MAKE MONEY ONLINE POSTS: The Biggest Retirement Risks and How to Prepare for Them

الأحد، 27 مايو 2018

The Biggest Retirement Risks and How to Prepare for Them

Over the past century, life expectancy in the United States has dramatically increased, a fact that has profoundly impacted the financial security experienced during our golden years.

After World War II, the first generation of retirees were generally expected to live less than a decade after leaving the workforce. Now, the average American is living to be about 78.8 years old, and as a result retirement can last anywhere from 20 to 30 years, with some people spending more time retired than they did working.

That sort of longevity is wreaking havoc on the best of financial plans, particularly when combined with the rising costs of some of life’s most significant expenses.

“About half of Americans are at risk of not being able to maintain their standard of living throughout retirement,” said Michael Gerstman, CEO of Fort Lauderdale-based Gerstman Financial Group.

Health care (including long-term care) and housing are among the biggest financial burdens and potential threats to your stability during retirement, said Gerstman, often derailing retirement plans.

What’s more, depending on which financial advisor you speak with, there are additional costs that many retirees fail to anticipate or properly plan for, from inflation to the premature death of a spouse, to things like unexpected emergencies, caring for children and grandchildren, and the cost associated with filling all of your newfound free time.

Taken collectively, or even individually, these issues can seem overwhelming at best.

Health Care

A male retiring today can expect, on average, to spend about $245,000 on healthcare during retirement, according to the recently published book Common Financial Sense. It’s a figure that excludes nursing home or long-term care expenses. And because of longer life expectancies, women may have to spend even more than that after retirement to cover general medical expenses.

As for those long-term care costs, they now average more than $43,500 per year, while a bed in a semi-private room in a nursing home carries an average charge of more than $82,000 a year.

“No one really understands healthcare costs and how they can escalate,” explained Greg Makowski, one of the book’s authors. “We’re so used to being under an employer’s plan,” he continued. “All of sudden you hit 65 and are on Medicare, and you could be paying $10,000 a year for premiums.”

Most people don’t pay for Medicare Part A. But if you do have to pay for it (generally because you didn’t pay Medicare taxes for a long enough period), premiums for a couple retiring at age 65 currently average $644 per month, according to the book. By age 75, average expenses escalate to $1,239 a month, and by age 85 they reach $2,387 per month.

Those costs are simply for Medicare Part A costs like premiums and coinsurance. There’s also the financial burden associated with Medicare Part B (which covers 80 percent of outpatient care), and all of the supplemental insurance that people are not necessarily accounting for – such things as vision, hearing, and long-term care. None of these things is paid for by Medicare, and thus typically come out of your pocket.

“As you get older, you lose your hearing, you need eye surgery, and your teeth go because you wear them out,” said Makowski. “And these things – hearing aids, vision, dental – are not covered.”

So what’s the solution, if there is one?

Makowski says as a society we have not yet developed a meaningful way to address the financial realities of retirement other than socking away all the money you can away in 401(k) plans, savings accounts, and health savings accounts, while you’re still working.

“What ends up happening is people can’t live the retirement they thought they could live,” continued Makowski. “They end up living very modestly.”

Meanwhile, Gerstman said he often suggests clients purchase a life insurance policy that includes a long-term care rider.

“How it works is that if care is needed, the amount of the death benefit is the amount that can be used for the long-term care expenses, with certain annual maximums,” Gerstman explained. “If the coverage is not used up in your lifetime for long-term care, the balance is paid out to your named beneficiary.”

Housing

Housing costs make up close to half of the expenses identified by the Consumer Price Index–Elderly (CPI-E).

To help reduce this cost, homeowners and those considering buying a home should plan to pay off their mortgage before retirement, says Steve Wang, a certified financial planner and personal finance expert.

“If your current mortgage doesn’t allow for that, then consider refinancing it to a fixed-rate loan,” said Wang.

Homeowners with traditional 30-year mortgages can eliminate about seven to eight years of payments — and tens of thousands of dollars in interest — simply by making one extra payment annually toward the principal, added Gerstman.

“If you can further increase your monthly payment to your mortgage, let’s say an additional 5%, you can knock more years off of the loan,” said Gerstman.

Renters, meanwhile, have the advantage of not worrying about home repair costs, but will face the disadvantage of having a housing expense that never goes away. If you’re in this boat, it’s important to start saving sooner rather than later for housing expenses in retirement.

“Start saving now and make your money worth more down the road when you retire,” said Wang.

Inflation, Death of a Spouse, and More

While the Federal Reserve currently targets a 2% inflation rate, inflation has averaged about 3% annually since 1913 and 4% annually during the past 50 years, according to data from the U.S. Bureau of Labor Statistics.

“However, there have been periods when inflation exceeded 15%,” says Thomas Walsh, a certified financial planner at Palisades Hudson Financial Group. “While you can’t tangibly see it, inflation, especially unexpected increases in inflation, can do real damage to a retiree’s purchasing power, many of whom are living on a fixed income.”

To address this problem, Walsh says it’s important to continue to maintain some exposure to more aggressive investments during retirement, including equities. Being too conservative with investments during retirement can be costly if inflation spirals out of control.

The premature death of a spouse during retirement, meanwhile, will be made even more difficult if it brings with it a financial surprise.

“It’s important for both spouses to understand how their income is generated and what will happen when one spouse dies,” Walsh continued. “Going from two Social Security checks to one can represent a significant drop in income. The loss of a pension benefit, or a cut in the survivor’s benefits, can lead to the same issue.”

Again, it’s important to plan for such scenarios and to understand how they impact the household finances, in this case for the surviving spouse. Walsh recommends purchasing enough life insurance to make up for any loss of income and to cover funeral expenses.

The Cost of Free Time

One last cost associated with retirement that’s often not properly budgeted for – the expense of filling your free time.

“I like to say that retirement is having your week be comprised of six Saturdays and one Sunday,” says Jeff Motske, who’s recognized as one of the top financial planners in America and is author of The Couple’s Guide to Financial Compatibility. “It’s wonderful to finally have the time to devote to all those activities and projects you’ve been putting on the shelf. Unfortunately, a lot of those projects typically have a price tag attached to them.”

Whether it’s home improvement, traveling, or a new hobby, many retirees’ newfound projects take up both time and money.

Yet another reason to begin saving early, create a well-thought out retirement plan, and minimize expenses wherever possible.