If you are retired, or getting close, it’s important to plan the best route to make your income last. One of the most important things includes, avoiding the five most common pitfalls:
Underestimating Health Care Costs
It’s no secret people are living longer. In fact, health care costs are rising faster than inflation.
Fidelity estimates the average 65-year-old couple retiring in 2016 will need around $260,000 to pay for health care costs during their retirement and that does not include the cost of long-term care. With many public sector employees retiring long before they are eligible for Medicare, the situation becomes even worse since medical insurance premiums alone can exceed $1,200 per month.
The cost of long-term care must also be considered. The U.S. Department of Health and Human Services estimates that about 70% of people age 65 and older will require some type of long-term care services. According to the Genworth 2016 Cost of Care Survey, assisted living facilities average $43,539 per year (per person) and a semi-private room in a nursing home averages $82,125 per year. These costs can quickly deplete a couple’s retirement savings, leaving the remaining spouse with nothing but Social Security to carry them through their remaining years. Long-term Care Insurance should be considered, although expensive. The American Association for Long-Term Care Insurance says, the cost for a healthy couple at age 60 can range from $2,794 to $5,637 per year for a policy with a $150 per day benefit.
Outliving Your Income
Continuing medical advances coupled with today’s healthier lifestyles means healthy 65 year olds should expect to live into their 80’s or 90’s. Therefore, you should plan on at least 30 years or more of retirement income. Failure to plan properly could result in you outliving your savings and being forced to live on Social Security alone. And with the average Social Security benefit being just $1,348 per month, it will likely be insufficient to support your current lifestyle.
It’s becoming increasingly challenging for today’s workers to save enough during a 40-year career to support themselves during the retirement years. Public sector employees may spend more years in retirement on the job, so it’s even more critical they start saving a sufficient portion of their income early.
Failing to Account for Inflation
Inflation will erode the purchasing power of your savings over time. What is a sufficient retirement income now, will likely be insufficient in ten or twenty years. Social Security and some pensions have a built in Cost of Living Adjustments (COLA) to compensate for inflation, but retirees often fail to consider inflation when making plans based on distributions from retirement accounts. Using an inflation estimate of 3%, a 60-year-old couple’s $50,000 annual living expenses will double by the time they reach 85. Some costs, like health care, will likely rise too.
Investing Too Conservatively
Investing too conservatively can be just as risky as being too aggressive. This can limit the upside potential that a diversified portfolio can offer. It can also reduce how long your money will last in retirement and may even fail to keep up with inflation resulting in your savings slowly losing buying power. An overly aggressive allocation can also cause undue risk by exposing your portfolio to the full volatility of the equities market. Your portfolio should consist of a diversified blend of equities, bonds and short-term investments suited to your investment goals, time horizon and risk tolerance.
Withdrawing Too Much from Savings
One of the most common mistakes we see is people withdrawing too much from their retirement savings. To be confident your savings will last, withdrawals should not exceed 4% – 5% per year. Remember, your savings will be an income source that must last you the rest of your life and running out of money in your 80’s does not leave you a lot of options. Ideally, your savings should continue to grow during retirement so that you can gradually increase your withdrawals to adjust for inflation.
Planning ahead can help you navigate the course to retirement. Expect to live into your 90’s, and build an investment pile of properly diversified and allocated equities, bonds and short-term investments. Account for inflation and rising health care costs, and avoid excess withdrawals. Consult with your trusted financial advisor to get you on the road to a financially secure retirement.
As a financial advisor, I am committed to learning about your personal retirement/financial goals. Working together as a team, we will use your goals to build a retirement/financial plan focused on your specific needs and help you achieve “financial security and peace of mind during your lifetime.
I look forward to hearing from you. Please contact me at CPS Investment Advisors at (863) 688-1725, firstname.lastname@example.org