You have worked hard and saved for several years now, but like many approaching retirement, you are probably wondering “will it be enough?” Part of our Retirement Is For Living planning process involves a careful consideration of the various risks you may encounter in the forthcoming decades. These include risks as far ranging as financial, healthcare, housing, and public policy.
As the recent Coronavirus crisis suggests, even carefully designed retirement plans are susceptible to unexpected events. However, with thoughtful planning, the adverse consequences from many risks can be reduced or mitigated. Understanding post-retirement risks and integrating them into your retirement planning is the first step in ensuring that your Retirement Is For Living.
Personal and Family Risks
- Death of Spouse or Change in Marital Status: Periods of widowhood of over 15 years are not uncommon. These are often accompanied by a reduction in standard-of-living in addition to dealing with a major life adjustment. Separation or divorce can also reduce retirement income as you need to split your savings, as well as increasing bills due to having to pay 100% of living expenses instead of 50%.
- Family Member Need: Uncertainty in the well-being of children and loved ones might result in you helping them financially more than you expected. Health and home care of elderly parents in their 80s and 90s can challenge even the best laid retirement plans. Moreover, the majority of parents want to help even adult children, potentially damaging their financial future in both the short- and long-run.
- Longevity: Life spans at age 65 range from 0 years to over 40 years. Statistically, half of the population will live longer than their expectancy, which means that they will underestimate how long they will need their savings to last. Retirees need a flexible plan that covers a range of possibilities.
- Fraud, Theft & Bad Advice: Demographic changes and increased mobility means that many older Americans now find themselves with less family support than prior generations. The reliance on caregivers, advisors — and even scammers — can make a retiree’s data, passwords, and other personal information vulnerable.
Healthcare and Housing Risks
- Healthcare: Longer lifespans and rising medical costs mean more healthcare expenses during your retirement. Declining employer-sponsored medical coverage plus potential possible shortfalls ahead for Medicare could prompt a funding shortage for your care, expected to exceed over $300,000 during retirement, including Medicare cost sharing and prescription plans.
- Housing: Some housing can accommodate retirees as the age — but many of the homes you raised your families in when you were younger will not meet your changing needs. Accessible housing can offer you more options to stay in your home, longer, rather than move. Although future needs can be hard to predict, careful planning should think about functional requirements as you age.
- Long-term care: All retirees face the possibility of a debilitating illness or injury that requires long-term care. This risk is a source of anxiety for retirees, yet most are unwilling or unable to accept the premium costs for long-term care insurance. Retirees need to understand the range of long-term care insurance options available and incorporate the best option(s) for them into their retirement plans.
Financial Risks
- Inflation: Inflation is the long-term tendency of money to lose purchasing power. It can have a particularly negative effect on retirees because it chips away at retirement income in two ways: by increasing the future cost of goods and services and by eroding the value of assets a retiree has saved to meet those costs
- Interest rates: The growth of a person’s retirement fund depends, in part, on the direction of interest rates. While low-interest-rate environments may be great for younger individuals looking to borrow, they aren’t ideal for older folks looking to save their hard-earned money, especially in conservative investments. Banks and other financial institutions pay low returns when prevailing interest rates are low.
- Stock market risks: As recent months have shown, stock market performance can drastically affect your retirement portfolio. Although stocks tend to outperform other investments, losses can reduce investment value and sequence risk can hit new retirees especially hard.
Public Policy Risks
- Tax Increases and Additions: not only income, changes to property and sales taxes can present challenges to retirees — especially if they’re not working with the most flexible of budgets. Depending on locality, new kinds of taxes such as a value added tax could even be introduced where none existed before.
- Reduction in entitlement benefits: it’s well-documented that both Social Security and Medicare face long-term funding shortfalls. The two programs already compose 45% of Federal expenditures. In light of increasing debt servicing and other budget obligations, a retirement plan needs to consider the possibility of reduced entitlement benefits.
- Increased Contribution Expectations and Means Testing: One option to close the funding gap is to increase contribution expectations prior to retirement. Another alternative is to eliminate or phase out benefits for higher earners. A variety of options for means testing income would all help close the roughly 11% funding gap for the program. Higher payments for Medicare are already scheduled for high income retirees.
Live the Retirement You’ve Been Working Toward
Understanding post-retirement risks and integrating them into your retirement planning is the first step in ensuring that your Retirement Is For Living. But Planning for retirement doesn’t just stop at your retirement date. It’s a continuous process that adapts based upon your current circumstances and how your unique, retirement situation is impacted by the risks outlined above. One thing’s for certain: The more flexibility you can have during your retirement, the better off you’ll be.
Overall, Magellan Financial believes that professional wealth management has only one definition of success: when our financial services allow our clients to realize their lifestyle and financial goals in retirement. Our thorough, thoughtful, risk-based strategies are designed to support your greatest objectives, so you have the freedom to enjoy them. After all, your Retirement Is For Living.
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Sources:
https://www.investopedia.com/personal-finance/adult-children-derail-retirement/
https://institutional.fidelity.com/app/item/RD_13569_41055/five-key-risks-of-retirement.html
https://www.ssa.gov/OACT/TRSUM/
The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.
When considering rolling over your QRP assets, key factors that should be considered and compared between QRPs and IRAs include fees and expenses, services offered, investment options, when you no longer owe the 10% additional tax for early distributions , treatment of employer stock, when required minimum distributions begin and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with QRPs. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
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