Don't Risk Solvency of Retirement Funds


The time when someone saved over multiple decades of working to retire at 65-years-old and live a financially worry free 10 to 15 more years might have been what your parents envisioned, but it certainly isn't the world of today. The adoption of healthier lifestyles and advancements in medicine are just two of the many reasons that the Baby Boomer generation is living longer than what generations before them could have ever imagined.

Not that living a long life is a bad thing, but it does come with a hefty price tag since it means extending the number of years you must be able to support yourself during your retirement years. Another common concern is the increased probability of long-term care needs due to medical necessity and/or a mental or physical inability to continue performing activities of daily living.

In this day and age, it just makes good sense to have a long-term care insurance policy. However, many aging Baby Boomers are foregoing or altogether failing to consider long-term care insurance due to two faulty financial assumptions. The first being that retirement savings and assets will be sufficient to cover all medical expenses incurred during retirement. In reality, most retirees find that their retirement savings can't compare to the cost of long-term care. The very expensive price tag of long-term care services cannot only quickly deplete your own savings and assets, but also those of your loved ones when they start trying to flip the bill after you aren't able to any longer. Furthermore, just one unexpected illness or surgery can put a substantial dent, if not totally deplete, retirement savings. The second faulty assumption is that Medicare will cover all or a lot of the cost associated with long-term care. In reality, Medicare only provides a very limited amount of long-term care-related assistance; you or your family will be responsible for the majority of the cost.

The tax implications from funding long-term care with your retirement assets are yet another drawback. Once you start liquidating your assets, there will be less money working for you and you must report a higher taxable income. Since retirees live on fixed monthly income, the additional taxation alone could make a substantial financial impact.

The above scenarios should leave little doubt of just how important it is to make wise retirement planning choices, including having a long-term care policy. Even the government is recognizing the importance of long-term care insurance and the growing demand for it, as the House and Senate have introduced bills calling for above-the-line tax deductions for paid long-term-care premiums and the ability to buy the policies using pre-tax dollars in flexible spending accounts and cafeteria plans.

In closing, before buying a long-term care policy, be sure to consult your financial advisor and assess what your coverage needs might include. Also keep in mind that if you opt for a tax-qualified plan and itemize on your taxes, then the eligible premium could qualify as an un-reimbursed medical expenditure; there won't be taxation of benefits paid under a tax-qualified plan; non-qualified premiums aren't tax deductible; and premiums exceeding 7.5% of your adjusted gross income are tax deductible.