What are the financial risks in retirement? …this is not your father’s retirement!

Randy Deaton |

Submitted by Everest Retirement Planners on September 25th, 2019

By Randy Deaton

First the bad news, without question financial risk in retirement is significant and can cause irreparable harm to your retirement dreams.  That said, the good news is there are only five risks and most importantly, they can be mitigated, if not eliminated.

The risks are:

  1. Market Losses
  2. Longevity
  3. Health Care Expenses
  4. Long Term Care Expenses
  5. Liability Exposure

As we consider these risks maybe the first question should be what exactly is risk?  Webster’s’ defines risk as ‘the possibility of loss or injury’.  Risk is something we’ve tried to eliminate, manage or accept our entire lives. 

Market Losses

Interestingly, as we’ve aged risk has changed.  Remember early in your career when there was a significant decline in the stock market?  Did market losses cause your 401(k) to become a 201(k)?  Were you upset by the decline?  Sure you were, but did you lose sleep?  Probably not.  Why?  Because you knew this money was likely not needed for decades and the expectation was the market would rebound.  Back then market volatility was likely much more of an acceptable risk. 

How about today?  As we near retirement hasn’t your risk-profile completely changed?  Today, your retirement savings is likely much larger than it was when you were younger.  You have more to lose, but, more importantly, you don’t have the luxury of time. 

Consider this, in April of 2000 the S&P 500, which is a stock market index made-up of 500 large domestic companies, broke 1,500 for the first time.  The very next month the market began a sustained decline for almost two years dropping about 45%.  It was not until September of 2007 before the index broke 1,500 again.  Unfortunately, it only remained at that peak for less than a month when the financial crisis caused a broad-based market collapse sending the index spiraling down about 53% over the following year and a half.  I am sure you remember it well, but the interesting thing is the S&P did not exceed its prior peak of 1,500 until February of 2013.  So from April of 2000 through February of 2013 the market had quite a roller coaster ride, but it did not grow above the peak in 2000.  Thirteen years! 

What if that happened now?  Would your retirement expectations be met?  Clearly market volatility and losses are an ever-increasing risk as we approach the time when we’re going to be relying on that money for retirement income.  Obviously, this risk is significant and must managed or even eliminated.  Fortunately, there are strategies for those nearing retirement or in retirement where their savings can be positioned to avoid market losses and still achieve reasonable returns.

Longevity

In conjunction with the risk of market losses is longevity risk.  Transamerica Center for Retirement Studies did a survey that said the number one fear for retirees (43% of those polled) is outliving savings and investments.  This has been an ever-increasing risk for retirees.  Remember your father’s retirement?   He likely had a pension to supplement Social Security.  Longevity risk was not a concern as he had a promise of lifetime income from Social Security and his pension.  Today the majority of retirees only have their retirement savings to supplement Social Security. 

Further, we’re living longer.  Did you know when they created Social Security in 1935 average life expectancy was less than 65 years of age?  Today, according to data collected by the Social Security Administration a male reaching the age of 65 can expect to live to 84 and a female to 86.5.  Also, about one-third of 65-year olds today will live past 90 and one out of seven will live past 95.  Not knowing when you’re going to die is a real risk and must be addressed in your overall plan.  While this risk is real there are insurance-based strategies designed to meet a retiree’s income needs even if they run out of money.

Health Care Expenses

An individual’s risk of outliving their money is further exacerbated by health care expenses.  Fidelity estimates that a 65-year old couple in 2019 will need $285,000 to cover healthcare expenses in retirement and this does not include the cost of long-term care.  Again, compared to your father’s retirement the cost of healthcare has exploded.   And of course, the reality is that as we age we will require more healthcare.

Medicare in combination with private insurance will defray a large portion of your healthcare expenses, but you will still be faced with insurance premiums, co-pays, deductibles, the ‘donut-hole’ with Medicare Part D plans, and expenses not covered by Medicare like hearing aids, dental, vision and alternative care. 

When you enroll in Medicare it is vital that that you carefully consider the pro’s and con’s of going onto Original Medicare or selecting a Medicare Advantage plan.  Relative to what you will have to pay in out-of-pocket expenses there are significant differences between these two paths.  Know this, your decision may also be a lifetime decision because once you decide on Original Medicare or an Advantage plan, if you later decide that you want to switch to the other path the private insurers then have the right to decline or rate you due to preexisting conditions.   This can leave a person with less than optimal health care protection throughout the rest of their retirement.

Long-Term Care Expenses

So what about the expense of long-term care?  Know this, if your condition is viewed as ‘custodial’ Medicare and your supplemental insurance will not cover the associated costs.  For example, if you have a stroke or an Alzheimer’s diagnosis and you simply need assistance with activities of daily living (i.e. bathing, dressing, transferring, etc.) this expense will not be covered by Medicare or your supplemental insurance.

Have you had a family member or friend that needed this type of care?  If so, you know it’s not cheap.  The number one cause of impoverishment among the elderly today is the cost of long-term care.  The expense varies by region but according to a study done by Genworth in 2018 the national average for assisted living was $48,000 per year and for a semi-private room in a nursing home the cost was $89,000. 

You think that’s bad, it gets worse.  It’s likely that a 65-year old today is not going to have a long-term need for another 15 to 20-years.  In the year 2038 they estimate the annual cost for nursing care to be $181,000.  Do you have a plan for this potential expense?  There are ways to mitigate this risk including long-term care insurance, but is it worth the money?  Obviously, health care and long-term care expenses are real risks that can eat away retirement income and deplete savings.

Liability Exposure

Finally, there is the risk of being sued.  The good news is you likely have liability protection within your auto and homeowner’s policies, which provide some protection.  In most instances this protection is sufficient, but it is limited. 

Fast forward to later in retirement and imagine this, you’re driving down the road and a ball bounces out in front of your car.  What do you think is likely chasing after that ball?  Because of your advanced age you’re slow to put your foot on the brake and you hit that child.  Do you think you might get sued?  There’s a good chance.  Do you think that if they get a judgment against you it’s possible that judgment could exceed the liability protection you have under your auto policy?  Indeed.  Now your financial assets are at risk.  Protection to eliminate this risk is available, inexpensive and should be considered.

In Conclusion…

Will you be harmed by these risks in retirement?  Well….it just depends.  We know that if the house burns down you’re already protected with homeowner’s insurance and if you wreck the car your auto policy will cover the cost of repair or replacement.  However, the other risks become real in retirement and should be addressed.   If you’ve taken steps to eliminate or mitigate them you’ve vastly reduced your chances of financial demise.  And by so doing you should have no concerns or worries, that is, except to stay healthy and enjoy your grandkids.