People are living longer. That’s the good news. However, for many retirees the concern today is financially sustaining a long and happy retirement without altering their lifestyle.
“The risk is real,” said Michelle Grist, vice president and financial advisor for RBC Wealth Management in Oakbrook Terrace, Illinois. “The possibility of someone outliving their money is greater now because people are healthier. There’s more preventive care; people are taking care of themselves and they’re just plain living longer.”
A 65-year-old man today can expect to live to age 84, on average, according to Social Security projections. A 65-year-old woman can expect to live to nearly 87. Compare that to Social Security tables showing that in 1980, a man could expect to live to nearly 68, while a woman could expect to live to nearly 81.
Your odds of living to 100 are also improving, according to the National Institute on Aging. Globally, between 2010 and 2050, the institute estimates the number of centenarians will increase by a factor of 10.
Grist said the key to making your money last is a solid wealth management plan that’s flexible enough to see you through the long haul. Three of the biggest financial threats to your retirement finances are healthcare costs, market volatility and overspending. Here are some tips for wisely managing each one to sustain your retirement nest egg:
Rising costs for both care and insurance put healthcare front and center as a financial concern. Some people don’t consider the huge bite these costs could take out of your savings.
“People don’t think about healthcare in a quantitative way,” said Mary Williams, senior vice president and financial advisor with RBC Wealth Management and Grist’s partner at Williams and Grist Investment Group, an RBC Wealth Management team.
A 2015 study by HealthView Services found that average lifetime retirement healthcare costs in the United States for a 65-year-old healthy couple retiring this year will be US$394,954. Add to that Genworth’s projected annual median long-term care cost of more than $91,000 per person and the need to get serious about planning becomes clear.
“Those kinds of expenses are often left out of the equation when people plan for retirement, because they’re unpleasant to think about,” said Williams, “but they can be devastating to your finances.”
You can help mitigate the risk by better understanding potential healthcare expenses and positioning your investment portfolio for the long term. Even with good healthcare insurance or Medicare, retirees should maintain a financial cushion for unexpected or uncovered costs, Williams said.
This is especially important because healthcare costs are rising so rapidly. In the decade between 2000 and 2010, for example, total personal expenses for healthcare in the United States nearly doubled, from $1.2 trillion to $2.2 trillion, according to the Centers for Disease Control and Prevention.
Long-term care insurance can further reduce the risk that longevity poses, but it can be difficult to obtain and expensive for some, added Grist. One alternative is an annuity with an income-benefit rider that lasts the owner’s lifetime. Some of those contracts offer expanded benefits for nursing home care, and if nursing home care isn’t needed, you will still receive the income benefit.
Preparing for a market downturn is especially tricky as you age and have less time to make up huge losses from a market crash, such as the one experienced during the 2008 global financial crisis, said Ben Carlson, author of A Wealth of Common Sense. Carlson said the problem is even more challenging in a low-interest rate environment for retirees seeking a safer portfolio that delivers a steady source of investment income. Assets less likely to suffer during a market downturn, such as bank deposits or certificates of deposit, as well as bonds, deliver income in the form of interest, so when rates are low the payout is paltry.
The closer you are to retirement, the more devastating a market crash could be, said Carlson. However, he doesn’t believe retirees should be overly cautious and put all of their money in bonds and/or cash.
“You have to have some growth,” said Carlson. “I don’t think there is such a thing as living off interest these days, unless you have a huge amount of money.”
Look at your investments—both the pre- and after-tax portion—as a total return portfolio, said Grist. Then you can plan for the best distribution method that incorporates both inflation, tax and market risk.
Begin positioning your portfolio for retirement a few years before you stop working, so you can protect yourself from a market crash in the important years leading up to retirement and also create a more tax-efficient income stream.
The best formula will vary depending on a number of factors, but it might include converting some traditional IRAs into Roth IRAs to provide tax-free income in the future. Annuities also might fit into the picture if you need another source of guaranteed income outside of Social Security and pensions.
A diversified portfolio is your best protection against market volatility. Though the income potential may be relatively low in stable assets such as bonds and cash, they will protect you against the roller-coaster ride of equities. But you’ll still need equities for growth to fund the future and combat inflation.
There are certain threats to outliving your assets, which both Grist and Williams called “leakage.” Often, these leaks are in areas that are not only taking up a larger share of the budget than retirees think, but also setting them up for chronic overspending.
One example is multiple homeownership. “Clients with a vacation home that’s paid for tell us it only costs $10,000 a year to maintain, but there’s a lost opportunity cost in the money they used to buy the house,” said Williams. “That’s cash they could have invested.” Many also don’t plan for the ancillary costs of owning two or three homes, such as landscaping and ongoing maintenance.
Major leakage can also occur due to the cost of providing adult children with big-ticket items such as automobiles or private school tuition, items that are often not in the original budget.
First, know your budget. Instead of figuring out future income and basing your expenses on that, Carlson suggested working backward. Calculate your expenses first, and figure out the percentage used for discretionary spending. Then you’ll know how much to adjust based on your current income needs and any future outlays. It also helps you set aside money for the expenses that matter to you, rather than frittering it away on less-meaningful pursuits.
You can combat the risk of outliving your money if you nail down your budget and use any of the variety of online tools available to help estimate the amount you’ll need to last your lifespan. When plugging in the numbers, you can factor in varying interest rates, savings and inflation to help come up with a realistic amount. You can also calculate how your finances would fare in the event your spouse dies before you do, or becomes disabled. The number you get will help you determine what you need to do to reach your goal.
Williams recommends that retirees be thorough when considering their retirement budget and expenses. “The key is to be honest and be complete,” she said.
This article was originally published on Forbes WealthVoice.
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.
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