One of the biggest fears many have about retirement is running out of money. Here are five tips to mitigate this fear and improve your chances of success:
Consider buying long-term care insurance.
A major reason most people fear running out of money in retirement is an unknown major expense, which is primarily the cost of a health issue, such as cancer, a heart attack or a stroke. In my practice as a financial adviser, I’ve found I can more confidently project longer-term planning scenarios when clients have this extra ballast against the unexpected calamities in life. As a fee-only adviser I don’t sell long-term care insurance, but am an advocate of this asset for many of my clients’ retirement plans.
Alas, there are a limited number of quality companies offering this insurance, and health qualifications continue to narrow while premiums have been rising. For example, if a 50-year-old woman buys a $200-per-day benefit with a 3% compound inflation rider now, assuming premiums increase periodically, by the time she’s 75 she would have allocated about $130,000 of income or savings toward long-term care insurance premiums, assuming periodic premium increases. Due to the inflation rider on her policy, she would have a pool of almost $900,000 for long-term care needs. But if she waits until she’s 55 years old, by the time she’s 75 she would have spent about the same amount in premiums, if not more, but have $125,000 less in inflation-adjusted long-term care benefits.
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No Pensions? Think about creating your own by buying an annuity.
People can take a portion of their nest egg and buy an annuity that will pay a set amount of money for as long as they live. In effect, they can create their own pension plan. Just make sure you understand the fees and how much they will cost you. For many years I was not an advocate for annuities, but the benefits listed have caused me to rethink this for several clients:
- A Hedge Against Longer Life Spans. Longer life spans mean your money needs to last longer, too. Because annuities provide a guaranteed lifetime income, they can prevent retirees from depleting all of their assets. And since an annuity is administered by a financial or insurance company, it moves some of the longevity risk to the company offering the annuity product.
- Control Over Too Much Spending. Preserving wealth for my clients who consistently spend beyond their means is one of my biggest concerns. I find that annuities help them better budget their money. Retirees without a stable monthly income tend to tap their portfolios much more often than they realize. Some retirees also experience what I call “lifestyle creep.” For example, if they start retirement with 40% of their expenses covered by a pension or other stable monthly income source, but five years later it’s only covering 25%, it can mean their lifestyle spending is going up.
- Peace of Mind Over Stock Market Gyrations. For people who have absolutely no stomach for bear markets or stock market volatility, annuities can help prevent them from making what I call “the big mistake” – selling stocks during a big market pullback.
Run the numbers.
Third, ask your financial adviser to run a probability analysis that predicts how long their retirement savings would last in case of a major catastrophic event, such as a long decline in the stock market. At Brightworth, we conduct this kind of analysis for clients, and the results usually provide peace of mind. This exercise can show clients how their portfolios are affected under various adverse scenarios such as prolonged bear markets or excessive medical expenses. In the vast majority of cases, people still have enough money for the rest of their lives.
Think of your home as an asset.
People can consider selling their home and using the equity to pay for any unforeseen expenses. Most people count on the income from investments, Social Security and pensions (if one is available) to pay for retirement expenses. We don’t often consider downsizing or selling a home. However, this can be an asset worth hundreds of thousands of dollars that can be used for retirement expenses, if necessary. We typically advise clients to pay off their mortgages before retirement, which not only lowers their fixed monthly expenses, but adds another solid asset on the balance sheet. The home could be sold to pay for nursing home care, or the retiree could also consider a reverse mortgage if they need income to cover expenses.
Build up your emergency fund.
Keep a certain amount of your investment portfolio in cash and bonds. At Brightworth, we advise our clients to keep one to three years of cash in the bank and an additional three to five years of investments in bonds to cover living expenses. Here’s why: If the stock market craters, a person with five to 10 years of living expenses in cash and bonds can not only cover their expenses, but also preserve their investment portfolio as they are not forced to sell their stocks at temporarily low values. This strategy provides peace of mind.
For example, a person with a $1 million portfolio that’s all in stocks could see it reduced to $600,000 during a severe market downturn. If they need to sell their investments for living expenses, selling stocks while prices are low means they’ll have much less in their portfolio once the market recovers.
Following these five steps can help increase the odds that your portfolio will outlive you, and give you more confidence as you enjoy these happy retirement days.
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