Retirees: Expect the unexpected
Advanced planning can reduce your worries about what can go wrong.
“Let our advance worrying become advance thinking and planning “ — Winston Churchill
One thing we’ve learned is that a lot of mental energy is spent worrying about the future. But thinking ahead about what can go wrong and having a plan is the best antidote for this mental anguish.
Retirees can be thrust into financial turmoil when the unexpected occurs, such as unanticipated illness and medical costs, the death of a spouse, a market downturn, or the need for in-home or nursing home care.
The goal is to create a nest egg that can last a lifetime at your desired lifestyle and can withstand any unexpected shocks.
Most pre-retirees and retirees worry a lot about the future. A 2013 study by the Society of Actuaries (SOA) found that both pre-retirees and retirees expressed significant levels of concern over inflation (77% of pre-retirees and 58% of retirees), being able to afford adequate health care (73% and 46%), and being able to afford long-term care (68% and 52%). Both groups also expressed a high level of concern about depleting their savings (66% and 41%) and maintaining a reasonable standard of living (65% and 41%).i
Many people also worry about outliving their savings. A 2014 Wells Fargo/Gallup survey of investors found that nearly half (46%) are “very” or “somewhat” worried about outliving their savings, including 50% of pre-retirees and 36% of retirees.ii
Having a comprehensive financial plan well in advance of retirement can be your road map to preparing for unexpected costs and life events. A financial plan considers both anticipated income and the expenses. The income side of the plan includes income from all sources, such as company retirement plans or pensions, 401(k)s, IRAs, or other retirement accounts; insurance; investment accounts; cash reserves; and possible inheritances. The expense side will look at normal expenses for mortgage, food, cars, vacations, clothing, entertainment, and similar items. The plan then projects whether your nest egg — based on your projected income, expenses, and life expectancy — will last.
Preparing for the unexpected involves imagining anything that could go wrong as part of that plan. These are the worst-case scenarios. And we suggest explicitly planning for how you will deal with it to make sure your nest egg will weather the challenge.
We have found that having plans for worst-case scenarios also can provide peace of mind and guidance at a time when you also are dealing with the emotion surrounding a death, illness, financial downturn, or other misfortune.
It could happen to you
Death of a spouse — Certain types of insurance can help when a spouse dies. Joint insurance, not as common as individual life insurance, is designed to enable two people, typically spouses, to share in one life insurance plan. Joint life insurance comes in two types: first-to-die, which pays out to the surviving spouse after the first dies; and second-to-die, which pays a death benefit to heirs after both spouses are gone. Another advantage is that a single policy likely will be less expensive than two individual policies.
High health care costs — Although retirees age 65 and older are eligible for Medicare and most others have access to health insurance, that coverage does not pay for all medical expenses. Few anticipate rising health insurance premiums, even for Medicare Part B & D supplements, or dental expenses, as many retirees do not have dental insurance. Morningstar has reported that dental work, uncovered costs for prescription drugs, and rising insurance premiums were among the most worrisome unanticipated financial burdens for retirees.iii In addition to planning for annual increases and emergency costs, maintaining a healthy lifestyle also can help reduce costs overall.
Illness leading to in-home or nursing home care — Although Medicare will cover short stays in a nursing home under certain conditions, the long-term costs for a nursing home or a caregiver in your home are not covered. Your financial planning should consider whether you will have enough assets to “self-insure” or cover such costs, or whether you wish to consider some form of long-term care insurance. In some instances, a child or other family member might be willing to provide or manage care if it is needed. In those circumstances, a trust can be set up to pay direct and indirect expenses to the caregiver.
Changing financial environment — No portfolio is immune from the effects of a financial downturn. Inflation can be of particular concern for retirees on a fixed income because it can erode their buying power, especially those who live long past retirement age. Although stocks are recommended as part of a balanced portfolio, the timing of good and poor markets can impact retirement savings significantly. Stock market losses leading up to or early in your retirement can mean less income over the long term. A financial advisor can work with you to design your portfolio to help minimize the impact of a down market at various stages of your life. This may not mean abandoning stocks. For example, if you retire at age 60 or 62, your nest egg might have to last for 30 or more years, so it might be appropriate for you to have more risk in your portfolio during the early years of your retirement, even though you are more vulnerable to market conditions.
Outliving your savings — The most recent SOA figures for life expectancy show that women age 65 can expect to live to age 88; for men age 65, it’s 86. Given those projections, saving enough for a long retirement is important, especially if longevity runs in your family. Another option is a longevity annuity — an investment contract with an insurance company designed to address the potential financial problems posed by increased life expectancy and correspondingly longer retirement periods. The insurance company agrees, in return for the premium, to pay a periodic income amount for the rest of your life. Payments through this type of annuity commonly are set up to begin at age 75 or later.
You need to move — There are multiple scenarios under which you might have an unexpected change in your housing arrangements, ranging from damage due to a natural disaster, the need for a smaller, more manageable home, or some type of assisted living. Moving can be extremely difficult emotionally if a couple needs to leave a long-time family home or if they are being separated because one of them needs assisted living or nursing care. Adequate insurance can help if your home is flooded, or damaged by fire or weather conditions. Anticipating your changing physical and cognitive condition as you age, thinking about how and where you would like to live as you get older, and potentially securing long-term care insurance can be a key part of your financial planning process and can help make that transition easier when the time comes.
Ultimately, time spent planning up front can reduce your worry about your financial future. Although some risks can be minimized, many, such as accidents, illness, or financial downturns are completely out of our control. Understanding potential risks and making sure you have options to deal with varying conditions can help ensure you will have a comfortable retirement and financial security.
i Survey of the Risks and Process of Retirement, Mathew Greenwald & Associates Inc., 2013.
ii Wells Fargo/Gallup Investor and Retirement Optimism Index, 2014.
iii What Unexpected Expenses Crop Up in Retirement?, Christine Benz, Morningstar.com, Aug. 5, 2012.
Heath Moore is a wealth advisor for Bronfman E.L. Rothschild.
Bronfman E.L. Rothschild is a registered investment adviser. Securities, when offered, are offered through an affiliate, Bronfman E.L. Rothschild Capital, LLC (dba BELR Capital, LLC), Member FINRA/SIPC. Representatives may also be registered with Baker Tilly Capital, LLC, member FINRA/SIPC, an unaffiliated broker-dealer, in order to service various historical account relationships.
This publication should not be viewed as a recommendation, an offer to sell, or a solicitation of an offer to buy a particular security or service. The commentary provided is for informational purposes only and should not be relied on for accounting, legal, tax, or investment advice. Financial information is from third-party sources. While such information is believed to be reliable, it is not verified or guaranteed. Performance of any indexes is provided for reference and competitive purposes only without factoring any fees, commissions and other charges. Individual results achieved by investors will be different from those of the indexes. Indexes are unmanaged; one cannot invest directly into an index. The views and opinions expressed are those of Bronfman E.L. Rothschild, and they are subject to change at any time. Past performance does not imply or guarantee future results. Investing in securities involves risks, including possible loss of principal. Diversification cannot assure a profit or guarantee against a loss. Investing involves other forms of risk that are not described here. For that reason, you should contact an investment professional before acting on any information in this publication. ©2016 Bronfman E.L. Rothschild.
Click here to sign up for the free IB ezine – your twice-weekly resource for local business news, analysis, voices, and the names you need to know. If you are not already a subscriber to In Business magazine, be sure to sign up for our monthly print edition here.