Making Your Money Last

Disaster-Proof Your Retirement Plan

It's an unfortunate fact of life, but disasters happen. How you prepare for them makes a huge difference. Here's how to protect yourself from two of the biggest retirement disasters: long-term care costs and bear markets.

We have become used to watching disasters recently, as hurricanes, floods, fires and earthquakes ravaged cities and changed lives. With every passing month, a new disaster replaces the old in the headlines.

Many people who did all they could to prepare still lost their homes and, in some cases, their loved ones. Others who did nothing to prepare got lucky and escaped the worst. Misfortune tends to leapfrog like that. And that can make folks complacent.

Financial professionals frequently see a similar attitude as we talk to clients about potential threats to their retirement. Pre-retirees may know they need to plan, but it isn’t a priority for them just yet. Today, they’re still healthy, making money on their investments and seeing a steady paycheck coming in. They figure they’ll batten down the hatches at some point — but not right now.

The thing is, just as with any type of disaster preparation, the sooner you address your vulnerabilities, the more secure you’ll be. None of us knows exactly what will happen during a long retirement, but we do have several significant known risks we can work to eliminate or minimize. Let’s take a closer look at just two of those — market risk and health and long-term care risk — and some solutions for trying to address them:

Health and long-term care risk

Sadly, your life could be long but not necessarily healthy. Regardless of how well you take care of yourself, time will take its toll. Ask any 60-year-old, and they will probably admit that they are no longer as resilient as they were at 45. If you’re 65 today, there’s a 52% chance you will need long-term care at some point during your life, according to the U.S. Department of Health and Human Services. An illness could quickly drain your assets and leave your surviving spouse with little to live on when you die.

Today an extended health care situation can cost as much as $10,000 per month, even for home care. In my opinion, this could likely rise to $20,000 per month by the time the typical Baby Boomer is in their 80s. Medicare does not cover long-term care costs. Most retirees have no financial plans to deal with this and will be forced to spend down their assets.

Several financial strategies can be used to address long-term care. Traditional long-term care insurance is an excellent approach if you are in your 40s or 50s and still healthy. The plans typically cost $3,000 to $5,000 per year to cover a married couple. If you are self-employed or a business owner, you may be able to deduct this premium, even under the new tax rules. For individuals in their 60s, or those who don’t want to pay ongoing premiums, consider a single premium annuity or life insurance policy with a long-term care rider. These so-called hybrid solutions are becoming more popular with clients as the premiums are usually locked in, and the investment component is returned to your estate if you never need long-term care services. Some of these plans even offer a full return of your premium, should you change your mind down the road.

Another possibility is an income-based annuity, which is usually much easier to qualify for, as far as your health goes. We recently had a client who wanted long-term care insurance for himself and his spouse. Due to existing health issues, his spouse was not eligible for a traditional long-term care policy. We were able to roll over a portion of his 401(k) on a tax-free basis to secure an annuity that will provide guaranteed income in retirement. If either he or his wife needs home health care, the income from the annuity will boost up by 50%. This is not considered long-term care insurance by regulators, but the extra funds will make a difference if either spouse ends up needing care. If not, they still have the additional income from the annuity to support their desired lifestyle.

Market risk

Financial professionals, pundits and scholars issue warnings regularly about the inevitable ups and downs of the markets, but people have short memories. This bull market has lasted so long that many have forgotten how bad a bear market can be. If you weren’t in or close to retirement in 2000 or 2008, you’ve likely recovered all the money you lost and more.

No one can predict exactly when the next market meltdown will happen. If your retirement income plan relies heavily on your investments, poor market performance early in retirement can have a devastating effect on how long your money will last. After all, you will be pulling money out of your investments to cover living costs while the market is going down. You are permanently locking in your losses, and may not recover.

One of the simpler strategies to use to address this problem is the "bucket” approach. Determine your required annual expenses and if possible move four years’ worth into safer investments like money-market funds, very short-term bonds or an annuity. You won’t make much here, but that is not the point. Why four years? There have been a total of 11 bear markets since 1965 (where the declines were greater than 20%). The average time from market peak, to trough, to full recovery is 1,084 days, or three years. A small buffer is always a good thing, as some recoveries take a bit longer. When we experience the next market correction you will be able to weather the storm, and use these safe assets to cover expenses.

Another consideration would be to limit the use of index mutual funds as you approach retirement. By definition these funds will track the market, both up and down. This is fine for a 40-year-old, but not for someone close to retirement. Because it is so publicized, the S&P 500 index is seen as relatively safe investment by many retirees. In fact, this index experienced over a 55% drawdown in the 2008/2009 financial crisis.

What to do after a nine-year bull run? Favor high-quality companies and stocks, as these tend to do better in downturns and recover faster. Seek out areas that may be undervalued relative to the major U.S. indexes, such as International funds. Stick with boring companies that have been around for decades and pay consistent dividends. Also make sure to check the overall allocations in your portfolio. With nine years of stock market gains, you are likely over-exposed to the market. This could be a good time to take some gains off the table. You can do this yourself, or find an adviser to help.

Sometimes, you can see trouble coming and dodge the danger. But life-changing events also can come out of nowhere. A retirement plan that deals with the significant knowable risks can help you feel confident now and into in the future. And like any good business plan, you have to review and monitor and make changes as needed along the way.

Kim Franke-Folstad contributed to this article.

Advisory services offered through J.W. Cole Advisors Inc. (JWCA). JWCA and Arola Associates Inc. are unaffiliated entities.

About the Author

Mark Arola, Investment Adviser Representative

Principal, Arola Associates Financial and Insurance Agency

Mark Arola is an Investment Adviser and principal of Arola Associates Financial & Insurance Agency. He has been helping clients prepare for retirement since 2002.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
25 Best Kirkland Products You Should Buy at Costco
Smart Buying

25 Best Kirkland Products You Should Buy at Costco

Many of warehouse club Costco's store-branded Kirkland Signature items get high marks for quality and value. Check out our picks.
July 21, 2021
Warning: You May Have to Pay Back Your Monthly Child Tax Credit Payments
Tax Breaks

Warning: You May Have to Pay Back Your Monthly Child Tax Credit Payments

Unlike stimulus checks, you might have to repay your monthly child tax credit payments if you get too much money from the IRS.
July 16, 2021

Recommended

Retiring in the Next 5 Years? Make These Five Decisions Now
retirement planning

Retiring in the Next 5 Years? Make These Five Decisions Now

These five moves could mean hundreds of thousands of dollars in extra income over the course of your retirement.
August 1, 2021
Are You Itching for an Earlier-Than-Expected Retirement?
retirement planning

Are You Itching for an Earlier-Than-Expected Retirement?

Lots of folks are pulling the rip cord on their careers sooner than they had initially planned. Before you rush to join them, make sure you are really…
July 30, 2021
How Patients with Lasting Symptoms of COVID Can Apply for Disability
Financial Planning

How Patients with Lasting Symptoms of COVID Can Apply for Disability

Those who can no longer work because of COVID-19 may qualify for these benefits but the approval process can be a difficult road.
July 30, 2021
Exercise Saves Seniors Money on Health Care
Healthy Living on a Budget

Exercise Saves Seniors Money on Health Care

Adults who increase their physical activity pay hundreds less per year for health care, a new study shows.
July 29, 2021