Planning for retirement can be very challenging -particularly since each person retiring has no prior experience in this area. Each pre-retiree should address these risks to ensure a lifelong successful retirement. The four major risks to consider are: longevity of life, health care and need for long-term care, changes in public policy and timing of retirement.
Risk No. 1—Longevity of Life
It makes most of us uncomfortable thinking about how long we may live or what age we might be when we pass away, but this calculated guess is important to factor, as most people want to know they have enough money to retire. The risk here is calculating that you will live an “average” life span. While statistics tell us a male age 65 will live to 84 and a female age 65 will live to 86, there is more to consider. The remaining fact is that 25 percent of people now age 65 will live to age 90, and for this reason, many people underestimate their own life expectancy. Miscalculating life expectancy can put significant strain on your ability to meet income needs and also exacerbates inflation risk and even elder abuse.
Risk No. 2—Need for Long-Term Care
Forcing people to consider their own declining physical or mental health, along with not understanding how Medicare works, makes this topic the most challenging. Americans still don’t understand that Medicare only pays a portion of the first 100 days of nursing home care. The U.S. Department of Health and Human Services continues to report there is a 70 percent chance that an older person will need some form of long-term care. For those who have assets-and end up in an assisted living facility, dementia care unit or nursing home-unless you take prior action, all of your retirement savings can be lost to nursing home costs.
Risk No. 3—Changes in Public Policy
This is the area where we have the least control. Social Security income claiming strategies changed drastically during year 2015-especially for married couples-and will change even more in the next two decades. Medicare and Medicaid will also have to be revamped as they, like Social Security, are on financially unsustainable paths in their current forms.
Risk No. 4—Timing of Retirement
Timing our retirement in consideration of economic market cycles coupled with the amount we withdraw from retirement savings-which now serves as our income since we are no longer working-are frequently overlooked aspects of deciding when to retire. Most people assume they will automatically retire at age 65 or 66, since these are the ages we can obtain Medicare and our full Social Security benefits. However, if your retirement savings has just dropped 20-30 percent due to economic conditions, it may be best to think again. In this scenario, it’s likely prudent to postpone retirement until the economy recovers, so your retirement accounts have also recovered.
Prior to retirement, actions can be taken such as calculating maximum Social Security and educating oneself on lifelong income strategies. Understanding and planning for the risks will help ensure a successful retirement.
Donner is a Chartered Retirement Planning Counselor and can be reached at Beth@DiversifiedPlanning.com or 919-601-0501.