Just as my husband and I, both newly retired, began to whittle down our retirement savings, we were hit by the barrage of stressful news—from 9% inflation and rising interest rates to stock market swings and recession warnings. I called my financial advisor to ask how worried we should be.
Like many current and future retirees, we are keeping an eye on our investment accounts daily, concerned about how seriously current market losses and global economic upheavals could erode the savings we project for years to come.
We weathered the volatility of the 2007-09 recession, so we experienced a devastating market downturn that turned into a robust market recovery. But that was a dozen years ago, when we felt we had enough time and income from work to help us recoup any losses. Now, with our income reduced to Social Security payments, some pensions and investment returns, we haven’t been feeling so confident.
When I called our consultant, I needed reassurance.
think long term
“We are investors, not traders,” he reminded me. My husband and I are in our 60s and in good health, so we are planning at least a few decades of life ahead. With this perspective, our advisor noted, it is critical to maintain a long-term approach to our investment strategies.
As retirees, he told us, we should divide our savings into two categories: money we will need for immediate expenses today and tomorrow, and investments that will increase our savings to sustain us for decades to come. how many decades? Statistically, life expectancy in the US today is just under 78 years old, but many people are living into their 90s.
What does this mean for investors in their later years? That means we need to be educated and balanced in our investments, suggests a recent study by the Boston College Retirement Research Center.
See too: Three Things to Take Care of When You Retire – Your Future Self Will Thank You
Understand the risks you face
Study author Wenliang Hou, now a quantitative analyst at Fidelity Investments, said that understanding the relative value of risks is key to a good retirement, and laid out five essential dangers retirees face: (market risk), healthcare expenses (health risk), unforeseen needs of family members (family risk) and even retirement benefit cuts (policy risk).”
Hou’s study, “How well do retirees assess the risks they face in retirement?” states that most people worry too much about short-term market fluctuations while underestimating their potential lifespan and future healthcare costs. He said longevity risk should be the most critical concern for people saving for retirement, followed by health and market risks.
In other words, we must plan for a long life that includes an expectation of some potentially expensive end-of-life healthcare costs. Historically, the stock market has risen by more than 10% a year, so it shouldn’t be our main concern, and we should resist the urge to abandon the market when it goes down.
To read: How Will Boomers Cash Out Their 401(k) Balances?
How long will you live?
Hou said in an interview that, upon starting his study, he was “totally shocked” by how retirees underestimated how long they would live. Many of us use our parents’ lifespans for guidance, but that kind of objective information is unreliable, Hou said.
In my case, my mother died at 70, my father at 94. So how old will I be when I die? “Exactly the problem,” Hou told me, adding that personal circumstances are as critical as family history.
I tried two of the many life expectancy calculators available on the web, both asking a simple set of questions to make your predictions. They agreed: I should last until my 90s. The Social Security Administration’s calculator was a little more pessimistic, predicting it would only get to 87, but asked for less information. My husband’s life expectancy is probably a little shorter – on average, men don’t live as long as women.
Don’t miss: This couple retired 2 years ago on around $27,000 a year. here’s how it’s going
End-of-life healthcare costs
Despite the differences, Hou’s metrics, and those of many other studies, suggest that we shouldn’t just plan our retirement savings to last 10 years, but 20 or even 30 years. So using the spring and summer market downturn as our main guide doesn’t make any more sense today than it would a decade before we retire. Our money may well fluctuate over the next few decades, but on average it can be expected to grow.
In addition to longevity, there’s another critical concern, according to Hou’s report: Many retirees either don’t plan for end-of-life medical expenses or grossly underestimate what might be needed.
“Retirees can also have unexpected medical expenses and long-term care needs,” Hou writes. “Direct expenses increase rapidly with age, and health care costs in retirement have increased substantially in recent decades.”
An annual study by Fidelity estimates that, to be safe, a retired couple aged 65 in 2022 must project spending up to $315,000 in after-tax dollars for end-of-life healthcare costs not covered by Medicare. The cost of long-term care, such as the need for health aides, can quickly add up.
Visualize your life at 90
Planning should consider the many variables that can influence this projection, such as whether you want to end your days in your own home or a nursing home, and whether you have a spouse or other family member who will care for you.
Whether you’re alone or in need of a supplement to family care, healthcare costs can be another unpredictable and significant expense, which, of course, ties back into longevity risk.
Everyone needs to assess their own risks — as well as their risk tolerance — carefully and cautiously, Stuart Gabriel, a distinguished professor of finance at UCLA’s Anderson School of Management, said in an interview.
“History may not be a good guide,” he said, and “there is no one-size-fits-all answer, and no financial adviser who knows the answer” on how the market will fare at a time of high volatility like we are right now.
Even annuities, which guarantee a predictable return for life, can have large fees and payment-related conditions that make them less cost-effective than they may initially appear. “Read the fine print, be completely polite and understand what you’re getting yourself into,” advised Gabriel.
The answers to what will ensure your money lasts a lifetime are unclear, but like Gabriel, Hou has come to a definitive conclusion: we all need to be educated about the risks so that we can plan for a reasonable outcome.
“Education and awareness,” he said, are the keys to a successful – and long – retirement.
Susan Freudenheim is a semi-retired journalist in Los Angeles who has written for the Los Angeles Times, the New York Times and many other publications.
This article is reprinted with permission from NextAvenue.org© 2022 Twin Cities Public Television, Inc. All rights reserved.
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