No one wants to talk about death, illness or divorce. Unfortunately, you may have to raise some unpleasant issues when you speak with family members over the holidays if you want to ensure a successful retirement. Family issues are just about the only thing investors don't plan for, and it could hurt them in retirement, a new Bank of America Merrill Lynch and Age Wave study shows.
The study, "Family and Retirement: The Elephant in the Room," conducted in August 2013, surveyed more than 5,400 respondents and asked about family dynamics and long-term financial planning. The survey found that respondents were generous when it came to assisting family members but unrealistic in assessing some of their own needs later in life, especially long-term care.
In the survey, half of pre-retirees age 50 and older said they would make major financial sacrifices for family members, and 36 percent said they were willing to endure a less comfortable post-retirement lifestyle to aid family members. The baby boomers, also known as the "sandwich generation," are in a tough spot, with one in five parents seeing their children return home to live with them as they also attempt to care for their own aging parents. Those boomers surveyed said they would not be prepared if an aging parent or older relative needed long-term care.
But what about the boomers' own long-term care? The majority don't think they'll need it, with only 37 percent of survey respondents age 50 and older saying they may need long-term care in their lifetime. But according to 2013 U.S. Department of Health and Human Services data, 70 percent of retirees will eventually require it.
That's a big problem, according to Matt Curfman, senior vice president of Richmond Brothers, a money management firm. He says his clients in Jackson, Miss., may spend anywhere from $2,000 to $7,000 a month on long-term care. Paying for such care is an even bigger concern when someone is married, as they have to worry about how much will be left for the healthy spouse to live on once the ill spouse passes.
One option is long-term care insurance, but Curfman doesn't advise it. "The average rise of health care costs compared with what a long-term care policy offers is not great. There is an average increase of 15 percent a year and even if it's a great policy, there could be an inflation cap of 3 to 5 percent."
Curfman suggests that people planning for long-term care also consider trying to use the death benefit in their life insurance policy while they're still living. "Life insurance is becoming more unique. Some policies allow access to the death benefit while alive," Curfman says.
If a person can't perform two activities of daily living - feeding and clothing yourself, for instance - he or she can talk to a doctor, have the doctor write a note explaining their inability to succeed at those tasks and receive substantial access to the death benefit, Curfman explains. You can also receive an accelerated death benefit if you are terminally ill or have a life-threatening diagnosis such as AIDS, according to the U.S. Department of Health and Human Services. There are also hybrid life insurance policies that allow chronic illness riders, which may be helpful to boomers in their 50s and 60s.
Curfman says some financial advisors are beginning to factor long-term care and assistance to family members into clients' financial plans. "I think what's happening is that a lot of advisors only deal with retirement planning through asset allocation, and that's shortsighted to help with those goals but not deal with long-term care issues. It's not so much that advisors are proactive, it's that these issues are being brought to them and now they're reacting."
David Tyrie, head of retirement and personal wealth solutions for Bank of America Merrill Lynch, says the study makes it apparent that people are not having real discussions about their financial needs in retirement or how family issues complicate those goals. According to the survey, as much as 70 percent of adult children age 25 and older haven't discussed important financial issues with their parents, such as their parents' retirement, possible illnesses or anything related to aging. The survey also shows that more than half of parents age 50 or older haven't discussed inheritance, a will or where they want to live in retirement with their adult children.
"It's very clear people are not talking about this. People are only reactive, doing this after an illness or death of a family member. But there is fear of conflict or what might happen as a result," Tyrie says.
If families don't discuss important financial issues, debt could easily spiral out of control. Curfman gave the example of a couple he worked with who did everything right to plan for their retirement - only they didn't account for the financial help they would need to give their children and parents.
"They eventually had $100,000 in debt. They were embarrassed, but they weren't blowing money. They were helping out with kids and parents. They were two years away from retirement and did the planning, but didn't have a plan when it came to the parents and kids," Curfman says.