Health care employers need cure-all for retirement epidemic
Originally posted Jully 11, 2014 by Michael Giardina on https://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.”
Conflicting Views Of Supreme Court’s Contraception Decision Cloud Other Cases
Originally posted July 8, 2014 by Julie Rovner on https://www.kaiserhealthnews.org.
The Supreme Court’s decision last week that some for-profit corporations don’t have to comply with the contraceptive coverage mandate under the Affordable Care Act may have raised more questions than it answered. Expect confusion – and arguments – as lower court judges and the Supreme Court itself apply the decision to other cases.
This became apparent soon after the Hobby Lobby ruling when the court granted a temporary injunction to Wheaton College, a Christian school in Illinois. The college argued in a lawsuit that the special provisions provided by the Obama administration allowing it to escape the mandate are still insufficient.
But the order for the college, citing the Hobby Lobby ruling earlier in the week, created some confusion over whether Wheaton employees would still get access to contraceptives under the law. And the order provoked a blistering dissent from Justice Sonia Sotomayor, joined by the court’s two other female members, Justices Ruth Bader Ginsburg and Elena Kagan. They argued that the majority was already breaking with the precedent it established only days earlier.
Here are some of the questions raised by the Hobby Lobby case and the remaining cases also challenging the contraceptive coverage mandate.
What is the contraceptive mandate?
As part of the Affordable Care Act, most health insurance plans are required to cover, with no cost-sharing beyond premiums, a wide array of preventive health benefits. For women, that includes all contraceptives approved by the Food and Drug Administration, as well as sterilization procedures and patient education and counseling.
The mandate does not include coverage of RU-486 (mifepristone), the drug used for medical abortions after a pregnancy has been established. But it does require coverage of emergency contraceptives and intrauterine devices, which some believe can prevent the implantation of a fertilized egg. (Newer research suggests that is probably not the case, by the way.)
Who has sued to try to block the mandate?
There have been two separate sets of court cases challenging the contraceptive coverage requirements.
The first set comes from for-profit corporations that, under the law and accompanying federal regulations, are required to provide the benefits as part of their insurance plans. According to the National Women’s Law Center, there have been 50 cases filed by for-profit firms, while the Becket Fund for Religious Justice, which is representing many of those suing, counts 49. Most of those companies charged that the requirement to provide some or all of the contraceptives in question violated their rights under a 1993 federal law, the Religious Freedom Restoration Act (RFRA.)
The cases filed by Hobby Lobby, a nationwide arts-and-crafts chain, and Conestoga Wood Specialties, a Pennsylvania cabinet-making firm, were the first of those to reach the Supreme Court for a full hearing.
Religious nonprofit entities, mostly religious colleges and universities and health facilities, filed the second set of cases. The NWLC counts 59 nonprofit cases; the Becket fund, 51.
The Obama administration, under regulations issued by the Department of Health and Human Services in 2013, is not requiring those organizations to directly “contract, arrange, pay for, or refer” employees to contraceptive coverage. But the organizations say the process by which they can opt out of providing the coverage, which involves filling out a form and sending it to their insurance company or third-party administrator, still violates their religious beliefs by making them “complicit” in providing something they consider sinful.
What did the Supreme Court rule in the Hobby Lobby case?
The majority opinion written by Justice Samuel Alito said that “closely held corporations,” including those like Hobby Lobby and Conestoga Wood Specialties, can exercise religious rights under RFRA. Further, because the Obama administration was requiring those firms to directly provide the coverage, rather than offer them the same accommodation it was offering religious nonprofit groups, the requirement was not “the least restrictive means” of ensuring that women can get contraception and thus a violation of the law.
In making the case for Hobby Lobby and Conestoga Wood, Justice Alito went out of his way to praise the accommodation for religious nonprofits, saying it “does not impinge on the plaintiffs’ religious beliefs that providing insurance coverage for the contraceptives at issue here violates their religion and it still serves HHS’ stated interests.”
What impact has the Hobby Lobby decision had on pending nonprofit cases?
A fairly substantial one. Later that same day the Hobby Lobby decision was handed down, a federal appeals court in Atlanta cited it in issuing an injunction against enforcing the mandate against the Eternal Word Television Network.
But the real fireworks erupted on July 3, when the Supreme Court granted its own injunction in the case filed by Wheaton College.
The unsigned order required the college to write to the Secretary of Health and Human Services, stating “that it is a nonprofit organization that holds itself out as religious and has religious objections to providing coverage for contraceptive services.” The order specifically said the college “need not use the form prescribed by the government, EBSA Form 700, and need not send copies to health insurance issuers or third party administrators.”
Justices Sotomayor, Ginsburg, and Kagan were furious.
“Those who are bound by our decisions usually believe they can take us at our word. Not so today,” Sotomayor wrote. “After expressly relying on the availability of the religious nonprofit accommodation to hold that that the contraceptive coverage requirement violates RFRA as applies to closely-held for-profit corporations, the court now, as the dissent in Hobby Lobby feared it might…retreats from that position.”
What happens now?
The court made clear that in granting Wheaton College its injunction (as it did earlier this year in a case filed by the Denver-based Little Sisters of the Poor), it was not prejudging the case. “This order should not be viewed as an expression of the Court’s views on the merits,” it said.
But what is less clear is whether people covered by the health plans of those nonprofit organizations that are still in litigation will have access to no-copay contraceptive coverage.
The Supreme Court majority appears to think they can be covered. “Nothing in this interim order affects the ability of the applicant’s employees and students to obtain, without cost, the full range of FDA approved contraceptives,” the order said. “The government contends the applicant’s health issuer and third-party administrator are required by federal law to provide full contraceptive coverage regardless whether the applicant completes EBSA Form 700.”
The Obama administration, however, seems not so sure that will happen. “An injunction pending appeal would deprive hundreds of employees and students and their dependents of coverage for these important services,” the Justice Department wrote in its memorandum to the court.
One thing that is clear: Many more of these cases are yet to be decided by many more courts.
Hobby Lobby ruling spilling over to corporate world
Originally posted July 10, 2014 by Alan Goforth on https://www.benefitspro.com.
Both proponents and opponents of the recent ruling by the U.S. Supreme Court in the Hobby Lobby contraception case agree on at least one thing: The case may be settled, but how it will play out in the workplace is far from certain.
The court ruled that the 1993 Religious Freedom Restoration Act prevents certain employers from being forced to pay for contraceptives they oppose for religious reasons. However, the definition of which types of corporations are excluded remains murky.
"Nobody really knows where it is going to go," said Richard Primus, professor of constitutional law at the University of Michigan. "I assume that many more businesses will seek exemptions, not just from the [Patient Protection and] Affordable Care Act, but from all sorts of things they want to be exempt from, and it will put courts in a difficult position of having to decide what is a compelling government interest."
About 50 lawsuits filed by corporations nationwide, which were put on hold during the Hobby Lobby appeal, must now be resolved or re-evaluated. "We don't know ... how the courts will apply that standard," Primus said.
The decision also has ramifications beyond the courtroom. Even closely held companies with sincere religious beliefs must carefully consider the potential marketplace ramifications of crafting health-care coverage according to religious beliefs.
"Many owners of companies don't want to distinguish the difference between what's good for them personally and what's good for their business," said John Stanton, professor of food marketing at Saint Joseph University in Philadelphia. "I believe that if a business owner believes something is the right thing to do — more power to them. That's his business. However, he's got to be ready for the negative repercussions."
Eden Foods of Clinton, Mich., a natural-foods manufacturer, has filed a lawsuit and is balancing religious beliefs and business concerns. Since Eden initially filed its lawsuit last year over mandates to cover birth control in PPACA, some customers have taken to social media to express disapproval and outrage, even threatening a social boycott. However, the corporation also has gained new customers who support its stance.
"It's very conceivable they could lose business," said Michael Layne, president of Marx Lane, a public relations firm in Farmington Hills, Mich. "And they could lose employees, too."
Experts agree that the myriad issues raised by the Hobby Lobby decision could take a while to play out. "I think there will be a rush of litigation in the next year or two," Primus said. "I think that the exemptions are likely to get broader before they are limited."
Major work needed before enrollment
Originally posted July 10, 2014 by Kathryn Mayer on www.benefitspro.com.
The fall open enrollment period needs some major work, as new analysis out Thursday finds low satisfaction and little results, with many consumers remaining “uninsured and underserved,” after the first shopping experience in the exchanges under the Patient Protection and Affordable Act.
The inaugural J.D. Power 2014 Health Insurance Marketplace Shopper Study, which looked at enrollment satisfaction among more than 1,600 consumers who shopped for coverage under PPACA November 2013 through April 2014, found that satisfaction during the first signup period averaged 615 on a 1,000-point scale.
The results indicate that health plans need to “retool” their efforts ahead of 2015 open enrollment, which begins Nov. 15.
“No doubt that ensuring a technologically error-free experience, along with streamlining the online enrollment process will be most impactful to future marketplace shoppers,” said Rick Johnson, senior director of the health care practice at J.D. Power. “While the uninsured are now a smaller group, they continue to be underserved, just as they were prior to the exchanges, and continue to need more information delivered in an easy-to-understand and personal way.”
J.D. Power found that many shoppers began the enrollment process but had problems completing their plan purchase at the time of the survey primarily due to three reasons:
- A combination of technical problems experienced during the enrollment process (40 percent);
- The application process taking too long (19 percent); and
- The website not having enough information about the plans to make a selection (18 percent).
Additionally, 49 percent of shoppers who didn’t complete enrollment did not choose a plan during their initial shopping experience because they had not yet decided which plan they wanted.
The technical problems for HealthCare.gov have been well-documented.
The survey found that satisfaction was higher among those enrollees who got in-person help from brokers and navigators.
When shoppers used a navigator — a certified agent or broker used by 17 percent of shoppers — during the shopping process, satisfaction rose to a score of 631 compared to 611 for those who didn’t use a navigator.
Though it was the least common way to sign up for a health plan, in-person enrollment had a higher satisfaction rate at 715 points. Online enrollment had a satisfaction score of just 597 while selecting a plan on the phone had a score of 623.
That’s in line with previous research from the Urban Institute and the Robert Wood Johnson Foundation, which found that brokers are the highest-ranked of all information sources on PPACA and enrollment help by consumers.
But that finding also means carriers and brokers have more work to do, too, in working to engage consumers. J.D. Power said that “health insurance companies and the exchanges should continue to find ways to personalize the insurance shopping experience for consumers.”
“When the dust finally settles later in 2014 and in 2015, for health insurance providers to thrive in this new environment, they will need to retool their marketing, information and enrollment efforts toward a new generation of uninsured to serve their needs,” Johnson said.
Thousands still lack PPACA coverage
Originally posted July 8, 2014 by Kathryn Mayer on www.benefitspro.com.
Just because consumers are paying for health care coverage though the exchanges under the Patient Protection and Affordable Care Act doesn’t mean they’re actually getting coverage.
According to a report from the Wall Street Journal on Tuesday, thousands of enrollees still lack coverage despite picking a plan and paying for coverage due to problems in the law's enrollment systems. The problems are prevalent in California, Nevada and Massachusetts, states running their own exchanges. The enrollment glitches are causing thousands to delay care and pay more out-of-pocket expenses.
The newspaper’s report follows findings from the Health and Human Services inspector general last week that detailed widespread data errors still plaguing the law. That report found the administration was unable to resolve 2.6 million inconsistencies in the federal exchange out of a reported 2.9 million because the CMS system for determining eligibility was “not fully operational.”
And of the roughly 330,000 cases that could be straightened out, the administration only resolved about 10,000, which is less than 1 percent of the total.
The Wall Street Journal also reported that many enrollees who requested life event changes in coverage — such as marriage or a new child — haven’t gone into effect yet, even months are the request. For example, Minnesota has a 6,500 backlog for coverage change requests because of life events, the report found.
The Journal doesn’t pinpoint exact numbers, but it’s likely a fraction of the 8 million people who enrolled in coverage through the exchanges.
According to a report from the Commonwealth Fund, 20 million people have been covered because of the law — an additional 12 million people who gained coverage through other provisions of the law along with the 8 million who enrolled in coverage through the exchanges since the spring.
Why the Hobby Lobby Case Puts Employees (And Your Happy Workplace) at Risk
Originally posted July 3, 2014 by Jeremy Quittner on www.inc.com.
The Supreme Court's ruling in support of Hobby Lobby on Monday may be a win for anti-abortion advocates, but it could also spell the end to long-sought anti-discrimination laws for other groups.
A case in point: the Employee Non-discrimination Act(ENDA), which would add LGBT workers to the roster of groups including racial minorities, women, and the disabled currently protected by federal non-discrimination statutes, such as Title VII of the Civil Rights Act.
The bill is aimed at granting these traditionally vulnerable groups protections against discrimination in hiring practices and in the workplace, among other things. And though ENDA has floated around in Congress without ever passing for close to two decades, it did enjoy some recent time in the sun, as recently as last year, when it passed in the Senate. Its proponents are hoping for another try this year. Yet after recent events, that optimism may now seem quaint.
Legal observers now say Monday's Supreme Court ruling in the case of Hobby Lobby Stores v. Burwell, basically renders that once-promising bill moot. Since the Court's decision effectively lets businesses object--on religious grounds--to most any federal mandate, not just the Affordable Care Act.
In addition to causing confusion and unease among business owners in general, this latest implication of the Hobby Lobby ruling indicates that owners might also expect significant problems in their own ranks. From discrimination against women and LGBT people to sexual harassment incidents, the ruling's repercussions could extend far and wide.
"The majority [opinion] said that you can't discriminate based on race. It did not mention same-sex marriage" or sexual identity, says Kevin Martin, a partner at Goodwin Procter in Boston, and a former clerk for Justice Antonin Scalia.
Speaking for the majority in Monday's 5 to 4 decision, Justice Samuel Alito suggests the Hobby Lobby ruling should not be construed to support racial discrimination:
The principal dissent raises the possibility that discrimination in hiring, for example on the basis of race, might be cloaked in religious practice to escape legal sanction. Our decision today provides no such shield. The Government has a compelling interest in providing an equal opportunity to participate in the workforce without regard to race, and prohibitions on racial discrimination are precisely tailored to achieve that critical goal.
Nevertheless, Alito leaves open to question discrimination based on gender, sexual identity, and sexual expression. There's probably a good reason for that, notes Daniel O. Conkle, an expert on constitutional law, the First Amendment, and religion at Indiana University.
Extensive case law has already provided a precedent that forbids religious groups claiming an exemption from race-based discrimination, as Bob Jones University had decades ago. The university had sued the IRS, which revoked its tax-exempt status as a religious organization, based on its discriminatory admissions policies at the time.
Despite getting a recent boost, ENDA had been languishing for some time. Last year, the gay rights group Human Rights Campaign, reportedly helped place a religious exemption in the legislation, to make the bill more palatable to conservative lawmakers. The added measure included broad exceptions for any religious organization that opposed hiring LGBT people, as well as broad exemptions for small business owners with fewer than 15 employees. While that strategy worked in the Senate this winter-- ENDA passed 64 to 32--the bill stalled in the House.
Although President Obama signed an executive order in June, forbidding discrimination against LGBT federal contractor workers, currently, there is no federal law protecting people in the workplace on the basis of sexual identity or gender expression. Twenty-one states have added their own protections, and about 175 municipalities have as well. But in 29 states, it's still perfectly legal to fire LGBT employees based on their sexuality or gender expression.
About 75 percent of LGBT people say they have experienced discrimination at work, with an equivalent percentage saying they have been harassed at work, according to the Williams Institute, a gender identity law and public policy institute. Sixteen percent say they have lost a job due to their sexual orientation. Williams estimates there are about 8.2 million lesbian and gay workers in the U.S.
And after 20 years, particularly after the Hobby Lobby ruling, it now seems like ENDA's time has come and gone. LGBT people must try a new approach for workplace equality.
How baby boomers stay resilient
Originally posted June 30, 2014 by Emily Holbrook on www.lifehealthpro.com.
As the youngest group of baby boomers approaches 50, a new study shows how the generation stays resilient in the face of challenges. The Hartford Center for Mature Market Excellence and the MIT AgeLab Resilience in Midlife study found that:
- The most resilient adults have a strong sense of self-efficacy or the belief that they are able to manage through difficult transitions.
- Participating in entertainment activities and hobbies is the most common way that all adults in the study cope with stress. However, the most resilient adults are more likely to participate in physical activity than less resilient adults (70 percent versus 42 percent).
- Social connections and support are also common among the most resilient people. Sixty percent of the most resilient adults talk to or spend time with friends as a way to cope with stress, compared with 35 percent of the less resilient individuals.
- Ninety-four percent of the most resilient people reported that they are very or somewhat happy, compared with only 32 percent of the less resilient people in the survey.
- Thirty-four percent of the most resilient people reported that they are not stressed at all, compared with 6 percent of the less resilient people in the survey.
- Adults in their 60s reported higher levels of resilience, compared with people in their 40s and 50s.
For boomers, the most stressful aspects of their lives revolve around personal finances, according to the study. This type of stress can be relieved, at least in part, by following the advice and guidance of a professional financial advisor. Other ways to boost resilience in boomers include:
- Physical: Be active. Adults in our study who were more resilient reported higher levels of physical activity. Walking was listed as the top activity that resilient people participate in to help cope with stress. Whether it’s taking a walk, exercising, doing yoga or playing sports, being active is associated with resilience.
- Social: Stay connected to your friends and family. The most resilient adults in our study reported higher rates of spending time or talking with friends and family. Are there friends and family you are close to and have important conversations with? Keep those connections strong. Whether it’s talking on the phone, meeting for a meal, or just hanging-out, talk to the people in your network you rely on and who support you.
Personal: Develop the inner qualities that build resilience. Resilience is comprised of 5 key elements: family and social networks, perseverance, coping, focus of control (belief in your ability to control the situation) and self-efficacy (a belief that you are able to manage through difficult situations). In our research, we found that the most resilient adults reported a high level of self-efficacy. They are confident that they can deal with the stressors they face in the midst of life events.
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."
3 ways the Hobby Lobby decision affects workplaces
Originally posted July 1, 2014 by Eric B. Meyer on www.lifehealthpro.com.
Mid-morning yesterday, the Internet broke shortly after the Supreme Court issued its 5-4 decision in HHS v. Hobby Lobby Stores, Inc..
Jeez, I'm still cleaning out my Twitter, LinkedIn and Facebook feeds.
In case your wifi, 4G, 3G, dial-up, TV, radio, and other electronics picked the wrong day to quit sniffing glue, the long and short of yesterday's Supreme Court decision is this: Smaller, closely-held (think: family-owned) companies don't have to provide access to birth control if doing so would conflict with an employer's religious beliefs.
So, how does yesterday's decision affect your workplace? I promised you three ways, and here they are:
- The court's opinion creates a PPACA exception for closely-held business. If your company isn't closely held, then there's nothing to see here;
- The Hobby Lobby decision does not allow employers (closely-held or otherwise) to discriminate against employees under the guise of a religious practice. In the dissent, Justice Ginsburg pondered, "Suppose an employer's sincerely held religious belief is offended by health coverage of vaccines, or paying the minimum wage or according women equal pay for substantially similar work. Does it rank as a less restrictive alternative to require the government to provide the money or benefit to which the employer has a religion-based objection?" Well, no. The majority recognized that "the Government has a compelling interest in providing an equal opportunity to participate in the work force without regard to [a protected class], and prohibitions on [discrimination] are precisely tailored to achieve that critical goal."
The Court's opinion is a good reminder about religious accommodations in the workplace. Title VII requires covered employers to make reasonable accommodations for a worker's sincerely-held religious beliefs unless doing so would impose an undue hardship on business operations. The "sincerity" of an employee's stated religious belief is usually not in dispute. (More on that here). And, in these situations, an employer should not judge the employee's religious belief to determine whether it is plausible. Rather, the focus should usually be on whether the accommodation would impose an undue hardship — because the burden there is rather low.
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.