Record 401(k) Millionaires: A Boon for Retirement, But Long-Term Care Can Derail Your Plan
According to new data from Fidelity Investments, the number of 401(k) plan participants with account balances of $1 million or more reached a record high at the end of June 2024.
Approximately 497,000 individuals are now considered 401(k) "millionaires," marking a 2.5% increase from the previous quarter and the third consecutive quarter of retirement savings growth. According to Fidelity, the average balance among these accounts hit $1,595,200, an increase from $1,581,000 at the end of March.
While these figures highlight the success of many Americans in growing their retirement savings, they also underscore the need for comprehensive planning that extends beyond accumulating wealth.
The reality is that retirement savings are not only intended to provide income during your retirement years. Too many people fail to consider the impact of future long-term care costs on their retirement plans. Health insurance, including Medicare, does not cover long-term care services as they only pay for short-term skilled care.
The Hidden Costs of Aging: Long-Term Care
As Americans live longer, the likelihood of needing long-term care increases. Over half of those who reach the age of 65 will require assistance with daily living activities or supervision due to conditions like dementia. The costs associated with long-term care are rising sharply, and these expenses can quickly deplete even a robust retirement fund.
While the costs of in-home care, assisted living, and nursing homes are expensive, these long-term care costs are projected to increase dramatically in the decades ahead, according to a survey from LTC NEWS. However, costs vary depending on where you live, so if you are considering relocating, consider the cost of long-term care services in that area well before moving.
Long-Term Care Insurance offers a safeguard, ensuring access to quality care services—whether at home, in an assisted living facility, or a nursing home—without exhausting your retirement savings. An LTC insurance policy can protect your financial stability, allowing you to maintain a better lifestyle and leave a legacy for your loved ones.
The Role of Long-Term Care Insurance in Retirement Planning
Many retirees underestimate the financial burden that long-term care can place on their families. The absence of adequate planning can force loved ones to make difficult decisions, such as becoming caregivers themselves or drawing down your retirement accounts to pay for necessary care.
This situation can create significant emotional and financial strain, potentially compromising the quality of life that retirees have worked hard to achieve and adversely impacting the entire family as well.
The Economic Landscape and Retirement Realities
The current economic climate, marked by inflation and rising costs, has made it increasingly challenging for many Americans to save adequately for retirement. Despite inflation easing from its peak in June 2022, prices remain significantly higher than pre-inflation levels, affecting everything from rent to groceries. And when compared with January 2021, before the inflation crisis began, prices are up 20%. This economic pressure is particularly acute for low-income Americans, whose financial resources are already stretched thin.
Retirement experts recommend saving at least 15% of your income, yet many Americans are falling short of this goal. Fidelity's data shows that while some savers are achieving significant milestones, the average retirement account balance is still far below the $1.46 million Americans believe they need to retire comfortably. Moreover, more than one-quarter of non-retired investors fear they may have to return to the workforce due to inadequate savings.
According to Nationwide's ninth annual Advisor Authority survey, powered by the Nationwide Retirement Institute®, more than 6 in 10 (61%) investors say their expectations for retirement have changed significantly in the last five years. Nearly half say their dreams for retirement have been delayed, altered, or canceled due to the economic conditions seen in the previous five years.
42% of investors believe they need between $1 million and $2 million to retire, while 18% believe they need more than $2 million saved to retire comfortably.
"Americans believe they will need over $1 million to retire comfortably – a figure that could be discouraging for even the most committed retirement savers," said Rona Guymon, Senior Vice President of Nationwide Annuity Distribution.
What's important to remember is that everyone's 'magic number' in retirement will vary depending on a number of variables, including spending habits, health, debt levels, location, and more. It's good to have a goal in mind.
Securing Your Future Now
As the number of 401(k) millionaires continues to grow, it's clear that many Americans are taking their retirement planning seriously despite the economic uncertainty many people have about the future of the American economy.
However, securing a comfortable retirement involves more than just saving a substantial nest egg. Planning for long-term care is equally critical to ensuring that your hard-earned savings are protected and your future remains secure.
Adding an LTC policy to your retirement plan is essential in safeguarding your financial well-being, ensuring access to quality care, and reducing the potential burden on your loved ones.
Adult children often find themselves becoming caregivers despite being untrained and unprepared for the role. Juggling caregiving with their careers and family responsibilities makes it very hard on them and their loved ones. Often, they have no choice because their parents have no long-term care plan. However, you can include a plan in your retirement.
By addressing income needs and the likely costs of aging, you can create a retirement plan that truly supports a better lifestyle and legacy.
Options and Tax Benefits Available
You can't predict the future or the markets. You won't know when and for how long you will need help with everyday living activities that require long-term care services. You can control how you plan, and there are a variety of ways to plan.
Tax incentives are available for owning Long-Term Care Insurance. For those who are self-employed or operate an LLC, S corporation, or C corporation, premiums can be deducted as a business expense without the requirement to offer coverage to employees.
Additionally, qualified funds from a 401(k), SEP, IRA, or 403(b) can be used to pay for the policy, with the proceeds always remaining tax-free.
Partnership long-term care policies offer additional dollar-for-dollar asset protection, while hybrid long-term care policies—which combine life insurance or an annuity with Long-Term Care Insurance—include a death benefit.
However, it's important to note that not all "hybrid policies" meet federal guidelines for Long-Term Care Insurance, so careful selection is crucial.
Plan Now
Whether you are a "401(k) millionaire" or not, you have savings to protect and family you love. This is not usually a job for a financial advisor or general insurance agent. Use an experienced LTC Insurance specialist to find the appropriate policy since premiums and underwriting standards vary dramatically.
Incorporating LTC Insurance into your retirement plan is a proactive step that protects your income and assets and ensures that your spouse and adult children are not burdened with the full responsibility of caregiving. The peace of mind that comes with knowing you have a plan to cover long-term care costs is invaluable.