Financial Management and Planning for the Elderly

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According to the Federal Reserve, about 20% of all households headed by individuals who are 65 or older have about $700,000 in assets.  About half of these have assets of $1.5 million or more, making this age group the wealthiest of all demographics.

But other studies indicate that about a quarter of Americans whose parents are growing old expect to have to support them in their golden years.  Rich or poor, that means financial planning for America’s senior population creates several sizable challenges.

How is financial planning different for the elderly?

When people grow older, their financial issues shift from the responsibilities associated with raising a family and maintaining a job to other post-work life considerations.

  • Medical costs are likely going to rise. These costs may be minimized to some extent by Medicare or Medicaid, but they will still impact seniors. Prescriptions and medical equipment costs should also be a concern.
  • While you may no longer have a house payment, home expenses will not stop. You’ll still have to deal with annual property taxes, insurance, maintenance costs and emergencies such as plumbing, electrical or any number of issues that could crop up unexpectedly.
  • You may also consider hiring a housekeeper, gardener, snow removal service or handyman for the first time who can better perform tasks than you. And, if you’re spending more time at home in retirement.  For your peace of mind, you might also consider a home security system for the first time as well.
  • What about getting the car of your dreams? With that dream may come a monthly payment. Or, if you decide to keep your trusty old and reliable paid-for vehicle, you’ll still need to budget for ongoing maintenance. Aside from vehicle costs, you may also experience a jump in car insurance rates as well.
  • One financial planning line item you shouldn’t overlook is a budget for travel, trips and entertainment. It may be weekly golf, trips to the beauty parlor, regular dinners and a movie date, visiting your kids twice a year across the country or that annual cruise you’ve been taking for some time now.  You have earned the right to enjoy retirement, but it all takes money.
  • As a senior, you’ll also need to be concerned with long-term care costs, getting the most out of Medicare, budgeting on a fixed income in the midst of inflation, figuring how Social Security is a part of your retirement mix, and especially important, making sure you don’t fall prey to scammers who target seniors and their large nest eggs.

Finding a good financial advisor for the elderly

You will need to have some goals in mind before you start your search for the right financial planner.  If you need extensive help with retirement planning and investments, that could require a different level of service than someone who you just need to run a few questions by from time to time.

Consider tapping the following resources once you have an idea in mind about what you’ll want to accomplish:

Ask for recommendations.  This may seem obvious, but a great place to start is to talk with friends, family members or colleagues.  Try to find people who have similar goals and are in a similar financial position as you are so that you can tap into a professional appropriate for your needs.

The National Association of Personal Financial Advisors maintains a website that will let you search for a financial advisor near you.  These listings tend to be for advisors who handle larger estates, but it is still worth looking into to see who might be available to help you.

Another good resource is The National Association of Personal Financial Advisors which also has a search tool on its website.  This may be a more appropriate place to search if you’re estate is a bit smaller.

Major brokerages such as Fidelity, Schwab, TD Ameritrade, T. Rowe Price and others have automated investment management services known as robo advisors.  Based on your financial goals, computer algorithms are applied to help produce investment and allocation goals that are free from personal biases and the fees that may go with them.

Another good resource, especially if you fall solidly in the middle class, is to find resources through the Garrett Planning Network.  The site maintains a nationwide membership directory of independent, fee-only financial planners that provide advice to people from all walks of life, without minimum account requirements, sales commissions, or long-term commitments.

The Certified Financial Planners (CFP) website maintains a directory that has listings that allow you to search for results by specialties including elder care, retirement income management and retirement planning.

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How older adults can steer clear of financial scams

Seniors are often seen as targets of opportunity for scammers due to larger nest eggs and possible diminished mental capacities.  Common scams are widespread and include preying on unsuspecting victims in a number of areas such as taxes, banks, investing, credit cards, charities, posing as the IRS, money transfers and online dating.

Scammers use impersonation, identity theft, phishing, ransomware and other techniques to bilk millions of dollars each year from victims.

The best way to protect yourself is to slow down and think if you’ve been contacted by anyone requesting any kind of personal information or money from you.  Scammers thrive on panic and fear and they are specifically experienced in talking you out of your money and your personal information.

When in doubt, don’t take action.  Investigate thoroughly.  Don’t open unsolicited email attachments or documents from a website, even if it is from someone you know.  Scammers use the internet and email to hijack information all the time.  Also be careful about conducting sensitive business over a public Wi-Fi network which can be hacked by fraud perpetrators.

If you’ve got doubts, run the contact by someone you trust.  Also, put your phone number on the National Do Not Call Registry to make it harder for the bad guys to find. And, zealously guard your personal information.  Never authenticate yourself to someone who contacts you.

Analyzing investment accounts

Your investment accounts should be reviewed on a regular basis, but as you get older, you should start to shift in the kinds of things you look at and the goals you want to achieve.

If you are a senior, your primary goal should be to manage risk to ensure your investments are protected. This means you may want to shift more of your portfolio out of stocks and into more conservative/ investments.  Consider corporate or government bonds, money market accounts or bank CDs as safer place to stash your cash.

Asset allocation should be based on diversification.  It’s the best protection against risk when an older investor cannot afford to take heavy losses in more than one asset.  The level and nature of diversification should be based on the amount of risk a senior wants to take and to some degree, the size of their nest egg.

Seniors will also be influenced by how much current income they want to receive in the form of interest income from bank accounts and their investments.  Based on their risk tolerance, seniors should balance the amount of their portfolios they need safely stored in bank accounts and bonds with stocks that could potentially provide a higher rate of return. Some stocks offer regular dividends.

Also consider tax implications when reviewing accounts and a portfolio.  Interest, dividends or capital gains produced by an investment portfolio are usually taxable in the year they are earned unless they are in a tax-sheltered retirement account.

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Reviewing Social Security benefits

Before you apply for retirement benefits, there are certain Social Security “basics” you should know about:

  • Your “full retirement age” – Depending on your date of birth, that may be between age 66 and 67. This could affect the amount of your benefits and when you want the benefits to start.
  • When you can start benefits – You may start receiving benefits as early as age 62 or as late as age 70.
  • Benefits are reduced for age – Your monthly benefits will be reducedif you start them any time before “full retirement age.”
  • Working while you receive benefits – If you elect to receive benefits before you reach full retirement age, you should understand how continuing to work can affect your benefits.
  • Delayed retirement credits – Delayed retirement creditsmay be added to your benefits if they start after your full retirement age.
  • Life expectancy – Many people live much longer than the “average” retiree, and most women live longer than men. Social Security benefits, which last as long as you live, provide valuable protection against outliving savings and other sources of retirement income.
  • You can use Social Security’s Retirement Estimatorto get an estimate of how much your benefits will be at different ages and “stop work” dates before you apply.

Some of the things you should also think about before you decide include:

You can find out what documents and information you need to apply by reading Social Security’s “Checklist for Online Medicare, Retirement, and Spouses Applications.”

Medical costs – how to plan for elder care costs

According to the Scan Foundation, “70% of Americans who reach age 65 will need some form of long-term care for an average of three years. An average, middle-income American making a $50,000 salary would have to reserve six years’ worth of income (about $300,000) to pay boarding fees for three years in a private nursing home room that costs $92,000 annually.”

As people age and become more ill, their out-of-pocket expenses will rise.  In fact, nursing home and assisted living care costs are the number one category in this regard, followed by home health care.

This can lead to individuals and families being buried in premiums, deductibles and debt.

About 10% of seniors will put aside at least $200,000 at age 65 for long term care, but even this may not be enough.  For many families, their primary savings is in large investments like their homes which they may need to sell for elder care costs.  Even this may not be enough to make ends meet over the long term.

One option to protect seniors is buying long-term care insurance.  It will help seniors protect themselves financially and can work in concert with Medicare or Medicaid to form a decent shield against high costs of elder care.  Spouses are also protected under this kind of insurance and it prevents family caregivers from placing undue strain and burnout on their own lives, especially since a senior’s health needs can be constant and round the clock.

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Reverse mortgages:  Understanding the pros and cons

Reverse mortgages are a loan option that allows homeowners and homebuyers who are 62 or older to live more comfortably in retirement.

Reverse Mortgage Pros

  • You can continue to live in your home and you still retain title to it. You must still meet loan obligations and stay current with all expenses such as property taxes, insurance and homeowners’ fees.
  • You can take funds from a reverse mortgage as a lump sum, set up a line of credit to tap only when you need it, or take a steady stream of monthly advances.
  • You can use your reverse mortgage to pay off an existing mortgage loan. There will still be a lien on your home with the reverse mortgage, but you are not required to make monthly principal and interest payments, freeing you up from that expense.
  • No monthly mortgage payments are required as long as you live in the home and continue to meet your obligations to pay your property taxes and homeowners insurance and maintain the property.
  • Closing costs and ongoing fees, such as the FHA Mortgage Insurance Premium, can be financed with the reverse mortgage loan — so out-of-pocket expenses can be minimal.
  • Loan proceeds are generally not considered taxable income. You should consult a tax professional to make sure this applies to your specific situation.
  • For the most part, a reverse mortgage loan will not affect Social Security or Medicare benefits.
  • You or your heirs are not personally liable for any amount of the mortgage that exceeds the value of your home when the loan is repaid.
  • If your home increases in value in the future, you can refinance your reverse mortgage to access even more loan proceeds.

Reverse mortgage Cons

  • If you don’t make payments, the loan balance increases over time as interest on the loan and fees accumulate.
  • Because you are using equity in your home, fewer assets are available to leave to your heirs. You can still leave the home to your heirs, but they will have to repay the loan balance. This can be done using other funds or by refinancing through a traditional mortgage.
  • Reverse mortgage fees may be higher than with a traditional mortgage.
  • Eligibility for needs-based government programs, such as Medicaid or Supplemental Security Income (SSI), may be affected.
  • A reverse mortgage loan becomes due and must be repaid when a “maturity event” occurs, such as the last surviving borrower (or non-borrowing spouse) passes away or the home is no longer the borrower’s principal residence.
  • The loan becomes due if the homeowner fails to meet other loan obligations, including paying property taxes, insurance, homeowners’ association fees, and maintaining the property.

What to do when a senior is unable to handle his or her own finances

When a senior can no longer handle his or her own financial responsibilities, there are several options that can be implemented:

  • A judge will appoint a person or organization to care for the person as well as managing his or her finances.  Conservators are required to report to the court on the conservatee’s status at regular intervals.
  • Joint account. A trusted loved one can be added to a senior’s bank accounts allowing them to make financial decisions, write checks, pay bills and other related actions.  This can be a sensible precaution when someone is diagnosed with a degenerative disease such as Alzheimer’s.
  • Power of Attorney. A power of attorney is a legal document that allows another person to make financial decisions on their behalf in the event the assignor can no longer make sound decisions on their own.
  • Trustee. A senior can set up a living trust and name a trustee to manage financial decisions and keep the trust’s property safe.
  • Government fiduciaries. These fiduciaries are appointed by a government agency to manage monthly benefit checks issued by that agency — usually the Social Security Administration or the Department of Veterans Affairs.

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Picking a Power of Attorney

Deciding on a financial Power of Attorney (POA) is an important decision that directly impacts the lives of an entire family.

Choosing the right POA ensures that even if you are unable to make decisions for yourself, someone else will have access to your finances and can make decisions on your behalf consistent with your wishes and goals.

A financial power of attorney should not be confused with a medical power of attorney, which allows someone to act as your representative to make medical decisions when you can’t make those decisions for yourself.  The financial POA and the medical POA do not have to be the same person. However, the people you choose might need to work together to make certain that their decisions on your behalf don’t contradict one another.

The person chosen as a POA should be agreeable to performing those duties and have a commitment to taking them seriously.  They should also possess a solid understanding of business and financial issues and be comfortable working with attorneys, accountants and other professionals as needed.

It might be obvious, but the person selected should be somebody who is trusted, understands your values and goals, and will consistently act in your best legal and financial interests.

You should have a discussion with a potential POA before making a decision so that that they fully understand your financial details and are aware of the responsibilities they may take on in that role.

The life settlement option

Many older Americans may discover that life insurance policies that once made sense as part of their financial portfolio no longer meet their needs or are no longer affordable.

When this happens, they can sell their existing life insurance policy to a third party for more than its cash surrender value but less than the net death benefit.  Known as a life settlement option, the policy is transferred to the buyer in exchange for an immediate cash payment.  The buyer of the policy pays all future premium payments and receives the death benefit when the insured passes away.

This provides a viable option instead of letting a policy lapse back to an insurance carrier.

It’s always best to work with members of the Life Insurance Settlement Association (LISA) but at a minimum, to start the sales process of your policy you need to work with a licensed life settlement agent or broker.

Preparing a will or living trust

Wills and living trusts let you to decide how your property will be distributed after death. The primary advantage of a living trust is that it can make it easier to avoid the delays and costs that sometimes arise in probate.

Probate involves filing a deceased person’s will with the local probate court, taking inventory of the person’s property, paying all legal debts, and distributing the remaining assets.  Property transferred into a living trust before death does not go through probate.

Most states have rules that allow small estates to be administered outside of probate or through an “expedited” probate process. Rules are different in each state and you should probably contact an attorney to discuss the best way to accomplish a disposition of an estate.

Preparing a will or a living trust can be complicated.  For more information, consider checking out these resources:

National Academy of Elder Law Attorneys

National Consumer Law Center

Nolo Press

AARP – “10 Things You Should Know About Living Trusts

Making funeral arrangements

One of the ways to make things easier on a family is to take advance steps in planning for death.  With advance planning, a senior can have an active role in how they would like to be remembered.  Despite several benefits, many people are uneasy about the subject, which is why only about 20% of Americans have talked to loved ones about their funeral according to a 2017 survey by the National Funeral Directors Association.

If costs are a concern, consider final expense or burial insurance, so funeral costs will not be a burden when a person passes.  AARP also provides comprehensive advice and checklists to assist with advance planning efforts.

If you don’t set aside funds in advance, expect to pay $7,000 to $10,000 or more for a traditional funeral.  But costs can easily exceed those amounts depending on the size and scope of the ceremony.

The Funeral Consumers Alliance, a death-care industry watchdog group, has a number of resources you can access as well, including links to itemized lists of funeral costs, by state

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Financial programs and resources for the elderly

Here are several resources you can tap into for more information on financial planning and care for senior citizens:

A Place for Mom

American Elder Care Research Organization

Aging Care

The 10 Best Books to Help You Retire Richer, According to Financial Advisors

5 Books to Read Now if You Want to Retire Rich

AARP Health Care Costs Calculator

AARP Retirement Calculator

Department of Labor Lifetime Income Calculator

Life Insurance Calculator

Trusted Financial Advisor

Net Worth Calculator

Social Security Quick Calculator

Social Security Life Expectancy Calculator