My Comments: My posts last week focused on the stock market and my belief we’re not yet near the bottom of the current cycle. This week, my attempts will focus on retirement issues. If you’re 39 or older, you should find something of value here.
I make no apology for promoting my recently published book on retirement planning, The Dynamics of Retirement. I am now working daily to update my online course videos to reflect the approach I outlined in the book.
At every point along the way, assuming you are still alive, there will come a time when you stop working for money. The issue then, from a financial perspective, is where will the money come from to pay your bills. You’d better hope you made an effort to fix this problem before it’s too late.
by Maryalene LaPonsie \ 22 APR 2020 \ https://tinyurl.com/ybfs7gjt
A 65-year-old can expect to live another 19 to 21.5 years, on average, according to the Social Security Administration. What’s more, the government agency says a third of 65-year-olds will hit age 90, and 1 in 7 will live beyond age 95.
Those numbers show a significant improvement in life expectancy over time. In 1960, for instance, a 65-year-old man was only expected to live an average of 13 more years while a 65-year-old woman had an average remaining life expectancy of 17 years.
Financial planners have taken note of the trend and adjusted their guidance and savings plans accordingly. “It’s not odd in this day and age for someone to live to 100,” says Wendy Terrill, retirement planner and owner of financial firm Assurance & Guarantee in Burlington, North Carolina.
Adjusting investment strategies is just one way in which longevity is changing the face of retirement. Living longer has also translated to seniors having more time to do the things they want and added opportunity for more health care expenses to emerge. To prepare for all the ways in which a long life will impact retirement, workers need to start saving early to plan for the following three challenges:
- A longer retirement means more time to fill.
- Health care may eat up funds.
- Standard investment strategies may not work.
A Longer Retirement Means More Time to Fill
The prospect of a 20-year retirement has changed how some people approach their senior years. “The big risk is outliving your money,” says Keith Bernhardt, vice president of retirement income for Fidelity Investments.
Rather than quit the workforce at age 65, many Americans continue to work either to supplement their retirement income or because they miss the routine of the workplace. The Bureau of Labor Statistics estimates growth in the senior workforce will outpace that of younger employees. While job growth in the labor market for 35- to 44-year-olds is expected to rise 13.9% from 2018 to 2028, according to BLS, it will rise 50.8% for those 65 to 74 and 104.9% for those age 75 and older.
While a longer retirement means more time for work and other pursuits, it’s best to fulfill life goals, such as traveling or learning a new hobby, early in retirement. Those who wait too long could find they run out of cash or good health to make their dreams a reality.
Health Care Costs May Eat Up Funds
When it comes to the price of health care in retirement, the numbers can be staggering. Fidelity Investments estimates a 65-year-old couple retiring in 2019 will need $285,000 to cover health and medical care costs in retirement.
“These costs can be very daunting,” says Mark Haywood, a financial advisor with financial services company Northwestern Mutual in Houston. Ongoing long-term care is among the most significant health care cost faced by seniors today. While many older Americans rely on Medicare for their health care coverage, Medicare will not cover out-of-pocket costs such as nursing home, assisted living or home health care that is intended to help with activities of daily living such as eating, bathing and dressing. “Often, people underestimate their Medicare costs and overestimate what it will cover,” according to Haywood.
State Medicaid programs may pay for long-term care but only after seniors have depleted almost all their assets and savings. That leaves retirees and their families to pay these extra costs unless they have a long-term care insurance policy.
“The longer we live, the more likely we’ll need some type of long-term care,” says Greg Hammer, president of Hammer Financial Group in Schererville, Indiana. The federal Administration on Aging notes a 65-year-old has a 70% chance of needing some type of long-term care. That care won’t come cheap either.
The Genworth 2019 Cost of Care Survey found median national costs for long-term care range from $1,625 a month for adult day care to $8,517 a month for a private room in a nursing home. The monthly median price of a home health aide providing care in someone’s home was $4,385, the survey says.
Standard Investment Strategies May Not Work
Long retirements can also mean people have to rethink how they withdraw money from retirement funds. In the past, pulling out 4% of a fund’s principal each year was considered a safe way to ensure money would last over a 30-year retirement. However, with the country entering a recession and people living longer, that rule of thumb may not work anymore.
Plus, moving investment money upon retirement into conservative funds, such as those based on bonds or cash, may no longer make sense. “Do keep in mind that you should plan for inflation,” Bernhardt says. “Plan for your savings to have some growth components.”
Traditionally, bond and cash investments were used to ensure retirees wouldn’t risk losing money when they needed it. However, with a 30-year retirement not out of the question, older Americans may need to keep a portion of their money in more aggressive growth funds to ensure gains on their investments are outpacing the rate of inflation.
Another option is to invest money in vehicles that provide guaranteed income, such as fixed indexed annuities. However, these investments can be complex and may be best considered with the guidance of a finance professional. While some advisors focus on accumulating assets, Terrill recommends finding someone with expertise and experience in distributions as you enter retirement.
While a longer retirement provides more time to enjoy hobbies and spend time with family and friends, the downside is you may need more money to do everything you want. By planning in advance and preparing for potential health care costs, a long retirement can be more good news than bad news for you and your loved ones.