We recently asked readers to tell us about their financial planning for retirement and promised to have experts review readers’ plans and offer advice. One of the first responses we received was from Betsy Campana, 63, who works fulltime as a pharmacist at a hospital in Milford, De., where she and her husband moved after he retired. Ken Campana, 72, is a retired meteorologist with the National Weather Service.
The Campanas are relatively well off in many ways, but they face challenges, including the cost of Ken’s care for Alzheimer’s and Parkinson’s diseases in a long-term care facility and Betsy’s concerns about how much longer she will be able to work.
“My concern is that as long as I am able to work, I seem to be okay financially,” Betsy wrote. “But I am worried that he will outlive my ability/desire to work, and I don’t know if I can survive if that happens.”
We asked two experts to take a look at the Campanas’ situation and to share their thoughts and suggestions. Our experts are Richard W. Johnson, director of the Urban Institute’s Program on Retirement Policy, and Mehmood Nathani, who in 2001 founded Altius Financial Advisors, a Bethesda-based fee-only firm that provides financial advice and manages investments.
The big picture.
Both started out by noting how fortunate the Campanas are in some ways. “What’s working well?” said Nathani, who pointed first to the fact that Ken has a $6,000 a month federal government pension, which would provide Betsy, if she were to survive him, with $4,000 a month. That’s better than most people in their age group, Johnson said. “Nationally, only 37 percent of adults ages 65 to 74 received pension income in 2012,” the last year for which data is available, he said.
And Betsy “still works and earns a sizeable pay check” that puts her in the top 10 percent of workers aged 55 to 64, Johnson noted.
Still another plus is their health insurance from the federal government, which provides primary coverage for Betsy and supplements Ken’s Medicare coverage. Ken also has relatively low-cost care.
Because he had military service, Ken was able to qualify for long-term care in a Veterans Administration facility where costs are just over $4,000 a month. “Long-term care costs are the most serious financial risk facing older Americans today,” Johnson said. He pointed out that nationally median annual nursing home costs are $77,000 (just over $6,400 a month) for a semi-private room and $88,000 (more than $7,000 a month) for a private room.
Costs are even higher in Delaware, he said. There the median cost of a semi-private room would be $107,000 and year and a private room, $113,000. That equals $9,000 for a semi-private room, “more than his monthly pension income,” Johnson said.
The Campanas also own tax-deferred annuities, a savings account, an Individual Retirement Account, Betsy’s 401(k) plan and about $150,000 in home equity. As a result they have more wealth than the median 2013 wealth of either adults aged 55 to 64 ($166,000) or adults aged 65 to 67 ($232,000), Johnson said.
Grasping income and expenses.
So what are their challenges? One is to take better stock of their monthly spending. It’s sometimes difficult to do, but it’s the bedrock of planning for retirement. Betsy initially estimated her monthly spending at $3,500, but with a monthly mortgage payment of $1,600 and what she notes is “a very expensive version of life insurance” for Ken that costs about $2,000 a month, that initial estimate was clearly too low. And, as Betsy herself noted, it didn’t include estimates for things like gifts, vacations or car maintenance.
“Having a good handle on monthly expenses is key to financial planning, because it affects how much you can save, when you can retire and how much you will need to withdraw from your portfolio in retirement” Nathani said.
Nathani notes that the Campanas are very reliant on Betsy’s salary – the same concern Betsy highlighted in writing to us. One thing she should consider is when to take Social Security. If you take Social Security before the age at which you may claim full benefits, which for Betsy is 66, your benefits are reduced because you’ll be taking the benefits for more years. If she were to start taking benefits at her current age, they would be reduced by about 20 percent. In her case, Nathani said, she should “wait until at least 66 and possibly even up to 70, assuming she’s in good health and can draw upon her portfolio to support her from 66 to 70.” Once you reach full retirement age, every year you delay taking benefits returns about 8 percent in additional benefits.
If Betsy were to claim later than age 66, she would increase her benefit by about 8 percent a year.
Now, about that portfolio. Nathani, who is a certified financial planner and a chartered financial analyst, noted that Betsy is not fully aware of how her investments were allocated across stocks, bonds and cash. “This is important to know and control because it determines the growth rate of the portfolio and also its risk level,” he said. And, as she takes a closer look at her investments, she might want to consider investing in low-cost mutual funds, especially indexed mutual funds.
Too much insurance.
“She owns a long-term care policy, which is good,” Nathani said. Johnson added that many long-term care costs are not covered by Medicare or ordinary health insurance and end up depleting many people’s assets.
But when it comes to other policies “she might have too much insurance,” or more than she needs or can afford, Nathani said. For instance, he said, Ken would probably be alright financially, if Betsy were to die first, because his $6,000 more than covers his $4,000 care at the VA hospital. And they have additional financial assets to supplement his needs.
She also might want to take another look at Ken’s expensive life insurance, he said. Betsy would probably be okay financially even without it, he said, noting that she would have the $4,000 survivor’s benefit from his pension, her own Social Security and their financial assets. If she really needs the insurance, she might consider converting it to a fully paid up whole life policy for a smaller amount, avoiding additional years of high payments. That decision will depend on an assessment of Ken’s health outlook, he said. Her other options are to keep the policy or terminate it and take out the cash surrender value.
Generally speaking, Nathani said, life insurance is most important for people in their 30s, 40s and 50s, when a death and the resulting loss of income would make it hard to keep up with living expenses such as a mortgage and education expenses.
They also have some investments that Betsy now sees in a different light from when they were persuaded to buy them. The seller, who advertised himself as a financial planner, “seems to have turned out to be a very sophisticated insurance/annuity salesman,” she said.
Often individuals who style themselves as financial planners are sales people working on commission. The bigger the commission, the better off they are, so their interests may not be aligned with yours. As a result, they may make self-interested investment recommendations. If you’re looking for a financial professional for help, look for one who works on a fee-only basis. Also look in the description of the individual or a firm that they will act as a fiduciary, putting the client’s interests foremost.
Indexed annuities, such as the Campanas bought, are “difficult to understand, expensive and illiquid,” Nathani said. They are hybrid products, combining insurance and investments that are sold as protection against losses in the markets. And getting out of them can be complicated and costly, he said. Even with his experience in finance, Nathani said he would have to spend hours looking at this type of product to fully understand what was being sold.
A look at housing.
The Campanas’ outstanding mortgage, which has 20 more years to run, also highlights what Johnson calls “another growing risk for older Americans.” Between 1998 and 2010, the share of Americans aged 65 and older still paying off mortgages increased from 30 percent to 46 percent, Johnson said. That leaves less Social Security and pension income for other living expenses.
Betsy Campana had another question she wondered about: whether she should think about moving into a continuing care community in the future. Continuing care communities offer independent living for healthy adults, assisted living for residents who need more help and skilled nursing care for those who need it. They guarantee lifetime housing and appropriate care.
Nathani had a few thoughts to share, based on experience with clients and family members. “They vary considerably in terms of facilities and costs,” he said. “From what I know, most of these facilities charge an upfront payment and a monthly fee. Sometimes the upfront fee is partly returnable to the heirs of the person living there. It’s best to visit a variety of such places based on the location and price range you seek.”
The Campanas situation underscores how hard financial planning for retirement can be. Even those fortunate enough to have traditional pensions have to make decisions about other investments, such as retirement savings plans. It’s complicated, and most of us have a lot to learn.
In Finance Lab, we pair frustrated readers with financial advisers. Want to participate? Tell us your story.