Covering The Great Retirement Income Gap
Look beyond the averages to protect retirement income
Michelle Prather
October 2017

Your clients have retirement figured out. They’ve saved diligently and checked off all the planning boxes. They’ll have a comfortable, steady income throughout retirement. 

But what if their income needs suddenly increase? Once they’ve reached the “top of the mountain”—the point at which they retire with everything they’ve accumulated for retirement—do they have what they need to get back down the mountain safely? 

Usually, people plan for a steady income to see them through their golden years, based on their assets and expected retirement income. What they may not adequately prepare for—or, more accurately, protect themselves from—is a drastic increase in their income needs. 

As their financial professional, a best practice is to help them protect their strategy from disruption. 

For instance, if your client has prepared for a $100,000 annual budget in retirement, could they come up with $170,000 if they had to? Maybe they could for one year, but if they had to for three, five or more years, what then?

The most likely reason a person might suddenly need a much larger income in retirement is a significant health care event. If care is needed, either in-home assistance or in a care facility, for more than three months, they might suddenly be facing a gap—a big one—between their retirement income and their income needs. And the longer the need for long term care continues, the bigger the gap grows. Even the best strategy for income throughout retirement could be tested by an income gap. 

Faced with a need for more income, many people will begin to liquidate other investments in managed accounts, annuities and cash equivalents. And the more they liquidate for  long term care, the more their future income—their plans to “get back down the mountain”—could be jeopardized.


The danger of planning for averages
People who’ve prepared well to ensure they don’t outlive their income have probably thought about health care expenses, and maybe even  long term care expenses. Sometimes they’ve put aside some portion of their assets to cover long term care, either in their home or in a facility. 

Averages tell us that a typical long term care event lasts a little under three years, depending on factors such as age when the event begins, whether a person is male or female, and others.1

But this is only one scenario of aging and  long term care. An average scenario isn’t necessarily the most common scenario, and that’s definitely the case with  long term care. More and more as Baby Boomers age, they’re increasingly needing some degree of  long term care for chronic health conditions or other disabilities. 

About half of the people using  long term care services—either in home or in a facility —have a long term disease such as diabetes, Alzheimer’s disease or other dementias, or depression.2  These types of illnesses often last far longer than the average of three years, and may not be anticipated when a person first enters retirement. 

The number of Americans living with Alzheimer’s disease is growing—and growing fast. An estimated 5.4 million Americans of all ages had Alzheimer’s disease last year.3 An estimated 5.2 million of those people are age 65 and older. 

If that sounds like a lot, it is—one in nine people age 65 and older has Alzheimer’s disease. And that trend is expected to continue. 

These numbers will continue to escalate rapidly in coming years, as more and more of the baby boom generation passes the age-65 milestone. Alzheimer’s disease is just one of the diseases that could require significant care expenses in retirement—Parkinson’s disease, diabetes, and other similar illnesses could all require  long term care greater than the average of three years. 


Long term care planning for any scenario
Trying to fund long term care with existing assets is a risky option at best. With costs of care increasing as a disease progresses (see chart), assets are going to decrease as the need increases for more income. With progressive diseases, even families who can provide care for their loved ones face difficult decisions about when it may be necessary to turn care over to a skilled-care facility. 

Self-funding long term care longer than five years becomes all but impossible for most people. More likely, they end up spending down assets to qualify for Medicaid, which can leave a surviving spouse or children with little to nothing left of the assets the person had at the “top of the mountain.”

Making a conversation about long term care protection part of your best practices with your clients will ensure that they have considered the risks that a need for long term care could pose to their retirement income stream. Some types of asset-based long term care protection provide a death benefit if long term care is never needed, and offer an option for lifetime benefits to cover long term care for as long as they need. 

Clients may also find the expense of long term care protection fits into their strategy better than they anticipate, even if they’ve already entered retirement. Long term care protection can be funded with a portion of their existing funds—that’s an asset they won’t have to liquidate if care is needed, and the return comes in the form of long term care benefits. 

One possible funding scenario could be for a retired couple to use a Required Minimum Distribution (RMD) and use it for long term care, assuming the RMD isn’t a critical piece of their income. Often, couples become interested in long term care when their friends and close family start experiencing long term care needs. Investing their RMD in a whole life or annuity product with long term care protection, like one with guaranteed premiums and a death benefit, might be more attractive to them now than when they first retired. 

Another example: a retired person’s “just in case” annuity may be better utilized for long term care to protect more critical income from long term care expenses. Some annuities may also be transferred tax-free into annuities with long term care protection with a 1035 exchange.

In any case, talking to your clients about whether their income strategy will get them “back down the mountain” safely is a best practice for any financial professional. 


Author's Bio
Michelle Prather
is the national accounts vice president for the companies of OneAmerica®. In her role, Michelle leads sales and distribution of asset-based long term care (LTC) products through banks and financial institutions. She has more than 18 years of experience with asset-based LTC products, has been a keynote speaker for many large conferences throughout the country, conducted numerous client workshops, and taught and trained many financial professionals. Prior to her current role, Michelle was a regional marketing director and an internal wholesaler. Prather may be reached at OneAmerica, One American Square, P.O. Box 368, Indianapolis, IN 46206-0368. Telephone: 317-224-4660. Email:

Leave a Comment