Retirees everywhere have been sold on the idea that income generation is what they should be focused on as they make their transition out of the work force. As a financial planner, I hear retirees talking all the time about things like a 100% bond portfolio, investing the bulk of their life savings in annuities or government bonds and overinflated emergency accounts more often than most anyone here would expect. Something that may surprise you is, from our point of view… these are all WAY too risky.
What is risk?
From our point of view, there are two types of risk that retirees in specific need to be concerned with. They may seem obvious but to many financial planners in Colorado, they focus on the risks that are immaterial rather than the ones that truly cause bankruptcy for senior citizens.
The top 5 risks retirees need to be concerned with are:
- Running out of money before the end of your life
- Inflation
- Healthcare costs
- Long Term Care Costs
- The risk that your family will have a hard time financially once you’re gone and you’re unable to help them because you’re not around.
1. Running out of money before the end of your life:
Why is this a risk retirees should be worried about? Because we don’t know what the future holds and there’s no way to forecast it accurately. If a financial advisor asks you to build your retirement budget and assumes that the budget you build is truly a budget they need to plan for, they’re effectively saying either you or they can tell the future.
The fact of the matter is, no one knows what the future holds for sure and the most conservative perspective you can have is to just try and have as much money as you possibly can.
Buying an annuity because, based on your budget, you can now afford all your projected expenses easier may sound great (when taken at face value) but when you really think about it… what happens if your future is more expensive than you expect? Bad things happen that you can’t overcome without sacrificing potentially a lot more than you’d be happy with.
Does this mean annuities are inherently bad? No, not at all.
It means that annuities can be a good idea to include as a small portion of your portfolio but if an advisor recommends you contribute 50% of your life savings to one, run.
2. Inflation:
Many advisors plan for a 2% or 3% rate of inflation and hopefully they’re right because at 3%, life is affordable. As we’ve all seen in 2021 and 2022, 3% may not be the reality. With QE and massive government spending, we may be in for a 5% or even higher rate of inflation.
How does this change anything at all? If you invest in anything that doesn’t keep pace (or preferably outpace) inflation, you’ll find that you have to give yourself a pay cut every year. That’s not what most people tell me they dream of in retirement and shouldn’t be what you dream of, either.
Things like a 100% bond portfolio, an over-inflated bank account or a portfolio consisting of mostly fixed annuities may help you to sleep well in your 60’s but in your 80’s and 90’s.. you better hope that inflation doesn’t go wild.
3. Healthcare Costs
Healthcare in the United States is broken. The cost of going to the doctor for an emergency costs more than what over 77% of Americans have in emergency savings these days and to most people’s surprise, Medicare can only barely be called health insurance and it’s only getting worse. Without proper planning, one major medical bill could ruin your retirement and rid your children of an inheritance.
Based on a survey by bankrate.com, less than 1/2 American households have $1,000 in emergency savings and based on a study by ehealthinsurance.com in 2020, the average annual deductible for single, individual coverage is $4,364 and $8,439 for family coverage. What does this tell us?
Healthcare is tragically unaffordable in the United States for everyone; retirees included.
What does this all mean to you?
It means you have to plan for high healthcare costs in retirement just in case.
The way we plan for high healthcare costs is choosing the appropriate insurance policy to cover all the things that Medicare doesn’t.
If you’d like to review the list of things that Medicare doesn’t cover, click here. I don’t have sufficient space in this blog article to list it all.
The two general types of insurance policies you can purchase to cover what Medicare doesn’t are:
- Medicare Advantage Plans
- Medicare Supplement Plans
The difference may astound you.
Medicare advantage are typically less expensive and operate more like your typical employer provided HMO health insurance policy with deductibles, coinsurance and preferred providers. A few side benefits of Medicare Advantage are, they typically include things like Dental, Optical among many other benefits. Also, they’re easier to file a claim than the other alternative because they’re managed by one company rather than Medicare + another. The big downside is, you typically have to stay in network which can get tricky because what if you need a specialized professionals help that’s out of network to save you or your spouse’s life? I guess you’ll either go bankrupt or just have to settle and hope that staying in network is good enough. In my opinion, I’m not a huge fan of that answer. Life is short and it’s nice to give ourselves a chance to make it a little less short.
The other alternative is Medicare Supplement Plans. The main benefit of these are that you can go to any healthcare provider that accepts Medicare (and basically all of them do). This means that you can go to the best doctor in the country to solve your xyz problem and you’re giving yourself the best chance of survival which is great. In addition, the max out of pocket is typically far lower (if anything at all) and it’s not that complicated to use (contact the provider and have them pay the hospital or reimburse you).
The big downside? It’s typically more expensive (occasionally, a lot more) and you may not use it as much you think (what if you have a short retirement).
There are tons of different Medicare Advantage and Medicare Supplement plans out there and they differ not just by state but by county so there is no silver bullet in any strategy to cover healthcare costs in retirement. Each strategy deserves time, care and analysis. This is the kind of thing you’d expect someone like Progress Wealth Management to help with. We’re not paid on commission to sell anything and we’ll help you make the right decision for you.
4. Long Term Care Costs
I’ve heard more times than I care to count that, most people’s plan for affording a retirement community is a single bullet and a long walk in the woods. The hard part with that plan is, no one wants to die, ever and it gets scarier the closer we all get to death and the more we all experience loss in life. For this reason, we have to plan for it.
The problem with planning for it is, we don’t know how long we’ll all live and what kind of care we’ll need in our old age. Some of us may die in our sleep in our 70’s and others may live well into our 100’s and nearly go bankrupt trying to afford 10 years of memory care.
The figure above shows the average annual cost of health care in retirement. As you can see, it gets pricey; enough so where a few years could bankrupt some people. Many people I work with hope they can afford it but don’t know how they’ll make it work. This is the kind of thing a financial planner would help with.
5. The risk that your family will have a hard time financially once you’re gone and you’re unable to help them because you’re not around.
As our population grows, environmental disasters become more commonplace and economic struggles become an everyday part of life for so many people; we have to recognize the reality the life may be more difficult for our children and our children’s children than we expect.
Most everyone I work with is concerned that, once they’re gone, what is the kind of life their children will experience? How will they survive if they fall on bad times and no one’s there to help their kids or grandkids stay off the streets?
We can hope that our families will be okay but it’s nice to know you’re doing everything you can to ensure this.
What does this mean to you?
I would never tell anyone to make massive sacrifices in their golden years to ensure their kids whom are likely doing at least okay get a big inheritance. This is your money but we still shouldn’t throw money away for no good reason if it means that by making better decisions will ensure a better future for our loved ones.
Better decisions about our retirement include:
Being purposeful with our financial lives by having a plan for how to manage taxes, grow our investments as effectively as we can and not being reckless with our spending.
To summarize:
Retirement planning isn’t a one-size-fits all exercise. There are no silver-bullets that can guarantee financial security in our old age. Each retirement plan is unique and deserves thoughtful analysis because we all have such different lives, goals, assets, risks and circumstances.
At Progress Wealth Management, we believe that DIY-ing your retirement plan isn’t just risky but ridiculously risky because there’s so much you can miss because it’s complicated. We think that everyone who’s planning to retire within the next 5-10 years should hire on a financial planner to ensure they’re not missing anything.
If you don’t already have an advisor you trust, here’s what to look for:
- Make sure they’re a fiduciary because if they’re not, they’re likely a wolf in sheep’s clothing only seeing you as a prospective sale and not as someone they should care deeply about as their client.
- Make sure they’re a CFP. The CFP is the gold standard of financial planning designations. It has over a thousand pages of material and delves in the nuances of tax, risk management, investing, estate planning, budgeting, debt, etc. These may not all seem like things you need help with immediately but they’re all tied together and can impact one-another. A good financial planner needs to know about each area. Having their CFP ensures this.
- Make sure they’re “fee-only” meaning they’re paid to give advice; not sell.
We are accepting new clients at this point and have over a decade of experience in financial planning and we’d be honored to help you plan for this transition.
If you’re not ready to hire on a financial advisor, download our complimentary Retirement Planning Guide by clicking here so you can at least prepare yourself a bit better for this transition on your own.