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Retirement Planning for Successful Independent Living

Life insurance can provide a way to plan ahead for retirement, particularly if you know how and whether to tap living benefits.

Written by Devon Delfino / August 25, 2022

Quick Bites

  • You can tap into your life insurance benefits during your retirement, but there are pros and cons to consider.
  • While planning for independent living in retirement, factor in your lifestyle costs as well as potentially needing physical assistance.
  • It may be worth adding a financial buffer—beyond your traditional savings vehicles—to avoid running out of cash in retirement.

Retirement can be an alluring concept, offering the chance to live life for pure enjoyment. Will you travel the world? Move closer to family members so you can spend more time with them? Volunteer in your community? There are a lot of possibilities on the table. But even though you aren’t working, you still have to find a way to keep your bills paid.

“If you want a true, decent retirement, then you need to start taking care of things,” says Brad Hindman, a financial advisor and managing director of investments at Wells Fargo.

Here’s what you should know to plan your retirement for independent living as a senior.

Inside this article

  1. How life insurance fits in
  2. Costs of living situations
  3. Steps toward independent living

Why life insurance can be an important retirement planning tool

Most people tend to think about life insurance as a part of death planning. After all, when you say you have a $100,000 policy, you’re referring to the death benefit. But for those with permanent life insurance policies, like whole or universal, there may be living benefits which you can tap into during your retirement. 

For example, long-term care riders (or add-ons) can be added to permanent life insurance policies. This can add flexibility, says Hindman, since you’d be able to tap into that cash if you become unable to care of yourself—but keep in mind that using it will decrease the death benefit.[1] Considering that the average 65-year-old has nearly a 70% chance of needing some type of long-term care services at some point in the future, that can be a useful add-on.[2] 

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Using Life Insurance While Alive

Life insurance is meant to be a boon to your family when you die, but there are some benefits you can tap into your policy sooner if necessary.

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Another potential pro for life insurance in retirement is that those policies can be converted (tax-free) to annuities, which pay out fixed sums over time.[3] That can help bolster your retirement income. Of course, that would cancel your policy, and you would have to pay income tax on the payouts.[4] So if you want to keep your policy active, this isn’t the best option.

Permanent policies also build cash value, which can be tapped in retirement (though it isn’t limited to that time period). But you should know that you’d have to pay taxes on those withdrawals, and some policies may require those funds be paid back.[3]

But the biggest potential hurdle to permanent life insurance policies, says Hindman, is qualifying. If you’re nearing retirement, it may be more difficult since they often require a medical exam, and rates are based on factors like your age.[5,6] So, if possible, it’s best to get those policies earlier in life when you can lock in lower rates.

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What about long-term care insurance?

Long-term care insurance is an option that kicks in if you end up needing assistance with basic living activities (like bathing, dressing, using the toilet or eating).[7] This can be a helpful way to hedge against the unknown. But, unlike a life insurance policy with a long-term care rider, if you don’t end up needing those benefits, your premiums would simply be gone. Still, it could be worth looking into if you don’t have access to permanent life insurance.

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In-home care costs vs. community living vs. nursing homes

Even if your retirement planning goal is to live independently for the long haul, you should be aware—and plan for—the costs of various living situations.

Here are the figures for 2021, according to data from Genworth Financial, an insurance provider[8]:

In-home careCommunity, assisted livingNursing homes
$5,000 per month$1,700 to $4,500 per month$7,900 to $9,000 per month

While these figures can be helpful, keep in mind that the quality of these facilities may vary, and macroeconomic factors like inflation will impact the costs.

Tips for planning an independent retirement

The biggest question, says Hindman, who focuses on retirement and estate planning, is whether or not you’re going to have “a big enough pile of money to be able to sustain [your lifestyle],” given your age and life expectancy. The Wells Fargo executive recommends thinking about the following:

Cost of your living situation

The monthly cost of staying in your home (is your mortgage paid off by then) or moving into a retirement community (what's the rent?) will have a major impact on your spending. But it’s important to factor in how those costs break down. In an independent living community, for example, there may be fees or extra amenities that come with certain options which will inflate the rate. Understanding your personal non-negotiables—the desire for independence but assistance when you want it, for example—can help you identify options that fit your needs so you have a more accurate financial target.

Healthcare spending in retirement

In general, healthcare costs tend to increase as we get older. But it can be difficult to know what that will actually look like, especially if you’ve generally been healthy. For context, the average annual spending for those with Medicare is about $6,168, and one in 10 of these seniors spend at least $10,816 per year.[9]

Long-term sources of income

Many folks rely on a retirement account, like a 401(k) or IRA as their primary source of income. But you may also be receiving income from other sources, like Social Security. That will, of course, impact how much you can afford to spend on daily activities. But it can also have a knock-on effect on your healthcare costs. That’s because Medicare—specifically, part B and prescription drug coverage—is based on your modified adjusted gross income (MAGI), which includes both your adjusted gross income and any tax-exempt interest income. For a married couple with a MAGI of more than $182,000, for example, Medicare premiums would increase anywhere from $68 to more than $400 over the standard premium of $170.10.[10]

Tip

You can use the Social Security Administration’s calculator to project your benefits.

Your tax bracket in retirement

Assuming you have at least some retirement income that’s taxable, you’ll want to look at just how much you’d pay in taxes each year based on your desired annual spending. For example, if you have both pre-tax and after-tax funds, you may consider splitting your withdrawals between those accounts so that you don’t push yourself into a higher tax bracket and thus reduce the amount of money you can actually use.

On top of the necessary costs, it can help to have a buffer, adds Hindman. After all, many people worry about running out of money in retirement. A buffer—such as another savings account or income stream—can protect you if something unexpected goes wrong, or if you happen to live longer than you thought.

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If you find that you’re short on retirement funds, there are two common ways you can address it: Reducing your income in retirement (living on less), or working longer. But Hindman cautions against the first option, as many people tend to spend more in retirement, not less. On the other hand, if you extend your retirement timeline—either by working longer or starting to plan earlier—you’ll have more flexibility.

Article Sources
  1. “Should you buy life insurance with a long-term care rider?” Progressive, https://www.progressive.com/answers/life-insurance-long-term-care-rider/.
  2. “How Much Care Will You Need?” Longtermcare.gov, https://acl.gov/ltc/basic-needs/how-much-care-will-you-need.
  3. “Annuity vs. Life Insurance,” Annuity.org, March 24, 2022, https://www.annuity.org/annuities/strategies/annuity-vs-life-insurance/.
  4. “1035 Exchange,” AAFMAA, https://www.aafmaa.com/learning-hub/life-insurance/tools/1035-exchange.
  5. “Can I get life insurance without a medical exam?” Progressive, https://www.progressive.com/answers/life-insurance-without-med-exam/.
  6. “How to understand life insurance rates,” Fidelity Life, https://fidelitylife.com/learn-and-plan/insights/how-to-understand-life-insurance-rates/.
  7. “What is Long-Term Care?” Longtermcare.gov, https://acl.gov/ltc/basic-needs/what-is-long-term-care. ​​
  8. “Cost of Care Survey,” GenWorth Financial, https://www.genworth.com/aging-and-you/finances/cost-of-care.html.
  9. Claire Noel-Miller, “Medicare Beneficiaries’ Out-of-Pocket Spending for Health Care,” AARP Public Policy Institute, Dec. 15, 2021, https://www.aarp.org/ppi/info-2020/medicare-beneficiaries-out-of-pocket-spending-for-health-care.html.
  10. “Premiums: Rules for Higher-Income Beneficiaries,” Social Security Administration, https://www.ssa.gov/benefits/medicare/medicare-premiums.html.

About the Author

Devon Delfino

Devon Delfino

Devon Delfino is a writer who’s covered personal finance—including everything from student loans to budgeting to saving for retirement and beyond—for the past six years. Her financial reporting has appeared in publications like the L.A. Times, U.S. News and World Report, Teen Vogue, Masha

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