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10 Facts about Retirement that Could (or Should) Scare You

By SHP Financial Blog | June 17 , 2016

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Retirement planning is one of the most important things you can do to ensure that you have a happy life well into your golden years. Unfortunately, not enough people take retirement planning seriously. They fail to see the importance of saving while working and the importance of proper planning once they’re ready to leave their work-life behind.   That’s why we’ve created the following list of ten facts about retirement that could, or should, scare you.  All of which can be addressed through proper retirement planning.

1. Not having enough money saved for retirement

Not having enough money saved up for retirement is the number one concern among retirees across America.  Do I have enough money to retire? Will my money last as long as I do? These are often the first questions we hear when we sit down with a potential client for the first time.

How much money each person needs to retire varies depending on a number of different factors. How much are your monthly expenses? How much do you have coming in from various income streams, such as pension and social security? What does that equate to when you factor in inflation and longevity? What are your income tax liabilities?

Retirement is not the time to be winging it.  It’s not the time to just live care-free, drawing down on your savings whenever you feel like it without having a plan.  Once you are entering retirement, it’s critically important to create a written income plan that addresses lifestyle expenses versus income streams, tax liabilities, healthcare costs, inflation cost, longevity, and so on, so that you can determine how long your current savings will last you. This way, you will be able to determine whether or not you need to work longer, can retire now, or perhaps work part-time for a number of years. Either way, with a well thought out income plan you should be able to sleep easier knowing you have a plan to cover your expenses for the rest of your life.

2. Not having an estate plan

Not having a current, up-to-date estate plan can have a severe negative impact on the people who are closest to you. They could lose large portions of the assets you’ve earned over the course of your lifetime. You’ve worked hard to accumulate your wealth and whatever you choose to leave behind to the next generation needs to be protected. Otherwise, a large portion of it will go to the government, instead of to the people you love most.

Loss of assets due to estate taxes is only one scary fact about not having an estate plan. The other is loss of time. All too often, families can be found caught up in probate for years. Taking time out of their busy lives dealing with probate issues, and paying their lawyers hourly, all at a time when they grieving the loss of a loved one.  It’s certainly not something most people would wish on their families and it can all be avoided with a proper estate plan.  Taking some time out to plan ahead will mean a world of difference for your loved ones down the road.

3. Healthcare costs

According to the latest retiree health care cost estimate from Fidelity Benefits Consulting, a 65-year-old couple retiring this year will need an average of $220,0008 (in today’s dollars) to cover medical expenses throughout retirement1.  This does not even include the costs of Long-Term Care.

While you could be very healthy throughout the beginning of your retirement years, whether it’s when you’re in your 70’s or 80’s, eventually everyone will need healthcare.  What will the healthcare costs be then?  Do you have a plan in place to deal with such expenses?  Most people will opt for a Medicare supplement, but those can often be costly and it’s important to include these future costs when you are creating your retirement income plan.  Plus, there are other options out there for you to explore, for both healthcare expenses as well as long term care

It’s important to start thinking about this now.  If you incur these expensive costs, especially long term care, without having the proper plan, it can completely derail your retirement. Start exploring your options. Talk to a qualified Financial Advisor who can walk you through the pros and cons of each, and can put a health care plan together for you as a part of your overall retirement plan.

4. Longevity – you could be in retirement for the long haul

The medical field has changed dramatically over time, and medical technology continues to march forward.  In addition to such advances, we have continued to improve our eating habits and lead overall healthier lifestyles. All of these factors contribute to increased longevity.

According to a recent JP Morgan Study, more than half of Americans underestimate their life expectancy2.  Faulty longevity expectations can be detrimental to your retirement.  You need to have an accurate life expectancy so that you can plan for income that will last as long as you do.

According to the study, “one in ten 65-year old men will live to age 93 and one in ten 65-year-old women will live to age 96.”    So, how do determine what your life expectancy will be?

A study by the Boston School of Medicine found that 50% of those who live to the age of 100 have a parent, sibling or grandparent who lived to age 903.  If you have a relative that has lived that long, you may want to plan for a longer retirement.  

Even if you don’t have longevity in the family, your lifestyle, family health history and your current health status can also play a major role.  These are things your financial advisor should be discussing with you as they help you determine your longevity expectations for your retirement plan. Without this, you’ll be left wondering whether you’ll have enough money to last the rest of your life, rather than enjoying the golden years you’ve worked so hard to get to.

5. Market volatility

Not having a plan to control market volatility can be very scary in retirement.  As you approach retirement age, you need to adjust your investment portfolio to reflect this new season of your life. At this point in your life volatility trumps return.  It’s important that your portfolio be less risky, now that you have fewer years to recover from a large market downturn, as we have seen repeatedly throughout recent history.

It’s even more important to have a solid investment plan that controls volatility once you are drawing down on your assets in retirement. In other words, when you are taking withdrawals from your accounts.  If you look at your portfolio and it has market swings that match up with the S&P 500, it might a bit too risky for you unless you are not taking withdrawals and have a plan to hold that money in those accounts long-term.

Unfortunately, many people we talk to think they are in conservative portfolios and once we analyze it for them, we find out they have much higher risk than they thought. It’s important to have your portfolio analyzed by a qualified Financial Advisor to make sure that your risk matches the stage you are at in your life.

6. Hidden fees eroding your returns

Fees within your investments are scary because they can rob you blind in retirement. Most often when a client first comes to our office they have mutual funds (a.k.a. retail investments) that are loaded with high, hidden fees and tax inefficiencies. They have no idea how much in fees they are actually paying because the fees are buried deep in their portfolios with zero transparency. There are unexpected trade fees, loads and 12b-1 fees – which are marketing fees passed onto you as the investor. Basically, you are paying a higher cost to own a “pool” of stocks and/or bonds.

Most clients will come in telling us they’re only paying 1% to their broker, but after doing a fee analysis on their portfolio, we often uncover invisible costs such as transaction fees that are eating away at their returns.  In some cases, clients are really paying closer to 3% and they don’t even know it.  

 If you have a $500,000 portfolio you may think you are paying $5,000 a year in fees, but you actually may be paying close to $15,000 per year.  Imagine what else you could have done with that $15,000, such as traveling, home improvements or investing in your grandchildren’s college education. The possibilities are endless.

 The bottom line is: you have choices.  There are many different investment opportunities out there that will save you money in fees.  Our recommendation would be to work with a Financial Advisor who is a licensed Fiduciary. Fiduciaries are required to always do what is in the best interest of the client. First and foremost of those duties is to find investment strategies with low, transparent fees.

7. Millions forego “free” money

Americans leave an astonishing $24 billion dollars on the table every year by not contributing enough to receive their full employer 401(k) match, according to a study by Financial Engines, a 401(k) advisory firm4.  According to the study, over 20 years, average annual losses added up to over $42,000 per plan participant.

Why do so many people fail to take advantage of their employer match?  Most people feel that they cannot afford to live on less take-home income. They fail to see how important it is to save for retirement. They may not want to make the sacrifices they need to make in order to save for retirement, often thinking they will “get around to it down the road.”  

Unfortunately, as Financial Advisors, we see all too often what happens to people who are now 5 to 10 years away from retirement and have not saved up enough. Now, they are left with relying on social security, and hopefully a pension if they’re lucky enough to have one. Their lifestyle will most likely need to change to accommodate the lack of income coming in.  Retirement is not the time you want to be making these sacrifices.  It’s the time to live out your retirement dreams without worrying about money. You’ll always find reasons not to contribute to your retirement accounts, but stop the excuses and take care of your future self. No one else will.

8. You may not be able to retire when you want to

When most people think of retirement, they dream of retiring early enough to still be able to enjoy all that life has to offer, and with enough income to do all of the things they want to do.

Unfortunately that is not always the case. According to a study from Bank of America Merrill Lynch, 55% of retirees actually retired earlier than expected, and the number one reason was a health problem5.  With the majority of Americans not saving enough for retirement in the first place, having to leave the workforce earlier than planned without the extra years to contribute to their retirement savings plans can be a scary thought.

On the flipside, some people may have to work much longer than expected.  Many times, we see people who want to retire in their sixties but when they finally sit down to put together their income plan, they soon realize that they just didn’t save enough to cover their expense needs in retirement. Often they either need to work longer or work part-time well into their retirement years, not because they want to, but because they have to.

9. Social Security Insecurity

Many folks today are feeling insecure about social security. We don’t know exactly how long it will be around. That’s scary. We do know that we’re paying into this fund that is supposed to help us when it is time for us to retire from our careers. Will we ever see that money again? It depends on our current age and the government’s ability to repair the cracks in the program’s foundation.

No one really knows what social security will look like in the future, but we know it has to be different than it is today if the program is going to sustain itself. 

10. Financial Literacy

According to Standard & Poor’s Ratings Services Global Financial Literature Survey, 57% of adults in the United States are financially literate, compared to 33% worldwide6. With the financial industry constantly changing, it’s no wonder that people are not as savvy as they could be in the areas of debt, risk diversification, inflation and compound interest.

Once you approach retirement, it’s even more important to make sure that you have a solid financial plan that addresses planning for income, longevity, taxes, healthcare, estate planning and managing investments to reduce risk and protect your assets.  It’s critical for pre-retirees to sit with an experienced financial advisor who can walk them through the complex process of planning for retirement to make sure that all of these areas are take care of.  Do you need to know every financial term? No.  You just need to choose a financial advisor who is experienced in all of these areas and who is someone you can trust.

 


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References referred to in this article:

  1. Fidelity Benefits Consulting, 2014. The estimate is based on a hypothetical couple retiring in 2014 at age 65 or older, with average (82 male, 85 female) life expectancies. Estimates are calculated for "average" retirees but may be more or less depending on actual health status, area of residence, and longevity. The estimate assumes that individuals do not have employer-provided retiree health care coverage but do qualify for Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care.
  2. https://am.jpmorgan.com/us/institutional/library/longevity-how-long-is-the-journey-through-retirement
  3. New England Centenarian Study at the Boston University School of Medicine, 2002.
  4. https://corp.financialengines.com/docs/Financial-Engines-401k-Match-Report-050615.pdf
  5. http://newsroom.bankofamerica.com/press-releases/global-wealth-and-investment-management/merrill-lynch-study-finds-health-cornerstone
  6. https://www.spglobal.com/corporate-responsibility/global-financial-literacy-survey?keyfindings

 

Investment Advisory Services are offered through SHP Wealth Management LLC., a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. 

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