Retirees everywhere have been sold on the idea that income generation is what they should be focused on as they make their transition out of the workforce. As a financial planner, I hear retirees talking all the time about things like a 100% bond portfolio, investing the bulk of their life savings in annuities or government bonds, and overinflated emergency accounts more often than most anyone here would expect. Something that may surprise you is from our point of view these are all WAY too risky.
What are the Top Risks Faced by Retirees?
From our point of view, there are five types of risk that retirees in specific need to be concerned with. They may seem obvious, but to many financial planners in Colorado, they focus on the risks that are immaterial rather than the ones that truly cause bankruptcy for senior citizens.
The top 5 risks retirees need to be concerned with are:
- Running out of money before the end of your life
- Healthcare costs
- Long-term care costs
- The risk your family will have a hard time financially once you’re gone and you’re unable to help them because you’re not around
1. Running Out of Money Before the End of Your Life
Why is this a risk that retirees should be worried about? Because we don’t know what the future holds and there’s no way to forecast it accurately. If a financial advisor asks you to build your retirement budget and assumes that the budget you build is truly a budget they need to plan for, they’re effectively saying either you or they can tell the future.
The fact of the matter is that no one knows what the future holds for sure and the most conservative perspective you can have is to just try and have as much money as you possibly can.
Buying an annuity because, based on your budget, you can now afford all your projected expenses easier may sound great (when taken at face value) but when you really think about it… what happens if your future is more expensive than you expect? Bad things happen that you can’t overcome without sacrificing potentially a lot more than you’d be happy with.
Does this mean annuities are inherently bad? No, not at all.
It means that annuities can be a good idea to include as a small portion of your portfolio but if an advisor recommends you contribute 50% of your life savings to one, run.
Many advisors plan for a 2% or 3% rate of inflation and hopefully, they’re right because at 3%, life is affordable. As we’ve all seen in 2021 and 2022, 3% may not be the reality. With QE and massive government spending, we may be in for a 5% or even higher rate of inflation.
How does this change anything at all? If you invest in anything that doesn’t keep pace (or preferably outpace) inflation, you’ll find that you have to give yourself a pay cut every year. That’s not what most people tell me they dream of in retirement and shouldn’t be what you dream of, either.
Things like a 100% bond portfolio, an over-inflated bank account or a portfolio consisting of mostly fixed annuities may help you to sleep well in your 60s, but in your 80s and 90s you better hope that inflation doesn’t go wild.
3. Healthcare Costs
Healthcare in the United States is broken. The cost of going to the doctor for an emergency costs more than what over 77% of Americans have in emergency savings these days and to most people’s surprise, Medicare can only barely be called health insurance and it’s only getting worse. Without proper planning, one major medical bill could ruin your retirement and rid your children of an inheritance.
Based on a survey by bankrate.com, fewer than 1/2 of American households have $1,000 in emergency savings, and based on a study by ehealthinsurance.com in 2020, the average annual deductible for single, individual coverage is $4,364 and $8,439 for family coverage. What does this tell us?
Healthcare is tragically unaffordable in the United States for everyone, retirees included.
What does this all mean to you?
It means you have to plan for high healthcare costs in retirement just in case.
The way we plan for high healthcare costs is by choosing the appropriate insurance policy to cover all the things that Medicare doesn’t.
If you’d like to review the list of things that Medicare doesn’t cover, click here. I don’t have sufficient space in this blog article to list it all.
The two general types of insurance policies you can purchase to cover what Medicare doesn’t are:
- Medicare Advantage Plans
- Medicare Supplement Plans
The difference may astound you.
Medicare Advantage is typically less expensive and operates more like your typical employer-provided HMO health insurance policy with deductibles, coinsurance, and preferred providers. A few side benefits of Medicare Advantage are that they typically include things like dental and optical among many other benefits. Also, they’re easier to file a claim than the other alternative because they’re managed by one company rather than Medicare and another.
The big downside is that you typically have to stay in-network, which can get tricky because what if you need specialized professionals to help to save you or your spouse’s life and they are out of network? I guess you’ll either go bankrupt or just have to settle and hope that staying in-network is good enough. In my opinion, I’m not a huge fan of that answer. Life is short and it’s nice to give ourselves a chance to make it a little less short.
The other alternative is Medicare Supplement Plans. The main benefit of these is that you can go to any healthcare provider that accepts Medicare (and basically all of them do). This means that you can go to the best doctor in the country to solve your medical problem and you’re giving yourself the best chance of survival which is great. In addition, the max out of pocket is typically far lower (if anything at all) and it’s not that complicated to use (contact the provider and have them pay the hospital or reimburse you).
The big downside? It’s typically more expensive (occasionally, a lot more) and you may not use it as much as you think (what if you have a short retirement).
There are tons of different Medicare Advantage and Medicare Supplement Plans out there and they differ not just by state, but by county, so there is no silver bullet in any strategy to cover healthcare costs in retirement. Each strategy deserves time, care, and analysis. This is the kind of thing you’d expect someone like Progress Wealth Management to help with. We’re not paid on commission to sell anything and we’ll help you make the right decision for you.
4. Long-Term Care Costs
I’ve heard more times than I care to count that most people’s plan for affording a retirement community is a single bullet and a long walk in the woods. The hard part with that plan is that no one wants to die ever and it gets scarier the closer we all get to death and the more we all experience loss in life. For this reason, we have to plan for it.
The problem with planning for it is that we don’t know how long we’ll all live and what kind of care we’ll need in our old age. Some of us may die in our sleep in our 70s and others may live well into our 100s and nearly go bankrupt trying to afford 10 years of memory care.
The figure above shows the average annual cost of health care in retirement. As you can see, it gets pricey enough to where a few years could bankrupt some people. Many people I work with hope they can afford it, but don’t know how they’ll make it work. This is the kind of thing a financial planner would help with.
5. Not Able to Financially Help Family
Many worry that their family will have a hard time financially once they are gone and they will not be able to help them. As our population grows, environmental disasters become more commonplace and economic struggles become an everyday part of life for so many people. We have to recognize that the reality of life may be more difficult for our children and our children’s children than we expect.
Most everyone I work with is concerned that once they’re gone, what kind of life will their children experience? How will they survive if they fall on bad times and no one’s there to help their kids or grandkids stay off the streets?
We can hope that our families will be okay but it’s nice to know you’re doing everything you can to ensure this.
What Does This Mean to You?
I would never tell anyone to make massive sacrifices in their golden years to ensure their kids who are likely doing at least okay get a big inheritance. This is your money, but we still shouldn’t throw money away for no good reason if it means that making better decisions will ensure a better future for our loved ones.
Better decisions about our retirement include being purposeful with our financial lives by having a plan for how to manage taxes, grow our investments as effectively as we can, and not being reckless with our spending.
Retirement planning isn’t a one-size-fits-all exercise. There are no silver bullets that can guarantee financial security in our old age. Each retirement plan is unique and deserves thoughtful analysis because we all have different lives, goals, assets, risks, and circumstances.
This is why every retiree should hire a holistic financial planner. There’s too much room for error and trying to DIY something as important as a well-structured retirement plan isn’t just a minor mistake for most people. It’s a big one.
What to look for when you’re searching for a financial planner?
- Make sure they’re a fiduciary. There are a lot of wolves in sheep’s clothing due to the lack of regulation in this industry. If they’re not, they’re permitted to sell you subpar investments, earn their commission and never talk to you again. That’s not right in our opinion.
- Make sure they’re a Certified Financial Planner®. The CFP® has ethical requirements and a requirement for all advisors to be holistic financial planners.
- Make sure that they’re experienced. New CFPs typically lack the know-how to explain complex concepts to their clients in an easily digestible way. If you have a hard time understanding your financial advisor’s points, it’s typically a sign that they’re new.
- Make sure you trust them. If you don’t, you won’t do what they recommend.
Progress Wealth Management is a Fee-Only, Fiduciary Financial Planning firm that specializes in helping its clients plan for retirement. Our unique approach to holistic financial planning and ultra-competitive fees set us apart from most firms within the financial sector. Best of all? We’re currently accepting new clients. Learn more by visiting the Progress Wealth Management website.
This article reflects the insights and opinions of its author and is not a recommendation or endorsement of their views or services.
About the Author
As a CERTIFIED FINANCIAL PLANNER™, it’s my life’s mission to provide unbiased financial education, advice, and guidance to help my clients create their path to financial independence. I believe that true comprehensive financial planning can provide the clarity and confidence necessary for families to understand and implement their own well-informed decisions.
My goal is to translate the complexity of financial topics into a simple, step-by-step action plan to help you understand how to align your money with your personal values and objectives. As a trusted source, my insights have been featured in articles by Forbes, Gobankingrates.com, the Washington Post, Yahoo Finance, MarketWatch, Business Insider, and MSN.
I look forward to us exploring the opportunities and options to help you experience the progress you’re hoping for.