American Retirement Crisis: Risk-Mitigating Strategies

Trent Bradshaw CFP®, AIF® & Brandon Rogers CFP®, AIF® |

There’s no doubt that Americans are facing a retirement crisis; now that we’ve covered some of the factors that are contributing to this nationwide issue, let’s discuss some strategies that can help protect your retirement lifestyle and might help ensure that your assets last as long as you need them to.

 

CONSIDER DELAYING RETIREMENT OR STARTING A SECOND CAREER

An increasing number of Americans are postponing retirement. Many choose to extend their working lives for a number of reasons, including allowing their investments to pursue additional growth, increasing their retirement savings, taking advantage of health insurance coverage, or waiting for a spouse to retire. Some simply aren’t ready to give up fulfilling careers.

According to a survey by the MetLife Foundation, about 9 million Americans between the ages of forty-four and seventy have already launched “encore careers,” or jobs that combine income with passion or social impact. As many as 31 million more are interested in making the transition to more meaningful work. An increasing body of research suggests that Americans are reinventing retirement and viewing it more as a phase of rejuvenation and recreation than as a period of complete rest.

 

DELAY TAKING SOCIAL SECURITY BENEFITS

One of the most important decisions facing a retiring worker is when to start taking Social Security benefits. Full retirement age (FRA) is the age at which you’re eligible to receive your full Social Security benefits. It used to be sixty-five for everyone, but current laws mean that for those born after 1938, the normal retirement age is somewhere between sixty-five and sixty-seven.

While the right age to start taking benefits depends on a retiree’s individual circumstances, in general, delaying benefits is usually a better choice for most people for the following reasons:

  • Delaying Social Security means you get increased benefits each year, reducing your risk of running out of money later in life. If you begin taking Social Security retirement benefits as soon as you become eligible at age sixty-two, you permanently give up a significant chunk of monthly income. Monthly benefits claimed at age seventy are 76% higher than those claimed at age sixty-two for a retiree whose FRA is sixty-six.
  • Each future cost of living adjustment (COLA) might be bigger. Social Security benefits increase each year to keep up with inflation. Your COLA typically could increase by a percentage of the current payout each year, meaning that delaying your benefits might give each adjustment a higher dollar value.

Between life expectancies, delayed retirement credits, and income considerations, Social Security claiming strategies can be very complex. Before making any decisions, be sure to consult with a tax planner or other financial professional who can help you make the right decision for your needs. Please feel free to contact us if you would like assistance with determining what is best for your situation.

 

FIGHT THE EFFECTS OF INFLATION

Inflation is insidious and can eat away at the purchasing power of your money over time. Retirees are disproportionately affected by the effects of rising prices because they are paying higher prices for food, housing, and other expenses while often living on fixed incomes. Medical bills are also typically higher in retirement due to increased health needs and higher insurance premiums. Even relatively low inflation can significantly impact a retiree’s purchasing power over time.

Having a portfolio that’s positioned to help fight inflation is critical. Traditionally, as workers have neared retirement age, they have gradually reduced their exposure to risk and favored more conservative investments that prioritize income and wealth preservation overgrowth. However, a too-conservative investment strategy can be as dangerous as a too-aggressive one since it exposes your portfolio to the corrosive effects of inflation and might limit your retirement assets’ ability to grow over time, thus increasing the risk that you’ll outlive your assets. A well-diversified portfolio that includes an appropriate mix of stocks, bonds, and other investment types according to your personal needs and goals may help you seek the growth you need in a way that lets you sleep better at night. Diversification helps you spread risk throughout your portfolio, so investments that do poorly might be balanced by others that do relatively better. However, please note that diversification cannot ensure a profit or protect against a loss.

 

PLAN FOR RISING HEALTHCARE COSTS

Longer lifespans, rising medical costs, declining medical coverage, and funding shortfalls for Medicare and Medicaid mean retirees face a serious challenge in managing their healthcare costs in retirement. According to a Fidelity report, a sixty-five-year-old couple retiring in 2015 will need an estimated $245,000 in savings just to cover healthcare costs during their retirement. In order to understand and plan for your health-care expenses in retirement, consider the following strategies:

  • Earmark a portion of your retirement savings specifically for healthcare expenses. Take advantage of tax-favored vehicles, such as health savings accounts.
  • Understand your health insurance options after retirement. While most retiring workers will lose their employer-sponsored coverage, some firms still offer retirement healthcare coverage.
  • Understand how Medicare fits into your health coverage.
  • Be a smart healthcare shopper. When visiting a healthcare provider, be prepared with information about existing conditions and any symptoms you are experiencing. Ask questions about a diagnosis and prescribed medications to be sure you understand all alternatives and outcomes. Know what you’re paying for so that you fully understand your out-of-pocket costs for any treatment plans.

 

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