Living in Retirement

Good Day,

As I had promised on my last blog, that I would give a heads up on healthcare costs that you are bound to come across in your retirement, the following article is a conclusion of the topic I had started, Living in retirement from the editors of Money Magazine.

How do I afford health care in retirement?

Save up a big fat pile of money before you retire. Sadly, we’re not joking.

Sure, once you hit 65 you will be eligible for Medicare. That will take care of a lot of your medical expenses, but probably not all. You will be required to pay a premium for some of your Medicare coverage, and you will probably want to purchase a private Medigap policy to cover all the costs that Medicare doesn’t. Fidelity Investments ran the numbers and estimated that a 65-year old couple who retired in 2009 will need $240,000 of their own savings to handle 20 years of out-of-pocket retirement health costs.

And be careful about relying on your employer’s promise to provide health care benefits once you retire. Even those that pledge such care may find it hard to live up to their promise when you hit retirement. More and more big companies in a financial pinch are reducing or rescinding health insurance benefits once promised to their retirees.

What is Medicare?

Medicare is the federal insurance program for Americans age 65 and over (it also covers the disabled). You are automatically enrolled at age 65. Medicare includes a mind-numbing maze of coverage, rules and regulations. Basic Medicare comes in two parts: A and B.

Medicare Part A provides coverage if you’re hospitalized.

Medicare Part B provides coverage for doctor visits and other “outpatient” costs such as physical therapy, plus some preventive costs such as diabetes testing.

But wait, there’s more.

Medicare Part C, known as Medicare Advantage, is a private plan run through Medicare that provides an alternative to Parts A and B. If you want it, you have to buy it.

Medicare Part D provides prescription drug coverage. It is a separate policy you buy from a private insurer if you want it.

What is Medigap insurance?

Medicare provides a whole lot of coverage, but it doesn’t cover everything. So some people choose to buy a separate policy to provide coverage for the areas Medicare falls short on. This is known as Medigap insurance. You buy Medigap from a private insurance company.

You can also use your Medigap policy to cover expenses you have under Medicare, such as annual co-pays and deductibles.

Important note: If you opt for a Medicare Advantage Plan (Medicare Part C), any Medigap policy you have won’t pay out. So if you decide to move into a Medicare Advantage Plan and you already have a Medigap policy, drop the Medigap.

Which Medigap policy should I buy?

There are 12 standard Medigap policies to choose from, with the eye-popping names of A through L. Medigap A is the most basic “core” policy. As you move through the alphabet, the plans add more coverage. For example, Medigap E will offer something that is not included in Medigap D, but will lack a coverage provided in Medicare F.

There is no difference in plans offered by different insurers; plan details are all set by the government. (Important caveat: If you live in Massachusetts, Minnesota or Wisconsin, check with your state insurance company or a private insurer who operates in your state. Medigap policies in these states offer coverage different than the plans followed by the 47 other states.)

If you and your spouse want Medigap coverage, you’ll need to buy separate policies; spouses aren’t covered together.

What is Medicaid?

Medicaid is a health insurance program for certain low-income individuals and their families. The program is run jointly by the federal government and your state. People 65 years of age or older who meet the income and asset limits for their state are eligible for Medicaid. Your state is in charge of setting the income and asset eligibility tests for its residents.

What does Medicaid cover?

Medicaid provides a broad level of health insurance coverage, including doctor visits, hospital expenses, nursing home care, home health care and the like. Medicaid also covers long-term care costs, both in a nursing home and at-home care. Medicare does not provide this coverage.

Prescription drugs are not covered by Medicaid. But if you’re eligible for Medicaid, the program may pay the premium for Medicare Part D, the Medicare prescription drug plan.

Should I get long-term care insurance?

A long-term care (LTC) policy doles out money to help cover the costs of nursing home care, an assisted living facility or at-home assistance if you are no longer able to take care of yourself. Once you hit 60 or so, you may no longer qualify for coverage. Get answers to more questions on long-term care insurance.

How can I tell if a nursing home is a good one?

Show up unannounced and ask to walk around. You want to see how the facility works when no one is expecting you. There’s nothing better than using your own eyes to get a feel for the professionalism of the staff.

The Medicare Web site also maintains a searchable database of Medicare-approved nursing care facilities with basic data on the operations of each facility.

Will my health coverage be affected if my spouse dies?

Medicare is not affected at all; each Medicare recipient has individual coverage through the program. The same is true with private Medigap policies.

However, if you received health care benefits as part of your spouse’s retirement package from a former employer, your coverage may be affected. It is up to the plan to set guidelines for coverage of surviving spouses. Check with the plan administrator for details.

Can I tap my home equity to support myself in retirement?

Yes. Two of the most common options are:

• taking out a reverse mortgage
• selling your current home and moving to a smaller one.

But use caution. Make sure to explore the risks of taking out a reverse mortgage, and the added costs of downsizing your home before making a move.

What’s a reverse mortgage?

It’s a way of tapping what’s probably one of your biggest assets: The equity in your house. Understandably, reverse mortgages seem pretty alluring to lots of retirees.

Here’s how they work. So long as you’re 62 or older, you get to draw down your home equity without repaying it as long as you stay in your house. You get the money up front, but the interest is deferred until you move out (in most cases, when you move to a nursing home or die).

However, the amount of equity you can pull out is far less than with a traditional mortgage. For example, an 80-year-old Chicagoan with a house worth $400,000 would probably be able to borrow only about $195,000. And the younger you are, the less you can borrow because it will be longer until the loan is paid back. So a 65-year-old in the same situation would get perhaps $160,000.

Should I get a reverse mortgage?

Reverse mortgages can definitely help cash-strapped retirees generate extra money for living expenses. But there can be an expensive downside: They carry stiff fees, nearly three times as much as those on a traditional mortgage. Upfront fees can exceed 10% of the loan in some cases.

So while a reverse mortgage can generate cash, it’s not necessarily the best or only way to do that. Because of the high upfront costs, a reverse mortgage is usually not a great option if you’re borrowing a small amount or you plan to move in a few years. You might pay far less by taking out a home-equity line of credit. Or you may be able to generate more income by selling and moving to a less expensive place.

Bottom line: Make sure there aren’t cheaper ways to get the money you need.

What’s the downside of a reverse mortgage?

Loan-origination fees (part of the upfront costs you pay to take out such a mortgage) can top $7,000 on a $500,000 home. Those sums are attracting aggressive salespeople intent on getting you to take out a reverse mortgage whether you need one or not. Some may try to persuade you to invest the proceeds in high-priced financial products, such as annuities, boosting their commissions even more.

No one can say how widespread such tactics are. But several lawsuits have been filed, and the Senate Special Committee on Aging was concerned enough to hold a hearing in December 2007, while FINRA (the Financial Industry Regulatory Authority) issued an investor alert in March of 2008.

Annuities are frequently pitched to seniors along with a reverse mortgage. However, you’re unlikely to earn more with an annuity than you are being charged in interest and fees on the reverse mortgage. Worse, you might have to pay surrender charges that are upwards of 20% to take money out in the first few years.

Should I use a reverse mortgage to buy an annuity?

What’s more, lots of salespeople pitch reverse mortgages to pay for long-term care insurance. Whether that’s a bad deal is tougher to evaluate since it depends on your assets and resources, the cost of the policy and the odds you’ll end up in a nursing home for an extended period. But Donald Redfoot of AARP’s Public Policy Institute notes that if you’ve got to take out a loan to be able to pay for a long-term-care policy – and a reverse mortgage is a loan – then you’re probably not a good candidate for one.

Where can I get objective advice about reverse mortgages?

While the federal government requires you to meet with a counselor before taking out a reverse mortgage, the quality of the counseling is uneven. (The U.S. Department of Housing and Urban Development is working on new standards for counseling that will require a discussion of the implications of using loan proceeds to buy annuities.)

If you want a rigorous analysis of whether you’re better off with a reverse mortgage or a less expensive home, consult a fee-only financial planner. Because fee-only planners don’t make commissions from investments they sell you (instead, they charge by the hour), you can be confident that they won’t be peddling annuities just to score high fees for themselves. To find one near you, go to napfa.org

What are the best places to live in retirement?

The goal is to find a balance between a region that allows you to maintain your financial security and one that doesn’t compromise your quality of life.

As all too many retirees have learned, relocating to save money can be a jolting experience if it takes them far from family and friends. Factor in the cost of traveling to see loved ones if you move to a different part of the country. You don’t want to be so far away that it becomes cost prohibitive to maintain your most important relationships.

Don’t pick up and move without giving a new town a trial run. Rent a place for a few months to make sure you get a true sense of what the community is like. If you have your eye on an area that’s very popular in the winter, spend some time there in summer. Maybe you will love the quiet – or maybe you’ll find it depressing when the high-season action packs up and goes home.

While change and new adventures can be invigorating, make sure wherever you move lets you continue to pursue your favorite hobbies or pastimes. If you are a big opera and symphony fan, moving to the boonies might not be a good fit.

Make sure you’ll have close access to good health care – especially in specialties of particular concern to older people, such as cancer, heart disease and general geriatric care.

Also carefully consider the financial pros and cons of the region you’re considering. Look for a well-diversified economy – that means the area is more likely to be able to weather setbacks to a particular industry. In a one-company or one-industry town, your home’s value can take a big hit if that company or industry hits a hard patch or decides to relocate. A protracted downslide in a region (or state) can eventually lead to cutbacks in basic public services, from a reduction in bus routes to a smaller police force.

You get the idea. New can be great. Just make sure that what’s new is also what you love to do, or have nearby. Money’s list of best places to retire can help you weigh the plusses and minuses of various cities.

Should I move to the city?

This is an increasingly popular move for retirees. One potential cost saving comes with getting rid of one (or more) cars. The insurance and maintenance savings on one care can easily be more than $1,000 a year, and you eliminate wallet-emptying trips to the gas station.

However, if you plan on taking your cars with you, budget in higher costs for parking and insurance. And if you go completely carless, factor in the new cost of taxis and public transportation to get around town.

Should I retire to a state that charges no income tax?

Retiring to a state (and county) that doesn’t tax retiree income – or taxes it only lightly – might seem like a no-brainer. It’s not. That’s because those places may compensate for low-income taxes with high property taxes or sales taxes. So make sure to factor in those other taxes too.

When you do the math on relocating to a different state or region, find out if you’ll be in line for any “senior” tax discounts. Some states and localities offer reductions or exemptions on property tax for senior citizens.

Should I retire to another country?

Maybe, if you’re worried that you’ll outlive your money. The cost of living in many foreign countries is much lower than that in the U.S. That means your retirement kitty can last longer. But there are many factors to consider. Some include:

Taxes. Many countries have tax treaties with the U.S. that help to reduce the chances you’ll be taxed twice. (Google expat sites for a given country and you’ll find the info you need.) But even if you’re living abroad full-time, you’ll still have to file a U.S. tax return.

If you work in retirement while you’re living overseas, you can claim the Foreign Earned Income Tax Credit. In 2010, this allows you to exclude the first $91,400 you earn in the foreign country from U.S. taxes. Earn more than that amount and Uncle Sam is going to take his cut of your earnings. Pension income from U.S. sources is also going to be taxed, no matter where in the world you happen to be living.

Health care. It’s a big issue – and potentially a big problem. Despite all the drawbacks with the health-care system in the U.S., the quality of care there is among the highest in the world, while some other countries are below par. Unfortunately, it’s those countries with the lowest cost of living that frequently have the worst medical care.

Another huge issue for expat retirees is that Medicare coverage does not extend beyond U.S. borders. You’ll either have to return to the U.S. for any care or budget to pay for care or insurance in your new home away from home. Either way, it can be more expensive than you bargained for.

Exchange rates. You’ll be subject to currency risk. If your retirement income is in U.S. dollars, you could suffer if the country you live in sees its currency’s value rise against the dollar.

Bill paying. Depending on the country, you may find it nearly impossible to open a local bank account – and once you do, it may not be set up to handle deposits (such as Social Security checks) in U.S. dollars. Many expats deal with this problem by maintaining a U.S. bank account and then paying for a wire transfer (and transfer to local currency) a few times a year.

And if you plan to just rely on your U.S. bank, you’ll ring up some sizable ATM fees anytime you want to get local currency by tapping your U.S. account. It can often cost you more than $5 per transaction, and many countries limit the amount foreigners can withdraw on a daily basis. As a result, you’ll be stuck paying the nuisance fee on smaller withdrawals.

Most retirees who live overseas keep their credit cards based in the U.S. and make online bill payments. That’s generally a good way to keep costs down.

Should I move to a smaller home?

If your goal is to reduce your housing costs, you need to do the math carefully before you move. For starters, smaller doesn’t always mean cheaper. If you can believe it, the national median price for condos – which typically are smaller than stand-alone homes – is now higher than the median price for single-family houses.

Think long and hard before you downsize into a new place that requires you take on a big new mortgage. Even if it is affordable today, you need to consider whether you can pay that mortgage well into your 70s and 80s – bearing in mind what might happen to your finances when either you or your spouse dies.

One way to gauge affordability is to check out what the payments would be on a 15-year mortgage. If you can handle the higher payments on a loan that would be paid off before you retire, or early on in retirement, that can be a manageable debt load. But if the monthly mortgage cost on a 15-year scares you, that’s a pretty good tipoff that you might want to look at less expensive homes. Don’t let yourself off the hook by financing with a 30-year mortgage unless you are absolutely sure you have the savings to keep up with those payments well into your retirement years.

If you do decide to take the plunge, sell your current place before you buy the new one. Tempting as a pristine new condo can be in comparison to your drafty old five-bedroom Victorian, don’t just plop down earnest money right away. Make sure that you have a buyer with solid financing. Otherwise, you could get stuck with two mortgages, two sets of property taxes, and – well, you get the idea.

At the very least, have your lawyer include a contingency clause in the sales agreement that obligates you to close on the new place only if you manage to sell your existing home by an agreed-upon date. In the sales frenzy of yesteryear, when sellers could make bidders do somersaults, they had no incentive to agree to such a clause. But in a market where homes are sitting on the market, sellers may show some mercy.

What costs will I cut by moving to a smaller place?

When you downsize, you can probably save on certain costs, including:

Utility bills – Especially if you currently live in a big old drafty house. Runzheimer International, a management consulting firm, estimates a $1,300 annual savings in utility costs by downsizing from 2,800 to 1,800 square feet. (On the flip side, if you plan to move somewhere much warmer, your air conditioning bill could zoom.)

Maintenance costs – If you are moving from a large (and older) home on a big chunk of land to a more modest footprint in a townhouse or condo, you’ll cut down drastically on yard work and snow removal, for example.

Property taxes – check to make sure. If you are in retirement mode and considering a move to a new county or state, ask if there is a property tax exemption or deductions for senior citizens.

What costs will I add by moving?

Yep, you may have some of those. If you are moving to a condo or townhouse, or a house that is part of a homeowner’s association, be sure to investigate maintenance costs and assessments. While you’re at it, ask for a record of the past five years of rate hikes. You want to have a sense of whether you are going to face much higher assessments going forward.

If your new place is appreciably smaller, make room in your budget for inevitable new purchases, such as replacing an oversized sectional or king size bed that won’t fit in a cozier place.

And don’t forget that when you sell, you’ll have the 6% or so sales commission (assuming you own your current home), plus the cost of the moving van and all the other fees associated with schlepping your possessions to a new place.

Bottom line: Running the numbers is key. Tot up the annual cost you currently pay for ongoing expenses; as you start shopping for a smaller home, get estimates for what those costs would be at the new place.