As we've pointed out recently, many Americans aren't making the right choices when it comes to being financially ready for retirement. A combination of misinformation and an unwillingness to confront sometimes difficult, expensive realities make it all too easy to just ignore our looming financial needs.
Unfortunately, those needs are likely to grow rather than go away, so we need to be ready and have a plan if our retirement years are to be economically comfortable. If you're at all confused about just how much you should be saving for retirement and which financial products for retirees will help you get there, read on to find out where Americans who are nearing or already in retirement should focus their resources -- and where they should skip.Pick This: Financial and Medical Power of Attorney
Not That: Just a Will
At this stage in your life, you've probably made out a will. If you haven't, your first step is to do so. Even if you think you don't have much in the way of assets, if you pass away without a will, your heirs will have no say as to how those assets are divided.
But a simple will isn't enough, cautions Gary Gilgen, a financial advisor and director of the financial planning department at Rehmann, a financial advisory and consulting company. If you become incapacited -- say you have a stroke or suffer from dementia -- and are unable to make decisions for yourself, you want to make sure that power is in the hands of someone you trust, not the government. A medical power of attorney lets your chosen person make decisions, such as whether or not to put you on a respirator to keep you alive, while a financial power of attorney gives that person permission to tap into your assets to pay for an expense, such as a stay in a nursing home.
Without these, you risk forcing your loved ones to go to court and have a judge choose someone to handle your affairs. The only way to ensure that the spouse, child or other family member or trusted friend of your choosing gets control over your finances is to select them yourself.
Pick This: Eliminating Your Debts
Not That: Continuing to Make Payments on Loans
"Try to eliminate as much debt as possible before retirement," Gilgen advises. Hopefully by this point in your life, you've done two things: You've built up a nest egg in the form of a pension, 401(k) or IRA, which you can begin drawing down to pay your day-to-day expenses, and you've paid off your mortgage, car loans, credit card bills and any other outstanding debts. In all likelihood, your retirement income will be less than what you brought in as a member of the workforce, so it's in your best interest to have as few obligations as possible toward which you need to put those dollars.
Pick This: Long-Term Care Insurance
Not That: Disability Insurance
Long-term care insurance is a "big issue" for seniors, says Steve Vernon, a retirement educator and president of Rest-of-Life Communications. Given that the average cost of nursing-home care is currently $7,200 a month, all but the wealthiest seniors will want to insure themselves against this prospect.
Gilgen points out that many of us take out disability insurance during our working years. "You won't need disability insurance anymore," he says, "so shift that premium over to purchase long-term care insurance."
Pick This: An Immediate or Private Annuity
Not That: A Reverse Mortgage
Advertisements for reverse mortgages, in which a senior deeds his or her house to the bank and lives in it until their death, abound, but our experts say seniors should avoid them at all costs. "I would use a reverse mortgage only as a last resort," says Vernon. If you need an income stream in retirement, he advises, "Go work at McDonald's or Walmart before you take a reverse mortgage."
Strong words, but they're echoed by Gilgen. "When you turn something over to the bank, they always have the option to call it in," he warns. This could leave an elderly American in the catastophic situation of having no additional income and no home. Both Gilgen and Vernon say annuities are an option if you're seeking an income stream in retirement. But it's important to shop around with different providers since annuities can have high adminstrative fees that cut into your future income stream. It also helps to know the different kinds of annuities from which you can choose.
If you want to keep your home in the family and your adult children have significant cash reserves of their own, Gilgen suggests a private annuity. Essentially, this means you deed the house to your child and he or she pays you a fixed amount per month, which keeps the home in the family and provides you with some income at the same time.
If this isn't option, Vernon says you can look into an immediate annuity, in which you pay a lump sum and the issuer pays you back a certain amount every month for the rest of your life. There are a few kinds of these annuities; similar to other investments, the variety of choices lets you pick the amount of risk with which you're comfortable. The least risky -- although also the lowest-yielding, Gilgen says -- is a fixed annuity. You'll only get a small percent of your investment each month, but the dollar amount is guaranteed to stay the same. An index annuity floats within a predetermined range, letting you benefit a little bit if the stock market skyrockets, and shielding you from a market meltdown. A variable annuity is just what it sounds like: The income you earn month to month reflects the fortunes of the assets in which your principal is invested. You have the potential to make more, but you also have the potential to lose big. (Gilgen says, though, for a premium, you can preserve your principal, but this also costs money.)
Pick This: Whole Life Insurance
Not That: Term Life Insurance
For younger people, term life insurance is a much less expensive product that makes a lot more sense. But as you age into the AARP demographic, things change. Term life insurance rates climb steeply for older people, to the extent that term insurance is in the same ballpark as whole life insurance. In addition, many seniors may lose employer-sponsored life insurance once they exit the workforce, leaving a gap in what they would be able to leave their surviving spouse or other family members.
With little difference in the price, it's in older Americans' best interest to choose a whole life policy, says Gilgen. What's more, some whole life insurance policies can be made to function as dual policies, offering long-term care insurance in lieu of life insurance should the need arise. (Gilgen says the details vary, but providers usually hold back a small portion of the overall benefit to pay out as a death benefit.) As he notes, "It's a perfect solution for folks at that age."
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