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Retirement Concerns You Can Tackle

38633090 - aged couple sitting on the sofa and checking bills When either Susan or I sit down to write our Cutter Family Finance column each week, we try to tackle topics that are relevant to everyone. However, we do recognize that people who are in different stages of life will often have different concerns. Our goal, as financial professionals, is to create peace of mind for our clients, and this comes from understanding what those concerns are.

Jill and I still have three young ladies at home and many working years ahead of us. Our concerns range from the mundane—when will one of us have a chance to go grocery shopping?—to the more substantial—how are we going to pay for three college educations and three weddings?

Those of you who are either facing retirement in the near future or who are currently in retirement have different concerns. When you stay up at night tossing and turning, you probably aren’t sweating the small stuff. One concern you may be worried about could be running out of money; health is usually a major worry. Another concern is usually about how you will be leaving your loved ones after you are gone.

This week, I want to touch on two of those fears. In our experience, we have found that oftentimes, people feel better just by understanding that they have options and knowing that there are possible solutions for their concerns.

The first is the very real concern; am I going to outlive my money?

Many people ask themselves this question. As most of you know, life expectancies have increased. People are living much longer lives. Pensions are disappearing only to be replaced by the 401k. As a result, retirement planning has become an entirely different animal over the past few decades. Now, instead of planning for 10 to 15 years of retirement, we need to plan for 20, 25, even 30 years in retirement. Strategies used even 15 years ago may prove to be outdated.

This makes the fear of outliving our money even more real. Studies have shown that more people are worried about running out of money than they are of dying. So, how do we plan for such a long retirement? With an extended life expectancy and lengthier retirement, one thing retirees need to do is maximize their Social Security benefits. Even with the recent changes to Social Security claiming options, there are many strategies that people can use to maximize their benefit.

When planning for an extended retirement, it is also important to look for additional sources of guaranteed lifetime income. By incorporating additional guaranteed lifetime income into a retirement strategy, market volatility has less of an impact on a retiree’s lifestyle. Oftentimes, annuities can be a very effective tool to provide that additional guaranteed lifetime income. And remember, incorporating anything into your retirement strategy can be either appropriate or inappropriate. There are many different flavors of annuities, and they are definitely not all created equally. Be sure to speak to a trusted professional who can help you to determine if an annuity is appropriate for you or not.

When planning for a longer retirement, it is important to not to become an emotional investor. So, it is important to utilize investment strategies with downside risk management for those assets that are invested in the markets. Doing so will allow for growth during market upswings, while limiting losses during turbulent times. And by having a defined strategy in place, investors are less likely to make irrational decisions that have a lasting impact on their portfolio.

The markets can be panic-inducing; I get it. The S&P 500 dropped more than five percent in January alone, which was the worst stock performance for that month since 2009. And despite the recovery we have had in the past decade, any statistic that references “since 2008” or “since 2009” is going to bring back some bad memories for many investors.

According to a study performed in 2014 by DALBAR, the nation’s leading financial services market research firm, the average retail investor earned just 3.69 percent when investing in equity funds, versus the S&P 500 Index returns of 11.11 percent over the same period of time (since inception of the DALBAR study on January 1, 1984).

Why the difference between the average retail investor’s performance and the “performance” of the S&P 500 Index? Well, that disparity is primarily because investors make decisions based on emotion instead of data. A rules-based investment strategy helps to protect investors from making decisions based on knee-jerk reactions, fear and emotion. This, in turn, can help to protect a portfolio during market downturns, which is essential, because capital preservation is the key a lengthy retirement.

The second concern is if you will need long-term care?

We believe that this is the biggest concern that today’s retirees face. There are three ways to pay for long-term care: out-of-pocket, with insurance, or by spending down assets and becoming eligible for Medicaid (the federal needs-based program). Many people are under the false impression that Medicare pays for long-term care. It is important to understand that Medicare only pays for a limited amount of long-term care under limited circumstances. So, what can we do?

As I just mentioned, some people have enough liquid assets to pay for long-term care directly to the provider. Some tap into the equity in their home. Often a retiree’s home represents a significant portion of their overall net worth, and so that asset cannot be overlooked. Many people, however, do not want to spend down their assets because they want to leave as much as they can to their loved ones. For those who try to reposition their assets in order to become eligible for Medicaid, it is essential to speak to an attorney who is an expert in that type of planning. There are many restrictions and factors to consider before repositioning assets.

Another option for those who do not have the assets to pay out-of-pocket is to invest in a cash-value life insurance product with a long-term care rider. With such a product, if long-term care is needed, the long-term care benefit is deducted from the policy’s death benefit. With this type of insurance, the policy holder receives a benefit in at least one form, either for long-term care coverage, or as a death benefit. If the policy holder never needs long-term care coverage, his or her beneficiaries receive a death benefit in exchange for the premiums paid for the policy.

Folks, I hope that this week’s column has helped to alleviate some of your concerns. And remember, each individual must evaluate his or her situation. But, at least now, you know there are solutions that may be available to help give you the peace of mind we all want in retirement.

Be vigilant and stay alert, because you deserve more.