January 19, 2016
As 10,000 people turn 65 years old each and every day and head into retirement, we wanted to take a look at what risks they and their retirement income face over the next 15, 25, or even 35 years, and what they can do about it. Here are the 4 biggest risks we see facing new retirees and a couple solutions.
Killer #1 – Inflation – The Silent Killer
This is quite possibly the most dangerous of all to your portfolio. We’ve all seen the statistics of how just 3% – 4% inflation can significantly erode purchasing power in as little as a decade. Compound that by a 30 year retirement horizon and you’ve got serious issues.
But the real problem with inflation is that it can really sneak up on you. Just the other day, I was at Starbucks and the coffee I always get cost $2.10. I can remember when it was $1.95, and I asked how long it had been the new price. “Several months”, I was told. That’s a 7.7% increase, but since it was only 15 cents, it didn’t immediately hit me. Spread that over everything you buy, and it makes a big impact.
The other type of inflation is known as “shrinkflation”. Have you heard of this? The is something the food and beverage industry has done to keep prices stable while increasing their margins. The simply reduce the quantities in their packaging, selling you less product at the same price. You end up needing to buy more to meet your needs, thereby increasing your expenses in that category. Pretty sneaky!!!
Killer #2 – Volatility – The Instant Killer
While building your investment portfolio (known as the accumulation stage), volatility can be managed, and with the proper strategy can be useful in outperforming the market and growing your portfolio faster. In retirement, when you begin to draw down on your portfolio for retirement income (known as the decumulation stage, volatility is brutal and can break you.
Sure, some people get lucky and volatility doesn’t hurt them, but that is really rolling the dice. Negative returns bring something known as sequence of returns risk into play, and the consequence of early negative returns in the decumulation phase can lead to you running out of money.
Furthermore, high volatility results in high anxiety. If you are counting on positive market results for retirement income, volatility will cause you to lose sleep, which is not what you need in retirement.
Note: There is some great research on Sequence of Returns Risk. If you are interested in reading any of this, please contact us for resources.
Killer #3 – Healthcare Expenses – The Legacy Killer
Everyone knows that healthcare costs are rising, but just how fast is a matter of debate. Even more uncertain is how much faster they will rise in the future. The Medicare system is under strain, and as more retirees enter the system, the amount of cost people are expected to share will have to increase.
But that’s not the real problem. Long Term Care costs are significantly higher, on the magnitude of 10 to 20 times, than traditional healthcare expenses. Most studies have shown that 70% of people age 65 an older will require some form of long term care, and the average time spent in a facility is nearly 2 years. Most Long Term Care facilities cost about $6,000 or more per month, so these costs add up quickly.
Amazingly, cost may not be the biggest issue. There have been many studies that show that spousal caregivers have a much higher mortality rate than the spouse who requires care. Put a different way, if your spouse needs long term care and you are the one taking care of him or her, you are probably going to die first. Furthermore, there is the issue of maintaining one’s dignity, but we won’t go into that here.
Killer #4 – Longevity – The Ironic Killer
Everybody wants to live a looonnng time and enjoy all the things during retirement that they never got to during their working years, right? But what if you live too long? And we’re not talking about a lingering illness that wastes the last years of your life. We’re talking about living a very healthy, vibrant, fulfilling life, but running out of money because you didn’t think you’d make it past 80, or 85, or even 90! My wife’s grandmother just turned 95, and one of our favorite client’s mom just turned 96, both without any signs of slowing down. But what if they didn’t have the money to continue to live the way they had for the previous 30 (THIRTY!!!!) years that they have been retired? Nobody wants to think about that.
All the studies say that the #1 fear of retirees is outliving their money, and understandably so. But this can easily be avoided.
So, how do we avoid these 4 retirement killers?
#1 – Maximize your Social Security benefit. Make sure you understand the various claiming strategies available to you and work with an advisor to make the proper elections. Make sure you avoid adverse tax decisions in your claiming strategy.
#2 – Ensure your healthcare expenses are covered. Look at your Medicare and make sure you choose a plan that is likely to cover the “gotcha” items and won’t break the bank. Consider Long-Term Care insurance, or a hybrid life insurance or annuity product that offers long-term care coverage.
#3 – Create sustainable, low-risk, inflation adjusted income. There are a number of ways to create income that will address most, if not all, of the retirement killers that we have discussed. Many of these will also help preserve a legacy, and provide peace of mind and restful nights’ sleep!
For more information on any of these items or to set up a consultation with our advisors, please contact us at:
888-981-1420 or 916-877-5125
Investment Advisory Services offered through Retirement Wealth Advisors, (RWA) a Registered Investment Advisor. Bentley Financial and RWA are not affiliated. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.