Include health care cost in plans

Originally posted August 3, 2014 by Redding Edition on http://www.ifebp.org

The possibility of having to pay major health care costs in the future is a primary concern of planning for retirement these days. Is there some way to plan for these expenses years in advance?

Just how great might those expenses be? There’s no rote answer, but recent surveys from AARP and Fidelity Investments reveal that too many baby boomers might be taking this subject too lightly.

For the last eight years, Fidelity has projected average retirement health care expenses for a couple — assuming that retirement begins at age 65 and that one spouse or partner lives about seven years longer than the other. In 2013, Fidelity estimated that a couple retiring at age 65 would require about $220,000 just to absorb those future health care costs.

When it asked Americans ages 55 to 64 how much money they thought they would spend on health care in retirement, 48 percent of the respondents figured they would only need about $50,000 each, or about $100,000 per couple. That pales next to Fidelity’s projection and it also falls short of the estimates made in 2010 by the Employee Benefit Research Institute. EBRI figured that a couple with median prescription drug expenses would pay $151,000 of their own retirement health care costs.

AARP posed this question to Americans ages 50 to 64 in the fall of 2013. The results were 16 percent of those polled thought their out-of-pocket retirement health care expenses would run less than $50,000 and 42 percent figured needing less than $100,000.

Another 15 percent admitted they had no idea how much they might eventually spend for health care. Not surprising, just 52 percent of those surveyed felt confident that they could financially handle such expenses.

Prescription drugs may be your No. 1 cost. EBRI currently says that a 65-year-old couple with median drug costs would need $227,000 to have a 75 percent probability of paying off 100 percent of their medical bills in retirement. That figure is in line with Fidelity’s big-picture estimate.

What might happen if you don’t save enough for these expenses? As Medicare premiums come out of Social Security benefits, your monthly Social Security payments could grow smaller. The greater your reliance on Social Security, the bigger the ensuing financial strain.

The main message is save more and save now. Do you have about $200,000 after tax saved for future health care costs? If you don’t, you have yet another compelling reason to save more money for retirement.

Medicare, after all, will not pay for everything. In 2010, EBRI analyzed how much it did pay for, and it found that Medicare only covered about 62 percent of retiree health care expenses. While private insurance picked up another 13 percent and military benefits or similar programs another 13 percent, that still left retirees on the hook for 12 percent out of pocket.

Consider what Medicare doesn’t cover, and budget accordingly. Medicare pays for much, but it doesn’t cover things like glasses and contacts, dentures and hearing aids — and it certainly doesn’t pay for extended long-term care.

Medicare’s yearly Part B deductible is $147 for 2014. Once you exceed it, you will have to pick up 20 percent of the Medicare-approved amount for most medical services. That’s a good argument for a Medigap or Medicare Advantage plan, even considering the potentially high premiums. The standard monthly Part B premium is at $104.90 this year, which comes out of your Social Security. If you are retired and earn income of more than $85,000, your monthly Part B premium will be larger. The threshold for a couple is $170,000. Part D premiums for drug coverage can also vary greatly. The greater your income, the larger they get. Reviewing your Part D coverage vis-à-vis your premiums each year is only wise.

Takeaway: Staying healthy may save you a good deal of money. EBRI projects that someone retiring from an $80,000 job in poor health may need to live on as much as 96 percent of that end salary annually, or roughly $76,800. If that retiree is in excellent health instead, EBRI estimates that he or she may need only 77 percent of that end salary — about $61,600 — to cover 100 percent of annual retirement expenses.


Average worker needs to save 15% to fund retirement

Originally posted July 22, 2014 by Nick Thornton on http://www.benefitspro.com

A typical household needs to save roughly 15 percent of their income annually to sustain their lifestyle into retirement, according to a brief from the Center for Retirement Research at Boston College.

Generally, workplace retirement savings plans should provide one-third of retirement income, according to the study. For lower income families, defined contribution or defined benefit plans should provide a quarter of all retirement income. Higher income families will need their retirement plans to provide about half of all retirement income.

Middle-income families will require 71 percent of pre-retirement income to maintain living standards after they leave the workforce. About 41 percent of their retirement income is expected to come from social security.

Low-income families need an annual savings rate of 11 percent in order to sustain their lifestyle into retirement, which is lower than middle-income families (15 percent) and high-income families (16 percent).  For lower income families, social security will replace a greater portion of pre-retirement income.

The Center’s National Retirement Risk Index says that half of Americans lack adequate savings to maintain their standard of living into retirement. A “feasible increase” in savings rates by younger workers can greatly affect their retirement wealth.

For those middle-income workers ages 30 to 39 who lack enough savings, a 7 percent increase in annual savings can provide adequate retirement funding. But middle-income workers age 50 to 59 who lack retirement savings would have to increase their annual savings rate by 29 percent, an unlikely expectation, the report adds.

For those older workers behind the curve, a better funding strategy would be “to work longer and cut current and future consumption in order to reduce the required saving rate to a more feasible level.”

Delaying retirement to age 70 greatly reduces the annual savings expectations workers need to meet in order to fund retirement.

A worker who starts saving at age 35 will need a 15 percent annual savings rate in order to retire at age 65. But if the same worker delays retirement until age 70, only a six percent annual savings rate is necessary.

A worker who starts saving at age 45 would need to save 27 percent annually to retire at 65. But by delaying retirement to age 70, the same worker only has to save 10 percent to maintain their standard of living after retirement.


Getting Employees To Save More For Retirement

Originally posted by Brian Walker, VP - National Director of Business Development at The Principal Financial Group®, a UBA Strategic Partner.

There's no denying it. The vast majority of workers won't be ready financially for retirement. Seventy percent are behind schedule in saving for retirement and half of all Americans have less than $10,000 in savings. Of immediate importance is the fact that nearly half of the oldest boomers are at risk of not having sufficient retirement resources to pay for basic retirement and healthcare costs!

Why should you care about retirement readiness? The answer is simple: Because retirement delays can hurt your bottom line.

The majority of employers expect the cost of health care and other benefits to rise due to delayed retirements. And they're exactly right. In fact, for each employee over the age of 65, a plan sponsor could be paying $5,000 more per year for health care. (Source: EBRI estimates)

In addition, the cost of employees working beyond the normal retirement age can have potentially significant implications for your business as a whole.

So how do you know if employees are saving enough, and how do you measure success?

Simple plan design changes can have huge impacts on participant outcomes. Features like automatic enrollment and automatic deferral increases, for instance, use participants' inertia to their advantage.

In fact, 91% of participants stay in the plan when automatically enrolled. And 88% of employees participate in an automatic escalation program when it's a default feature--only 12% opt out. But when they have to sign up on their own, just 6% participate.

PowerPoint presentation slides on this topic were created by The Principal Financial Group.


Health care employers need cure-all for retirement epidemic

Originally posted Jully 11, 2014 by Michael Giardina on http://ebn.benefitnews.com.

Like other industries, health care employers and benefit plan managers in the health care sector are struggling mightily with their ability to address the retirement preparedness of their evolving workforces.

Whether it’s the remnants of the baby boomers or introduction of millennials, the workforce dynamic in the health care industry is going through a change as the it continues to cope with the ongoing hiccups of the Affordable Care Act. Plan fiduciaries at health worksites also caution the need to motivate their employees to save adequately and helping them learn how to invest wisely.

The health care segment includes more 4,000 defined contribution plans, with approximately 5,200 retirement plan participants. In total assets, the health care sector has more $317.8 billion, which is about 40% of the overall DC not-for-profit market.

Ty Minnich, vice president, not-for-profit institutional markets at Transamerica Retirement Solutions, says the root of the problem is the “pendulum shift” from defined benefit to DC retirement plans, which adds to the retirement confusion.

“The aging population, although affecting all industries, is creating a workforce management issue – particularly in health care, where the demand for younger employees is there,” says Minnich. “The technical expertise, the knowledge they need with the sophistication of the changes in medical delivery [is critical], yet they have employees entering the retirement period of their careers and they are not retiring because they are not ready to retire, from a financial perceptive.”

According to health care retirement plan sponsors, approximately 75% say that employee engagement is one of the most significant challenges in managing a retirement plan. Of the more than 100 hospital administrators and chief financial officers surveyed by Transamerica and the American Hospital Association, most agree that helping employees save for retirement and retaining employees are top goals for their retirement plan.

Another wrench in the operation of health care businesses has been the ACA, and its overnight transformation – according to some in consultancy space – of how business is done in the field.

“[Health care] is undergoing an enormous change, from the perspective on how they get reimbursed for their delivery model,” says Minnich. “What you seeing is that the smaller regional community-type organizations just can’t exist in this marketplace.”

David Zetter, of Zetter Healthcare Management Consultants, explains that he is seeing similar shifts in all aspects of benefits and services – from small practices to large groups and health systems that the health care accounting and consulting firm works with.

“I don’t see how health care practices are going to do it,” explains Zetter, also a board member of the National Society of Certified Healthcare Business Consultants. “It’s just getting so expensive, and reimbursements are going down. It’s tough for a doctor to make ends meet at this point in time and if they keep wanting to be the employer of choice they are going to have to ante up. Unfortunately that’s going to cost them quite a bit of money, especially from a benefits standpoint.”

Meanwhile, there has been a change in how plan sponsors measure plan success in the medical industry. There is more of a focus around retirement readiness rather just solely participation rates, according to the study. And this intensified focus on improving employee interaction and tailoring print and electronic education touch points exemplifies how health care retirement plan sponsors are reacting.

“It all indicates that the plan sponsors are not only realizing they have to do more to help participants get ready for retirement, but also helping participant to help themselves,” says Grace Basile, assistant director of market research at Transamerica Retirement Solutions. “There’s no more ‘set it and forget it,’ there’s no more just getting into the plan.” Instead, she says it’s all about “increasing [engagement] over time, [and] making sure your investments are appropriate for where you are in your age and career.”

Overall, employers and their employees have been riddled with uncertainty of retirement since the recession. However, according to the Employee Benefit Research Institute, retirement confidence reported some meager gains from the losses over the past five years. Approximately 18% of Americans are very confident and 37% are somewhat confident with the future financial needs.

Nevin Adams, co-director of the Employee Benefit Research Institute Center for Research on Retirement Income, adds that all employers – not just those in the health care space – are faced with the challenges of finding the sweet spot of automatic enrollment, default rates and participation.

“One of the things that we are really hearing from employers is that employee benefits are going to continue to be sort of a differentiating factor,” Adams tells EBN. He says that demographic shifts are one of the biggest challenges for employers to deal with.

“The baby boomers [are] kind of hanging around, and the millenials looking for a place to come in,” he notes. “The benefit package and how it’s put together really will make a difference.”


Treasury issues final rules regarding longevity annuities

Originally posted July 1, 2014 by Daniel Williams on www.lifehealthpro.com.

Good news on the retirement front.

Today, the U.S. Department of the Treasury and the Internal Revenue Service issued final rules regarding longevity annuities.

According to the ruling, "these regulations make longevity annuities accessible to the 401(k) and IRA markets, expanding the availability of retirement income options as an increasing number of Americans reach retirement age."

In commenting on the ruling, J. Mark Iwry, a Senior Advisor to the Secretary of the Treasury and Deputy Assistant Secretary for Retirement and Health Policy, said:  “As boomers approach retirement and life expectancies increase, longevity income annuities can be an important option to help Americans plan for retirement and ensure they have a regular stream of income for as long as they live.”

Cathy Weatherford, president and CEO of IRI weighed in on the ruling: “The availability of longevity annuities in workplace plans and IRAs will facilitate access to a steady stream of guaranteed income throughout a retiree’s later years and help Americans enhance their retirement security at a time when they are most vulnerable to outliving their financial assets or facing reduced standards of living."


You Could Live to 100: How to Plan for a Long Retirement

Originally posted July 1, 2014 by Casey David on www.foxbusiness.com.

They say there are only two certainties in life: death and taxes. But that doesn’t mean we have any control over the actual timing of our death, which makes retirement planning hard.

Projecting your life expectancy is a critical part of executing a retirement plan as it determines how much you need in your nest egg and your drawdown tactics.

According to the Social Security Administration, a 65-year-old male has an average life expectancy of 19 more birthdays to reach 84. Women can expect to live a little longer: A female turning age 65 today can expect to live, on average, until age 86. In fact, 1 out of 4 65-year-olds will live past age 90, and 1 out of 10 will live past age 95.

Living longer is good news, but it increases the risk of outliving your retirement savings if you don’t plan accordingly.

Retirement income certified professional and Director at the American College, David Littell, offers the following tips to help boomers plan for longevity risks in retirement:

Boomer: What are some solutions to longevity risks for baby boomers?

Littell: The most direct solution for longevity risk is to increase income sources that are payable for life. This can be accomplished in a number of ways. The best place to start is to defer Social Security benefits to increase lifetime payments. Social Security has an added advantage in that benefits increase for inflation each year as well. Another option is to choose a life annuity payout option—instead of a lump sum—from an employer- sponsored retirement plan.

In addition, there are a number of commercial annuity products that can provide lifetime income. A life annuity can create a stream of income over a single life or over the joint lives of a couple. Annuities can be purchased that provide an income stream starting immediately – or, with a deferred income annuity, income can be purchased prior to retirement. A deferred income annuity can be purchased to limit longevity risk in one’s later years. For example, buying an annuity at age 60 that begins at age 80 can be a cost effective way to limit longevity risk. Deferred annuities can also be used to create income for life as these can be annuitized at a later date, allowing the owner to lock in lifetime income. Deferred annuities can be purchased with riders that provide for a lifetime withdrawal at a rate specified in the contract. Be sure to read all the disclosure before investing in annuity to make sure you understand all the potential risks, fees and terms.

Boomer: How important is it to make a good estimate of life expectancy for planning for longevity risk, and how can we create our own estimate?

Littell: Unless all of a retiree’s income sources are payable for life, part of the plan will be taking withdrawals from an existing IRA and other accounts. Determining how much can be withdrawn each year depends in part on how long retirement will last. So making a reasonable estimate (and updating that estimate over the years) is an important part of retirement income planning.

This process begins by considering average life expectancy. According to the Social Security Commission, the average life expectancy at age 65 is almost 20 years, and there is a one in four chance of living to age 90. In addition, there are some interesting tools available on the web for making a more personal calculation. For example, the Living to 100 calculator provides an estimate based on answers to questions about personal and family medical history as well as questions about lifestyle habits.

Boomer: What is a contingency fund and what is in it?

Littell: One solution to address longevity risk, as well as other risks faced in retirement, is to maintain a separate source of funds that are reserved for these contingencies. A contingency fund can be a diversified investment portfolio. If the purpose is to have funds available if life is longer than expected, then it is appropriate to choose investments that emphasize long-term growth.  A tax-efficient approach is to build this fund within a Roth IRA. With this approach, the value is not diminished by taxes and if the funds are not needed, the Roth IRA is a very tax efficient vehicle to leave to heirs.

A contingency fund does not always have to be an investment portfolio.  It could also be the cash value of a life insurance policy, or a reverse mortgage with a line of credit payout option. Both of those options have limited tax consequences as well.

Boomer: How does longevity risk impact some of the other risks faced in retirement? 

Littell: Some describe longevity risk as a risk multiplier. When a person lives longer in retirement, it means greater exposure to most of the other retirement risks such as inflation, increasing costs for health care and long-term care and more exposure to public policy changes that could put your savings at risk.

Boomer: How can boomers develop an income plan that evaluates all of the risks that retirees will face post retirement?

Littell: Building a retirement income plan requires strategies for creating consistent income to replace a paycheck and address other financial goals, such as leaving a legacy for heirs. But it also requires considering each of the major risks faced in retirement and having one or more strategies to address each risk.

One thing that becomes apparent when looking at all the risks is that the solutions to some risks require locking into income annuities and other low risk investments, while other risks require the flexibility of a diversified portfolio that can be adjusted based on changing circumstances over time. A critical guide for these choices is an informed advisor (such as someone who has earned the Retirement Income Certified Professional (RICP®) or Chartered Financial Consultant (ChFC®) designation from The American College) that can help you react (but not overreact) to changing circumstances.


One-Third of Workers Say ACA Will Delay Their Retirement

Originally posted May 27, 2014 on http://annuitynews.com.

Although the Congressional Budget Office projects a smaller U.S. workforce in coming years as a result of the Affordable Care Act (ACA), the majority of American workers don't believe that the ACA will allow them to retire any sooner, according to a new survey from http://MoneyRates.com. On the contrary, the Op4G-conducted survey indicates that one-third of workers expect that the ACA – also known as Obamacare – will raise their health care costs and thereby force them to retire later than they previously anticipated.

One-quarter of respondents felt that Obamacare would have no impact on their retirement date, and another one-quarter weren't sure how it would impact their retirement. Those who felt Obamacare would allow them to retire earlier were the smallest segment of respondents at 17 percent.

Many of the workers who indicated that Obamacare would delay their retirement said that the delay would be lengthy. Seventy percent of those respondents said they expected the delay to be at least three years, including the 39 percent who said it would be at least five years. The respondents who said they expected an earlier retirement were more moderate in their projections, with 71 percent indicating it would hasten their retirement by three years or less.

Richard Barrington, CFA, senior financial analyst for http://MoneyRates.com and author of the study, says that the purpose of the survey wasn't to determine whether Obamacare would truly delay or hasten anyone's retirement, but rather to gauge the fear and uncertainty that surround the program today.

"It's too early to tell whether Obamacare will actually delay people's retirements," says Barrington. "But what's clear at this point is that the program has created a lot of concern about health care costs as a burden on workers and retirees."

Barrington adds that whether or not these concerns are warranted, there are steps workers can take to better manage their health care costs in retirement, including budgeting for health insurance within their retirement plans, shopping regularly for better deals on insurance and using a health savings account as a way of handling out-of-pocket medical expenses.

"The poll reflects a high degree of uncertainty over the impact of Obamacare on retirement," says Barrington. "One way to reduce the uncertainty is to take active steps to manage how health care will affect your retirement."


10 tips to help employees boost their retirement savings

Originally posted on http://ebn.benefitnews.com.

Even if they began saving late or have yet to begin, it's important for your plan participants to know they are not alone, and there are steps they can take to kick-start their retirement plan. Merrill Lynch has provided the following tips to help boost their savings - no matter what their stage of life - and pursue the retirement they envision.

1: Focus on starting today

Especially if you're just beginning to put money away for retirement, start saving and investing as much as you can now, and let compound interest have an opportunity to work in your favor.

2: Contribute to your 401(k)

If your employer offers a traditional 401(k) plan, it allows you to contribute pre-tax money, which can be a significant advantage; you can invest more of your income without feeling it as much in your monthly budget.

3. Meet your employer's match

If your employer offers to match your 401(k) plan, make sure you contribute at least enough to take full advantage of the match.

4: Open an IRA

Consider an individual retirement account to help build your nest egg.

5: Automate your savings

Make your savings automatic each month and you'll have the opportunity to potentially grow your nest egg without having to think about it.

6: Rein in spending

Examine your budget. You might negotiate a lower rate on your car insurance or save by bringing your lunch to work instead of buying it.

7: Set a goal

Knowing how much you'll need not only makes the process of investing easier but also makes it more rewarding. Set benchmarks along the way, and gain satisfaction as you pursue your retirement goal.

8: Stash extra funds

Extra money? Don't just spend it. Every time you receive a raise, increase your contribution percentage. Dedicate at least half of the new money to your retirement savings.

9: Take advantage of catch-up contributions

One of the reasons it's important to start early if you can is that yearly contributions to IRAs and 401(k) plans are limited. The good news? Once you reach age 50, these limits rise, allowing you to try to catch up on your retirement savings. Currently, the 401(k) contribution limit is $17,500 for 2013. If you are age 50 or older the limit increases by $5,500.

10: Consider delaying Social Security as you get closer to retirement

For every year you can delay receiving a Social Security payment before you reach age 70, you can increase the amount you receive in the future." The delayed retirement credits range from 3% to 8% annually, depending on the year you were born. Pushing your retirement back even one year could significantly boost your Social Security income during retirement.