• Poor or uncertain health diagnosis
• Involuntary retirement due to unemployment
• Inheritances as both a recipient and a donor
• Long-term care

Poor or Uncertain Health Prognosis
When you’re in good health, it is reasonable to expect that you’ll live an average, or even above average, life expectancy and then plan accordingly. However, when you’re 45 or 50 and diagnosed with a life-threatening disease, retirement plans can immediately change. Some people move up their planned retirement date to retire while they still can. Others reduce their work hours and, hence, their income and retirement savings, because they want to or they have to (due to fatigue or the time involved in caring for their illness). It may be appropriate for some people, who know they will not live long enough to enjoy their retirement assets, to discontinue contributions to tax-deferred plans and spend the money, instead, on medical expenses or memorable experiences with their families. In any case, it’s necessary to revise your retirement savings analysis based on the specifics of the health prognosis.

A poor or uncertain health prognosis also dictates immediate attention to estate plans, including the drafting (or revision) of a will, living will, and power of attorney. In addition, it is very important to plan for the ill person’s spouse and/or other dependents through the use of Social Security survivor’s benefits, life insurance, pension plan distributions, asset transfers, retirement plan withdrawals, and/or trust arrangements. Check beneficiary designations on insurance policies and tax-deferred plans to ensure they are current and don’t conflict with provisions in the will. Contingent beneficiaries should be named to provide estate planning flexibility.

Involuntary Retirement
In addition to health problems, a forced “early out” incentive program or a layoff can lead to an involuntary retirement. Involuntary retirees face two main issues—being psychologically and financially unprepared for retirement. This is especially true for late savers who were counting on earnings during their 50s and 60s to help make up for lost time. Even with severance pay or enhanced pension benefits, retirees may not have enough money to maintain their lifestyles. A sense of loss, similar to feelings after the death of a loved one, is also common following unemployment.

Workers faced with involuntary retirement need to honestly assess their financial resources and marketable job skills. Perhaps they can start their retirement “bridge job” sooner than expected or convert an existing sideline business, or a spouse’s sideline business, into a full-time enterprise. Maybe some job retraining is in order, as well as a resume makeover that emphasizes transferable knowledge and skills rather than chronological work experiences. Free or low-cost career counseling is often available at a local community college or women’s center. If you face involuntary retirement, be sure to maintain and expand contacts with colleagues in trade or professional organizations. Today, as in the past, most good job leads continue to come from word of mouth and personal networking.

Sometimes, you can negotiate additional benefits from your employer, such as increased severance or outplacement support. Another key consideration for involuntary retirement is maintaining health-care coverage. Health benefits may be available through the federal COBRA law for up to 18 months (this law applies to work sites with more than 20 workers) or an unemployed person may have access to a spouse’s health insurance plan.

To make ends meet, unemployed people may need to consider using one of the catch-up strategies described in Part Two and Part Three—such as moving to a smaller house—sooner than planned.

Inheritances
Two aspects of inheritances need consideration in catch-up retirement planning: receiving an inheritance and leaving a bequest to one’s heirs.

Receiving an Inheritance
Some people view the likelihood of receiving an inheritance as an excuse not to save for retirement. This is a mistake. There are simply too many unknown factors, such as an anticipated donor’s health and longevity, to count on inheritances as a source of retirement income. Unless a donor is currently divesting his or her assets or has made outright gifts—which the recipient has subsequently invested—inheritances should not be included in a retirement savings analysis.

One way to increase the odds of receiving an inheritance is to encourage the donor, typically a parent, to purchase long-term care insurance. This way, the policy benefit, instead of the donor’s assets, can be used to pay home health-care and/or nursing home expenses, thereby preserving assets for distribution to heirs. In some cases, it may make sense for adult children to pay their parents’ long-term care policy premiums to preserve invested assets (if possible, several siblings can share this expense).

Leaving an Inheritance
During retirement planning, you may need to adjust your financial plans to include leaving an inheritance to your heirs. This is because most simple retirement planning tools, such as the "Ballpark Estimate", assume that you will draw down assets to zero during retirement. Donors who want to leave heirs “whatever is left, if anything” can use traditional planning tools. If, however, you want to leave your heirs “specific bequests, no matter what,” such as $25,000 to three grandchildren, you can either exclude the value of assets that will be passed on or plan to save more than the amount indicated by a retirement savings calculation.

For grandparents who want to fund their grandchildren’s education expenses, an opportunity exists with state-run 529 college savings plans. Donors can put up to five years worth of gift-tax excluded cash (in 2002, $55,000 per individual or $110,000 per couple) per beneficiary into a 529 plan. Two major advantages of doing this are that donors get assets out of their estate to reduce potential taxes and assets start growing immediately through compound interest instead of waiting to be deposited over time. Note that 529 college savings plans are different from prepaid tuition plans.

Long-Term Care Insurance
With longer life expectancies reported for both men and women, the cost of long-term care is an increasing financial risk that retirees, particularly catch-up savers with limited financial assets, need to consider. The term “long-term care” refers to a wide array of services ranging from limited assistance with daily activities in your own home to admission to a nursing home for intensive medical care and support.

To determine if long-term care insurance is appropriate for you, a good rule of thumb to follow is that premiums should not be more than 10% of your annual income (for example, $3,500 premium with a $35,000 income). The United Seniors Health Cooperative recommends that you have more than $75,000 in assets per person in your household, excluding your residence, and an annual income of $30,000 or more per person to justify the expense of long-term care insurance. You should be able to afford the current premium—as well as a potential 20% to 30% increase in premium rates—without significant lifestyle changes.

The best time to purchase a long-term care policy is generally around age 60, plus or minus about five years. If you wait too long, premiums increase significantly and/or you could become uninsurable through some type of medical diagnosis. You can actually purchase a policy as early as your 40s, but this is unlikely to be a priority for catch-up savers because premiums are competing for limited dollars with college tuition and retirement savings. In addition, you could be paying premiums for a long time before coverage is actually needed.

A few things to consider when looking for a long-term care policy: be sure you understand what is covered, look into a policy with a compound inflation rider, and choose an appropriate elimination period.

Resources

• A Shopper’s Guide to Long-Term Care Insurance is a 45-page booklet available from the National Association of Insurance Commissioners (call 1-816-8300).
• Critical Conversations About Financing Long-Term Care program materials are available on the USDA Financial Security in Later Life Web site: www.reeusda.gov/ecs/fsll/longtermcare.ppt.