Retirement

Are You Worried About The Right Retirement Issue?

By Susan Freudenheim, Next Avenue

Just as my husband and I, both recent retirees, began drawing down our retirement savings, we’ve been hit by the barrage of nerve-wracking news reports — from 9% inflation and rising interest rates to stock market gyrations and recession warnings. I called my financial advisor to ask how worried we should be.

Like many current and future retirees, we are eyeing our investment accounts daily, worrying how seriously the current market losses and global economic upheavals might erode the savings we’ve projected to see us through our remaining years.

We weathered the volatility of the 2008 Great Recession, so we have had experience with a devastating market downturn turning into a robust market rebound. But that was a dozen years ago, when we felt we had enough time and employment income to help us recover any losses. Now, with our income reduced to payments from Social Security, a few pensions and returns on investments, we haven’t been feeling as confident.

When I called our advisor, I needed reassurance.

Think About the Long Term

“We are investors, not traders,” he reminded me. My husband and I are in our 60s and in good health, so we’re planning for at least a couple decades of life ahead. With that perspective, our advisor noted, it’s critical to maintain a long-term approach to our investment strategies.

As retirees, he told us, we should divide our savings into two categories: Cash we will need for immediate living expenses today and tomorrow, and investments that will grow our savings to sustain us for those decades to come. How many decades? Statistically, life expectancy today in the U.S. is just under 78 years, but many people are living into their 90s.

What does this mean for investors in their senior years? It means we need to be both educated and balanced in our investments, suggests a recent study from Boston College’s Center for Retirement Research.

Understand the Risks You Face

The study’s author, Wenliang Hou, now a quantitative analyst at Fidelity Investments, said understanding the relative value of risks is key to a good retirement, and he laid out five essential perils retirees face: “outliving their money (longevity risk), investment losses (market risk), unexpected health expenses (health risk), the unforeseen needs of family members (family risk), and even retirement benefit cuts (policy risk).”

Hou’s study, titled “How Well Do Retirees Assess the Risks They Face in Retirement?”, contends that most people worry too much about short-term market fluctuations while underestimating their potential lifespan and future healthcare costs. He said longevity risk should be the most critical worry for people saving for retirement, followed by health and market risks.

In other words, we should plan for a long life that includes an expectation of some potentially expensive end-of-life health costs. Historically, the stock market has risen by more than 10% annually, so it should not be our top concern, and we should resist the impulse to abandon the market when it falls.

How Long Will You Live?

Hou said in an interview that as he began his study he was “totally shocked” by how significantly retirees underestimated how long they would live. Many of us use our parents’ lifespans for guidance, but that kind of objective information is not reliable, Hou said.

In my case, my mother died at 70, my father at 94. So how old will I be when I pass away? “Exactly the problem,” Hou told me, adding that personal circumstances are as critical as family history.

I tried two of the many different lifespan calculators available on the Web, both of which ask a simple set of questions to make their predictions. They agreed: I should last into my late 90s. The Social Security Administration calculator was a bit more pessimistic, predicting I’ll only make it to 87, but it asked for less information. My husband’s life expectancy is likely a bit shorter — on average, men don’t live as long as women.

Late-Life Healthcare Costs

Despite the differences, Hou’s metrics, and those in many other studies, suggest that we shouldn’t just plan for our retirement savings to last for 10 years, but rather 20 or even 30 years. Therefore, to use this spring and summer’s market downturn as our primary guide makes no more sense today than it would have a decade before we retired. Our money could very well fluctuate over the coming decades, but on average, it can be expected to grow.

Beyond longevity, there’s another critical concern, according to Hou’s report: Many retirees don’t plan for late-life medical expenses, or they grossly underestimate what might be needed.

“Retirees also may have unexpected medical expenses and long-term care needs,” Hou writes. “Out-of-pocket expenses rise quickly with age, and health costs in retirement have increased substantially over the past few decades.”

An annual study by Fidelity estimates that, to be safe, a retired couple aged 65 in 2022 should project spending as much as $315,000 in after-tax dollars for late-life health care costs not covered by Medicare. The cost of long-term care, such as the need for health care aides, can add up quickly.

Envision Your Life at 90

Planning should assess the many variables that can play into this projection, such as whether you want to end your days in your own home or in a nursing home, and if you have a spouse or other family member who will care for you.

If you’re on your own or need a supplement to family care, health care costs could be another unpredictable and significant expense, which, of course, connects again to the longevity risk.

Everyone needs to assess their own risks — as well as their risk tolerance — thoughtfully and with caution, Stuart Gabriel, a distinguished professor of finance at UCLA’s Anderson School of Management, said in an interview.

“History may not be a good guide,” he said, and “there’s no one answer that fits everyone, and no financial advisor who knows the answer” to how the market will go in a time of high volatility like we’re in now.

Even annuities, which guarantee a predictable return for a lifetime, can have major fees and conditions related to payouts, that make them less cost effective than they might initially appear. “Read the fine print, be completely educated and understand what you’re getting into,” Gabriel advised.

The answers to what will ensure that your money will last your lifetime are not crystal clear, but like Gabriel, Hou came to one definite conclusion: We all need to be educated about risks so that we can plan for a reasonable outcome.

“Education and awareness,” he said, are the keys to a successful — and long — retirement.

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