In “When I’m 64,” The Beatles sang whimsically about the possibility of growing older together as romantic partners. A recent New York Times article tells the stories of two families experiencing a different situation. Instead of couples aging, these families are dealing with parents and children aging together. While their situations are not desperate, they are far from whimsical.
The families’ stories have a lot in common. In both cases, the oldest adults are in their late nineties. They live in their own homes but have largely exhausted their financial resources. They can no longer afford paid assistance. Their children (who are in their mid-seventies) are helping to care for them.
The children are making significant sacrifices to help their parents. They have given up jobs, used their own retirement savings, and are spending much of their own golden years providing care. Furthermore, studies suggest children who care for their aging parents put themselves at risk for health problems as well. In short, should they live into their nineties themselves, the children’s retirements are likely to be more difficult than they envision.
How did these families get into this difficult situation? The article does not provide many details, but there are hints. One of the children says of her mother, “We did not think she would live this long – she wasn’t all that healthy.” The home care the parents purchased (in some cases with the children’s advice and support) was expensive, and the parents exhausted their remaining savings. The parents’ remaining resources are insufficient to cover their expenses, especially for care.
What steps can you take (either as a child or as a parent) to reduce the chances that this situation might happen to you? (I don’t mean to suggest that the families highlighted in the article did anything wrong. Families experience many demands on their resources as they age, including financial stress, medical emergencies, children who need extra support, etc. Any one of these can throw a family’s financial plan into disarray.)
Visualize the Possibilities
First and most important, recognize that you, your parents (and your children!) might live a long time. We all have a hard time imagining that we could live into our nineties, let alone to age 100, yet many people do. For information specific to your personal situation, try the Actuaries Longevity Illustrator, developed by the American Academy of Actuaries and the Society of Actuaries. (Actuaries work for life insurance companies and pension funds and estimate how long people live based on their habits and lifestyles.)
I used the Illustrator to develop planning horizons for a 65-year-old married couple, both in average health. The results suggest there is a 25%(!) chance the wife will live to 95, and almost a 20% chance that the husband will. There is a 10% chance that at least one of them will live to be 101. While this is great news for the couple, it highlights the importance of making plans to avoid running out of money or becoming dependent on their children. Families should also recognize that women tend to live longer than men.
Prepare for the Possibilities
Once you have a time horizon, you should consider three main categories of resources: income, assets, and insurance coverage.
Income is a regular inflow of cash. Social Security retirement benefits provide inflation-protected income which provides stable purchasing power for the life of the recipient, even if inflation is eating away at the value of a dollar. Pensions and some income annuities also provide monthly income throughout life, although most of these do not offer inflation protection.
Waiting until the recipient turns 70 before starting Social Security retirement benefits usually provides the best protection for long-life situations (see Steve Vernon’s Forbes articles here, here and here for more information about making the best Social Security benefit claiming decision).
If you (or your parents) are among the few still eligible for defined benefit pensions, you may be able to receive regular income, in addition to Social Security benefits, for the rest of your life. While you may be able to receive your pension as a lump sum (which you can roll over into your IRA), you may want to think carefully about taking the annual income instead. You can spend down the asset, but you can’t outlive the income.
Finally, you can purchase an income annuity. You can use some of your assets to buy what is, in effect, a personal pension. Again, it’s income you can’t outlive. Some income annuities adjust their annual payments to offset inflation (like a pension with a cost of living adjustment or COLA). They are more expensive than nominal annuities – you must pay extra for the inflation protection – but the extra expenditure will pay off if inflation accelerates.
Your financial assets are your savings. While you can draw on your assets during retirement to supplement your income, it is wise to preserve some of them to protect you against the possibility that you might need expensive help later in your life. (It is easier to do this if you have more regular income from Social Security, your pension, and income annuities). Unfortunately, the only way to preserve some of your assets is not to spend all of them.
Finally, you can buy insurance to protect against the possibility that you might need help. This insurance is called Long Term Care (LTC) insurance, and it pays benefits if you need specific kinds of help. Most LTC insurance sold today covers care you receive at home, in assisted living, or in a nursing home.
Medicaid also provides LTC insurance, which has two primary limitations. While coverage varies by state, and some home care and assisted living coverage may be available, only nursing home care is an entitlement in every state. In addition, obtaining Medicaid financing for care requires that you spend down most of your assets. If Medicaid is part of your plan, an elder law attorney can help you think through the intricacies of the program in your state.
As you plan for your own retirement or help your parents plan for theirs, the most important action you can take is to recognize that living a long time and needing help are both possible. You can take steps to prepare for these possibilities. Absent preparation, you will be forced to simply react. If someone in your family does reach ten decades, you want their life to be as wonderful as possible. While you may not enjoy John Lennon and Paul McCartney’s felicity of word choice, rhyme, and melody, you can compose your own version of “When I’m 94.”
This article originally appeared in Forbes.com.