This article was published in The New Haven Register on February 16, 2019.
Financial planning is about fulfilling your life goals. It’s also about being prepared to handle financial risks, especially when it comes to retirement planning.
Longer lifespans mean more Americans will face a trio of late-life financial risks identified in a January 2019 study by the Center for Retirement Research, “What Financial Risks Do Retirees Face in Late Life?” Understanding the risks that you face in the future will help you design and follow a comprehensive financial plan.
The study cites two reasons more people will face financial risks: First, more people are living longer, which will lead to more physical and mental health problems. The number of people aged 75 and over is projected to double over the next 20 years, from 23 million in 2020 to 45 million in 2040. Second, many more retirees will rely on 401(k)/IRA withdrawals — from often-modest account balances — instead of traditional pension plans.
By reviewing Social Security data and other studies on late-life financial risk, the study’s authors have identified the three areas likely to affect the most people going forward: health care and long-term care costs, mental decline, and widowhood.
Out-of-Pocket Medical Costs. With Medicare you will pay deductibles and co-pays, and there is no dental or vision coverage. Average out-of-pocket expenses amount to 20 percent of total income. That’s manageable for most people, but when you factor in the increasing need for long-term care (skilled nursing and help with daily activities such as dressing, bathing and eating) the situation can worsen rapidly. After a three-day hospital stay, Medicare will pay for 20 days of skilled nursing care (i.e., rehab). From day 21 to day 100 the patient must pay coinsurance of $170.50 per day; all Medicare payments stop after 100 days. One study estimates the average household post-age 70 will incur $100,000 in total out-of-pocket medical spending, and rising health care costs will not help. A good Medicare supplement can help offset some of these initial out of pocket co-insurance costs. Medicare supplements and Medicare will not cover longer-term nursing home and home health care situations that become custodial in nature. Those situations can be addressed with long-term care coverage.
Managing Money with Declining Cognition. Aging often brings a decline in the ability to manage money, making those over age 75 more susceptible to financial mistakes and fraud. Having savings tied up in self-managed 401(k) and IRA accounts also increases vulnerability when compared with receiving a monthly pension check. If dementia sets in, the situation can turn disastrous. Another factor: Many seniors will have fewer children to help them than in previous generations. Your attorney and adviser can help you to address some of these concerns through proper planning.
The Risk of Widowhood. The good news for women is that their risk of poverty has lessened as more women have joined the labor force: The poverty rate for widows dropped from 20 percent in 1994 to 13 percent in 2014. Short of outright poverty, however, having a job can actually make it more difficult for women to maintain the same standard of living post-retirement. That’s because the way Social Security is set up means that working women may be able to replace less of their pre-retirement household income. Studies show that a widow’s benefit as a percentage of the couple’s combined benefit drops the closer her income approaches her husband’s income. With no earnings, a woman’s benefit (i.e. her husband’s benefit amount) replaces 67 percent of pre-retirement household income, and the percentage gradually falls as the woman’s income rises, reaching 50 percent at equal salaries.
(See the study at https://crr.bc.edu/briefs/what-financial-risks-do-retirees-face-in-late-life.)
Eric Tashlein is a Certified Financial Planner professional and founding Principal of Connecticut Capital Management Group LLC, 2 Schooner Lane, Suite 1-12, in Milford. He can be reached at 203-877-1520 or through www.connecticutcapital.com. This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Registered Representative, Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRA/SIPC.