Retirement planning doesn’t let you just run out the clock; any number of threats can turn a winning plan into a loss.
Unforeseen circumstances are the downfall of any great retirement plan, and they don’t all have to be tragedies. Unexpected deaths can wreak havoc on retirement and estate planning, but so can an unexpectedly long life. Meanwhile, a changing economic climate leaves retirement funds vulnerable to an increased cost of living. So how do you combat these changes?
We talked to Thomas Walsh, a certified financial planner with Palisades Hudson Financial Group in Atlanta, who brought four key retirement threats to our attention. He also laid out strategies for dealing with all four while not deviating too significantly from a retirement plan.
1. Premature death of a spouse
It isn’t something that most people want to think about, but premature death doesn’t only affect estate planning, inheritance, and succession planning (if you own a business), but financial planning in general. Funeral costs and outstanding debt need to be dealt with, but the loss of a partner’s Social Security checks or private pension can make that a lot more difficult. “Many people don’t consider this,” Walsh says.
Solution: Changing the plan, with the help of life insurance
The Social Security Administration provides online tools to assess how your benefits may change due to the death of a spouse. Survivor benefits help, but only if you’re age 60 or older or caring for children under age 16. Meanwhile, you may actually have to give back some of the deceased’s benefits.
If there’s still other income (like a salary or a pension) that can’t be replaced, you may have to do some math and determine just how much you’ll need to cover the shortfall. “Life insurance can be used to make up for the loss of a spouse’s pension income,” Walsh says, but no one plan works for everyone. For younger couples, Walsh recommends inexpensive term life insurance. For people past 65, however, cash-value policies such as whole life end up being more affordable over the long term.
Just make sure you’re communicating the whole way through. If one of you is more financially savvy than the other, that person is going to want to make sure their spouse is taken care of. Provide routine updates and maintain a list of all checking, savings, investments, and credit cards, as well as an estimate of each account balance, Walsh says.
If you pay bills online, keep a list or file with the logins and passwords for each account to avoid late payment penalties and missed payments. Keep a file for your important documents like insurance policies, wills, and powers-of-attorney. Make sure your spouse knows your financial adviser, tax preparer, attorney, and insurance agent. Unfortunately, they’ll be some of the first people your spouse has to contact after you die, so it will be helpful if you’ve already made the introduction, Walsh says.
2. Health care costs
Just about every retirement survey conducted by financial firms finds that people underestimate what they’ll need to save for health care and don’t seem to realize how much health care costs are going to rise. Medicare plans, including Medigap and Medicare Advantage, don’t cover most long-term care, dentistry, vision care, hearing aids, eyeglasses, or private nursing. Prescription drug coverage also has a caveat for the most expensive drugs, which means you could pay up to $5,000 annually. Meanwhile, medical cost inflation regularly outpaces standard inflation.
“If you face a major medical issue or need long-term care, you may have to spend your savings at a much faster pace than you expected,” Walsh says. “I’ve seen many clients unintentionally low-ball their estimated medical costs in retirement because they’re in perfect health at age 55. But health can change quickly, especially in old age.”
Solution: A health savings account or other tax-advantaged account
The biggest upside to a health savings account (HSA) isn’t simply saving for future medical expenses: It’s the combination of the immediate tax deduction for your contributions and future income tax exemption on withdrawals for qualified medical expenses.
However, to qualify for an HSA, you must have a high-deductible health plan, and you can’t be on Medicare. The minimum annual deductible is $1,300 for self-coverage and $2,600 for family coverage.
While employers typically offer an HSA as part of a health care package, any qualifying individual can open an HSA with banks and insurers that offer them. If you don’t qualify, retirement plans like IRAs, Roth IRAs and 401(k)s basically perform the same function. To keep up with health care costs, though, Walsh suggests keeping a diverse portfolio with at least a portion in further diversified stocks.
Inflation has averaged roughly 4 percent a year over the past 50 years, according to the U.S. Bureau of Labor Statistics (though it’s held under 3 percent so far this century). Using the longer-term model, $1 today would buy only 46 cents worth of goods in 20 years.
Solution: A diversified investment portfolio
Walsh suggests a mix of stock mutual funds and exchange-traded funds (ETFs). How much you’ll invest in each varies by your risk tolerance.
Also, resist the temptation to abandon stocks completely during retirement. “Being too conservative with your investments during retirement is a mistake,” Walsh says. “If you have all of your savings in low-yielding investments like bonds or CDs, it will be difficult to keep up with inflation.”
Stocks will offer the best long-term returns but are more volatile year to year. You can manage that risk by putting together a mix of U.S. large-capitalization, U.S. small-cap, international, natural resources, and real estate investments. By building your portfolio with mutual funds and ETFs, you tamp down on risk by owning thousands of individual securities across multiple asset classes.
4: Outliving your savings
Your chances of living longer increase as you age. For example, according to the Internal Revenue Service’s life expectancy tables, a 30-year-old is expected to live to age 83. Yet, if you’re 65 years old today, you can expect to live until age 86.
Solution: Periodic planning
Take stock of your health and investments, but also take a glimpse at those IRS tables every so often. They won’t gauge exactly how long you’ll live, but they’ll give you some idea of what to expect and how to plan. As Walsh says, the effectiveness of your retirement plan is only as good as the assumptions going into it. If you underestimate how long you’ll live, you’ll end up shortchanging yourself.
“Hopefully, you’ll live happily to a very old age. Give yourself some cushion and save and invest with that in mind,” Walsh says.
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