payable to the insured if he or she is still living on the policy’s maturity date, or government-funded Medicaid planning, which pays for medical care for low-income individuals. These and other long term care preparations are discussed in more detail in chapter 3.

One of my clients, Frank, was 92 years old. He was in great shape and had just driven from California to Montana where he fixed up and resold mobile homes. He also took care of a neighbor who had dementia. When his wife, Betty, got Alzheimer’s, he took care of her for as long as he could until he couldn’t lift her anymore. He now visits her in a nursing home every day, but she doesn’t recognize him.

One day, he said, “Kris, I was never told Medicare won’t cover all your convalescent care in a nursing home and at home.” But it doesn’t, and Frank learned that through firsthand experience. He’s forced to pay for Betty’s care by spending down their estate. It took them years of careful saving and “doing without” to end up with enough money to see them through their final years together. Or so they thought. With all the expenses they have to cover for Betty’s care, their painstakingly built retirement fund will be depleted in a year.

Frank thought he’d give some of his money away so Betty could get on Medicaid, but there’s a five-year “look-back” period. So he’d have to wait for another five years before applying for Medicaid or face misdemeanor charges. That’s yet another reason why it’s important to do your PREtirement planning now!

Challenge 3: Families and Money

If you are young and in love and don’t think that you need to plan for retirement before marriage, think again. For example, many circumstances warrant the consideration of a prenuptial agreement, including being involved in a family-owned business, owning your own business, having a substantial 401(k) or other retirement plan, inheriting assets from your family, owning a residence that will be used as the marital home, or marrying someone who has already accumulated a large amount of debt. A prenuptial agreement can protect what assets you currently have or significant assets that you expect to inherit, and can also protect your assets from the debts your partner acquired before marriage.

If you have minor children, estate planning is a necessity, not just for financial reasons. You will need to name a Guardian to take care of your children (more about this in Chapter 2). Without a plan in place, if both you and the other parent of your children die while the children are still minors, then the children will become wards of the court until a judge can decide with whom the children should live until they become adults. Without a plan in place, control of the minor’s inheritance will be taken over by a court-supervised Guardian or Conservator whose fees will be paid for out of the inheritance. Then, depending on the laws of the state where the minor lives, when the child reaches the age of 18 or 21, whatever guardianship funds may remain will be turned over to the young adult, with no guidance, supervision, or accountability. They may be fine—or it may be a disaster. Through proper PREparation, you can make advance decisions that you feel are best in your particular circumstances and write documents that will allow you to express those decisions and preferences.

Challenge 4: Social Security and Taxes

President Franklin Delano Roosevelt set up Social Security in 1935 to help Americans have an income or pension after age 65. While FDR probably didn’t intend to have older people taxed on their earnings in their senior years, that’s essentially what happens today. Therefore, you should consider some of the following strategies to reduce your taxes.

Giving can reduce taxes. Gifts in any amount between spouses are tax-free. Gifts are never taxed to the donor. Current gift tax laws also permit gifts of $13,000 per year, per individual, to any number of recipients with no tax consequences. Also, any direct payment of medical and education expenses on behalf of another escapes taxation. Making gifts now can reduce the size of your estate and potentially reduce estate taxes upon your death. If the gifts are to charitable institutions, such gifts can also reduce your income taxes in amounts that vary, depending on your income.

Shift your income into tax-exempt securities. You can put money into municipal bonds, for example.

Consider the tax consequences of working or not working. I know that I’ve said that you may not have enough money saved to live comfortably, especially if you have larger than anticipated medical bills. But you need to consider carefully whether working will end up costing you more money than not working because you’d end up paying taxes and potentially becoming ineligible for certain benefits.

Comments

[Old Limey]

That's one of the primary things I have done - About 40% of our total income comes from municipal bonds, currently earning $166,494/year. In addition we both have IRAs invested in CDs and corporate bonds, as well as pensions and social security, and retired debt free.

I also manage both of my daughter's accounts.

The youngest, age 52, received a very large settlement and a very large alimony payment for 8 years when she divorced 4 years ago. She's already in the highest tax bracket because of the alimony so a regular job makes no sense but she makes about $250/week selling used books on the Internet. I have her settlement invested in muni bonds and her annual income from them is now $128,508/year and projected to be $170,000/year when her alimony ends since all of the bond income is reinvested as well as $60K/year which is 25% of her alimony.

My other daughter, age 54, works from her home on Maui and telecommutes to her old job in Silicon Valley working for an eviction attorney. She has a SEP-IRA that I started managing for her from the very beginning, it is now worth $1.8M. She also has a sideline taking photos of windsurfers. Her husband is a builder and primarily does small jobs and home repairs these days but he has a sideline selling packets of dried mangoes (very tasty). She currently lives with a guy she met at eHarmony.com, in his huge home in a gated community. She pays him the same rent she was paying before she met him about 3 years ago and plans to live on her investments rather than ever sink a large part of them into buying a home.

My son, age 49 still has a regular job as a Western Regional Sales Manager for a large international corporation, makes $160K/year which I find amazing considering he never went to college. He is the poorest of the three kids and is about to get even poorer as the result of a pending divorce. I have managed his 401K from the beginning but that is about to get cut in half when the divorce is final.

So instead of our children taking care of us in our old age we are helping them prepare for their retirement, although two are already semi-retired.

[Old Limey]

Disregard my prior post - I screwed when I was editing it.

That's one of the primary things I have done - About 40% of our total income comes from municipal bonds, currently earning $166,494/year. In addition we both have IRAs invested in CDs and corporate bonds, as well as pensions and social security, and retired debt free.

I also manage both of my daughter's accounts.

The youngest, age 52, received a very large settlement and a very large alimony payment for 8 years when she divorced 4 years ago. She's already in the highest tax bracket because of the alimony so a regular job makes no sense but she makes about $250/week selling used books on the Internet. I have her settlement invested in muni bonds and her annual income from them is now $128,508/year and projected to be $170,000/year when her alimony ends since all of the bond income is reinvested as well as $60K/year which is 25% of her alimony. She currently lives with a guy she met at eHarmony.com, in his huge home in a gated community. She pays him the same rent she was paying before she met him about 3 years ago and plans to live on her investments rather than ever sink a large part of them into buying a home.

My other daughter, age 54, works from her home on Maui and telecommutes to her old job in Silicon Valley working for an eviction attorney. She has a SEP-IRA that I started managing for her from the very beginning, it is now worth $1.8M. She also has a sideline taking photos of windsurfers. Her husband is a builder and primarily does small jobs and home repairs these days but he has a sideline selling packets of dried mangoes (very tasty).

My son, age 49 still has a regular job as a Western Regional Sales Manager for a large international corporation, makes $160K/year which I find amazing considering he never went to college. He is the poorest of the three kids and is about to get even poorer as the result of a pending divorce. I have managed his 401K from the beginning but that is about to get cut in half when the divorce is final.

So instead of our children taking care of us in our old age we are helping them prepare for their retirement, although two are already semi-retired.

[rick]

Actually gifts are never taxable to the receipient but are taxable to the donor if over the gift tax threshold amount for the year. The excess can be used to reduce the donors estate tax exemption and not pay the gift tax in the year of gift, but it is eventually taxable to the donor. The article is incorrect in this point.

[Strick]

Old Limey - Any concerns over the "muni-bond bubble" with that much invested? I noticed my dad has quite a bit in them too and they don't seem very diversified (or maybe you're in a fund of munis?). Our state capital's issues (Harrisburg) is obviously why its hard to take lightly.

[Lurker Carl]

"Sandwich generation" may be a new term but raising children while caring for aging parents is not a new phemonenon. My parents did it over 50 years ago with both of my grandmothers. My mother lived with us for the final seven years of her life while we were raising teenagers. That is how families existed for eons before nursing homes and assisted living were invented. And with the cost of such facilities escalating into infinity, I suspect most families in the future will be doing the same.

[Old Limey]

@Strick
It doesn't matter what you are invested in there are always worries of one sort or another. One good thing about muni bonds is that the majority of them are insured, though the insurers are not in great shape. I have been trying lately to only buy California bonds because they are not taxable by California. I don't worry about the daily price fluctuations because my average bond purchase price is $986.8 but the most recent one I bought was $1050 because the muni market has moved up strongly. My bonds are actually valued $320K more than I paid but that's immaterial since I never plan on selling any of them. I keep a very small amount in a muni bond fund just in case I need some cash in a hurry.

[Jenny]

Thank you to everyone who comments about their personal experiences here. I love reading the comments and the posts at free money finance!

Jenny

[Jose]

I am definitely in the sandwich generation. I'm dealing with my parents financial and medical issues ( (I've posted a few articles on this) while simultaneously helping my son in his first year and college and a daughter who is struggling in High School. Some times it seems so overwhelming that I would like to disappear. Estate Planning isn't just about protecting your assets, it's about medical powers of attorney, medical care, arranging for a cleaning service and much more!

[Nick @ ayoungpro.com]

Very interesting. I'm a long way from retirement but it is interesting to learn some of the challenges faced by people retiring now or in the near future. This will help me be better prepared when I retire. I wonder what issues my generation will face?