Between the Baby Boomers and their still-active parents, it's hard to make an absolute prediction of the state of senior finances. LoveToKnow Seniors consulted financial expert Mike Schiano to give us some straight talk about saving for retirement, health care, and other financial issues.
Schiano is a certified professional money manager and credit counselor, as well as the author of two books, Spend Your Way to Wealth, and The Ultimate Guide to a Better Credit Score. He is also the vice president of outreach for the In Charge Education Foundation, an organization dedicated to supporting personal financial literacy.
Through his one-on-one financial workshops, websites, and multi-media "Money Minutes", Schiano guides individuals and families toward the best resources for spending and saving.
Senior Finances: Mike Schiano Interview
It would seem that America has a wealthier and healthier senior population than previous generations. Is this true?
Today's seniors are a mixed bag financially. Many are really struggling to get by in the face of rising gasoline, food, and healthcare costs. Safe investments like CDs and money market accounts, traditional sources of retirement income, have been paying very low rates for several years with no sign of interest rate growth.
Luckily, many seniors have enjoyed great increases in the values of their homes in recent years, which gives them access to more capital when they sell their homes in order to pay the bills.
Baby Boomers who are just beginning to retire have more assets, wealth, and disposable income than any previous generation. This generation of seniors also has access to better medical care and preventive care than their predecessors, so they are expected to live longer on average. While this is great news overall, it means they will need more money to fund a longer life.
How are today's seniors saving?
According to a recent survey by the Employee Benefit Research Institute, 32 percent of all retired people report having less than $10,000 in savings. EBRI also reports that in 2005, Social Security was the largest source of income for those currently age 65 and older, accounting for 40.1 percent of their income on average. Pension and annuities income was 19.3 percent, income from assets 13.6 percent, and income from earnings 24.8 percent.
In your opinion, what changes will this generation experience that others have not?
The biggest change will be dealing with the extended lifespan, one that requires better financial planning. There is a new and real danger of someone outliving his or her savings. More people over the age of 55 are still working than at any time in our history. This indicates the need for people who traditionally retire to continue to work. This fact will impact the number of available jobs for younger people, and other aspects of our economy.
Saving for the Future
How much does someone really need to have in retirement to be comfortable, now that the average life expectancy is 78?
First, one would need to calculate what percentage of their current annual income they will need in retirement. Assuming a two-to-three annual inflation rate, it's easy to see that planning to live on half or less of your current income is probably not very realistic.
Most experts agree that the average retiree will need to plan on having at least 70 percent of their highest current annual income each year. In some cases, depending on the planned lifestyle, retirees may need 100 percent or more of their current annual income available each year in retirement to live comfortably.
Additionally, income from investments, pensions, Social Security benefits, and other income that will be available in retirement should be factored into the calculation. If you plan to continue working part-time during retirement, or have assets like real estate you would be able to sell during retirement, those factors will lower the amount of money you will need in savings.
Can you please provide a senior finances scenario?
Let's assume someone earns $60,000 during the peak earning years prior to retirement.
One should plan on having income of no less than $42,000 a year in retirement. And that assumes the person will be downsizing their lifestyle. Many seniors actually want to do more traveling after retirement and not move to a smaller, less expensive home. So, using the figures above, it is more likely that you will need to have at least $54,000 saved for each year you plan to live in retirement.
Imagine if you retire at age 65 and live to age 90? That would be 25 years times $54,000 or roughly $1.35 million required in savings.
If the average American wanted to save $1 million for retirement, and works for 50 years before retiring, they should be saving $20,000 per year. How are you doing on that plan?
I'd advise anyone 45 or younger to set a target of having at least assets and cash valued at $1 million for the day they plan to retire.
For someone preparing for retirement, how much can he or she really count on Social Security right now?
The average Social Security payment to a retiree is $1,044 per month, or $1,700 per month for a couple. So, as it was planned from the beginning, Social Security should be considered as a supplement to a retiree's income, at best. Far too many people are counting on Social Security as their sole income and the foundation of their senior finances.
Part two of that question: For someone preparing for retirement, what percentage should be saved for health care?
It is estimated that a couple at age 65 today, living to average life expectancy, could need as much as $295,000 to cover premiums for health insurance coverage and out-of-pocket expenses during retirement. A couple that lives to age 95 could need as a much as $550,000.
If you're 70 now, and don't have adequate savings, can you still create a nest egg?
It depends on your current income and assets. If you have a large income and/or assets that can be sold and invested at fair rates of return, you can build somewhat of a nest egg. Time is really the problem for a 70-year-old. There just is not enough time for savings from income to grow. So assets that can be sold, such as a home, are really the most likely way for a 70-year-old to create a lump sum for use.
Other Solutions for Improving Senior Finances
What thoughts do you have about reverse mortgages?
This is the hot, new product aimed at allowing people at age 62 or older borrow the equity they've built up in their homes without having a monthly loan repayment. Once approved for the loan, owners can access their funds when they need them like a line of credit, in a lump sum, as regular monthly payment, or in some combination of payment options. Payments are not taxable since they are loan proceeds and not income.
You don't need income to qualify and you don't need to make monthly payments. Reverse mortgage loans don't have to be repaid until the owner dies, sells the home or moves out.
At the end of the reverse mortgage period, the home's equity is gone and heirs will likely have to take on a mortgage or sell the home. Fees and closing costs for a reverse mortgage can eat up thousands of dollars in equity.
This is not a good option for someone who wants to leave assets to heirs. This is a possible option for people who don't have enough income or savings in retirement.
Why do some seniors continue to be victims of financial scam artists, and what advice or resources can you suggest that they can use to avoid these situations?
I think anyone is more vulnerable to financial scams when they are in a situation where they need to make lots of money in a short time period.
Too many seniors find themselves unable to afford life's necessities and are prime targets for the con men. Some thieves simply take advantage of elderly people who are unable to properly think through often complicated financial matters.
In addition, pride often keeps older people from seeking advice from younger family members, lawyers, and others.
I suggest getting advice on any investment from someone you trust before sending a penny. Let a lawyer review any offers for you. If you are told have won a prize, instruct the caller that you will have your lawyer call them back to work out the details and get their address and telephone number.
Never give out financial information over the telephone, especially when someone calls you from a company you have no previous financial dealings with. Legitimate financial companies will not pressure you to give them personal information and financial data over the telephone or via e-mail. It is prudent to report any suspicious calls to the Federal Trade Commission and your local police department. FTC.gov has lots of good information on the latest scams and how to avoid them.
What is the value of long-term care insurance?
This is insurance that pays for your care on an extended basis if you are unable to take care of yourself. According to AARP, long-term care policies today can cover a range of services, including extended care at home or in an adult day care center, as well as in an assisted living residence or nursing facility. Some even cover home modifications.
Benefits are usually triggered when a person cannot perform at least two key daily activities, such as bathing or dressing, or is cognitively impaired by Alzheimer's or another form of dementia.
With the average cost of nursing home care around $200 per day, long-term care can eat up a family's assets very quickly. This insurance can provide great financial relief.
However, the cost can be prohibitive. AARP says the best long-term care policy with a reasonable deductible, covering a wide range of care options, guaranteeing a sufficient financial benefit, and including inflation protection, could cost a 55-year-old $3,000 a year and a 65-year-old more than $5,000.
So, the younger and healthier someone is when they buy long-term care insurance, the cheaper the premiums. The catch is, most people who are younger and healthier can't envision the day when they would really need to be cared for in a nursing home.