Understanding the challenges will make it easier to plan for retirement without fear of outliving your assets.
Periods of high inflation, volatile markets and recessions, coupled with the reality that Americans are living longer in retirement, make the journey through life after work increasingly complex. Understanding these risks can help you prepare for retirement with clarity and confidence, seeing that you neither outlive your assets nor compromise your ability to transfer your wealth to the next generation.
The transition from wealth accumulation to a reliable income stream during retirement provides unique challenges, but the following strategies can help you overcome them.
Health care is often the most unpredictable and expensive retirement cost, particularly long-term care and hospital stays for serious illness. According to a recent RBC Wealth Management Wealth Insights report, RBC Retirement Paycheck: A Guide to Creating Your Personalized Retirement Paycheck, the national annual median cost for a private room in a nursing home is $108,405, highlighting the need for meticulous planning.
“The average couple is probably going to have some sort of long-term care event in their lifetime,” says Angie O’Leary, head of Wealth Planning for RBC Wealth Management–U.S. She says it’s crucial for retirees to plan for the likelihood that at least one member of a couple will need long-term care. This is particularly important as life expectancies increase.
Griffin Geisler, a wealth planning consultant with RBC Wealth Management–U.S., says with couples, “it’s highly likely that one of those individuals is going to live at least past age 90, if not past age 95.” He stresses the importance of planning for this longevity, since “70 percent of 65-year-olds will need some form of long-term care.” As such, long-term care insurance can be a prudent investment to mitigate unforeseen health care expenses.
But it’s also crucial to understand the limitations of Medicare and consider supplemental plans to cover gaps. Geisler underscores the limited provider networks available with Medicare Advantage, compared to the broader flexibility offered by Medigap supplemental plans under Original Medicare.
With Medicare Advantage, you tend to be limited to a network of providers in your local market area, Geisler explains. “For people who travel a lot, who maybe have homes in multiple states, Medicare Advantage can be very hard to navigate.”
He adds it might be difficult to find covered care with Medicare Advantage plans. “I often advise a Medigap plan with Original Medicare,” he says. A Medigap plan offers you more flexibility to see a provider anywhere in the country that accepts Medicare, which is most providers nationwide. Medigap has slightly higher premiums, but you’ll protect your cash reserves from medical events.
Recently, inflation has soared to its highest level in nearly four decades. Inflation erodes not only your savings but also your purchasing power. It’s important to calculate income and expenses before and through retirement to reflect cost-of-living increases.
“I think we need to be proactive in the planning process and honest about how we believe our expenses will grow long term,” says Geisler. He explains that assuming you’ll simply withdraw a stable dollar amount every year to cover what you need isn’t an ideal strategy. “We really need to have reasonable expectations in terms of what inflation is going to be over a 20-, 30-, 40-year period of time,” he adds.
O’Leary emphasizes planning carefully for expected inflation in health care, housing, education and transportation. “It’s important that you inflate your expenses by the right amount,” she says.
Market volatility can be particularly detrimental in the early years of retirement. A significant market downturn can create a ripple effect that extends beyond the immediate impact on your portfolio. Using the right strategies, such as diversifying your portfolio, to mitigate these market events is essential.
“For folks who are retired, particularly in the early retirement, it’s important to have the right asset allocation in place to withstand short-term volatility, while still participating in long-term growth,” says Geisler.
O’Leary stresses “being diversified across different investment types and geographic locations with a portfolio that includes fixed-income securities for stability and growth assets like stocks.”
Interest rates have a dual impact on retirement savings. While higher rates can make fixed-income products more attractive, these products’ interest rates often rise in tandem with inflation, eroding the real growth of all investments. One way to navigate volatile markets is to diversify your portfolio to include assets that offer higher real rates of return—the rate of return adjusted for inflation—and hedge against inflation.
“Our advisors are looking at things like laddered bond portfolios, certificates of deposit [CD] portfolios and fixed and variable annuities to take advantage of rising rates,” O’Leary explains. “But you really have to analyze those products carefully, because they tend to be a little more complex.”
To protect your portfolio, verify that it’s broadly diversified for ongoing growth and needed income, and monitor the credit risk of the institutions backing your cash and fixed-income investments. Work with a financial advisor for effective interest-rate management and to reposition your savings to capitalize on higher inflation rates.
Life’s unpredictability doesn’t stop when you retire. Whether it’s a home repair or a family emergency, unexpected expenses can derail even the most well-considered retirement plans.
Smart cash-management strategies, such as maintaining a robust emergency fund or establishing a line of credit, can provide a financial cushion. Planning for large expenses, including replacing cars or making modifications to your home so you can age in place, is essential.
Geisler suggests maintaining your access to credit in retirement. “Getting a line of credit is one way to avoid liquidating assets to meet unexpected costs or selling investments during downturns.” But he stresses the importance of getting that line of credit before you retire, because it may be easier then.
Recognize the implications of your spending, especially during down markets, and consider postponing certain expenses until market conditions improve. Try your spending plan for one year before retirement to determine whether it’s realistic, and make adjustments if it’s not. That way, you’re not caught off guard when unanticipated expenses inevitably arise.
While living longer is a blessing, it also poses a financial challenge. You must ensure that your money lasts as long as you do, without compromising your lifestyle and so that you’re able to maintain your independence for as long as possible. “We really need to extend our planning timelines much further than the average life expectancy tables suggest,” Geisler says.
Use your health history to project your life expectancy, and consider the joint longevity of you and your spouse. This will help you better plan for the financial aspects of your retirement years, so you can live comfortably. “Make optimistic estimates for how long you might live, to make sure that your money lasts,” O’Leary says.
Since women tend to outlive men, women should have a survivor plan that can be executed after their spouse dies, says O’Leary. She stresses the importance of educating women about money management so they can manage finances capably if their spouse loses their capacity to do so or they outlive them.
Implementing a wealth strategy with an individualized retirement income plan that considers the major risk categories—inflation, market, interest rates, taxes, longevity and health care—is critical. And be sure to review your financial approach yearly.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.
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