Published in the Baltimore Business Journal on November 12, 2021
The most significant fear most people have as they plan for their retirement is outliving their income. Though seven in ten workers say they have confidence in the planning they’ve done to live comfortably in retirement, many may not be prepared for certain risks that could threaten their lifetime income sufficiency.
The Risk of a Long-Term Care Event
Recent statistics reveal that more than two out of five Americans will require long-term care at some point in their lives, and the number increases to seven out of ten after the age of 65. Chances are, paying for long-term care could be a critical issue for most retirees.
In many cases, family members are willing and able to provide care at home. However, many situations reach a point where it either becomes impractical or too emotionally draining for the family caregiver. In these instances, they need to turn to some kind of professional long-term care services eventually.
There is no getting around the staggering cost of long-term care, but there are ways to mitigate the financial impact it can have. Whether the best solution is to accumulate the extra capital to cover the cost, transfer the risk to an insurance company, or some combination of the two, the most valuable asset we have is time. The best use of your time right now is to have a serious discussion about addressing the potential impact of long-term care and finding the optimal solution to pay for it.
In the last year, we’ve seen the inflation rate surge to levels not seen in decades to the point where it is now on the forefront of most retirees’ minds as it becomes a real threat to our purchasing power. That can be especially damaging to retirees’ financial security in their later years.
Whether this inflation surge is transitory, as some economists believe, or a more permanent increase that could last several years, it should serve as a wake-up call for people planning their retirement. Those preparing for retirement don’t need inflation to surge to 10% to understand the impact on purchasing power over time. Even at an average rate of 3% inflation, your purchasing power can decrease by 80%, where a $100 bag of groceries today would cost $180 in 20 years.
Inflation can also wreak havoc on your returns, which can be especially devastating on portfolios primarily comprised of fixed-income securities. If your fixed-income investments yield 3% and the inflation rate is 5%, your real rate of return is negative two percent.
Inflation at any level is almost a certainty. We can expect it, and we can plan for it. But, to mitigate its impact, time is of the essence.
Social Security Solvency
For many retirees, their Social Security benefits will play an important role in producing lifetime income sufficiency. So, when we see the recent headlines screaming something such as, “Social Security to Go Bankrupt by 2034,” it gets our attention. A big part of the problem is Social Security was created as an insurance benefit to prevent retirees from living in poverty—back when life expectancy was just 63 years old. No one expected life expectancy to expand by 20 years at a time when fewer workers are contributing to Social Security, it seemed inevitable that Social Security wouldn’t run out of money, but hindsight is always 20/20.
Congress has taken several steps along the way to increase the solvency of Social Security, such as increasing the full retirement age, raising the wage limit for contributions, and increasing FICA taxes. While time may appear to be running out, there are still many more levers the government can pull to bolster Social Security solvency. But, for anyone now on the glide path to retirement (age 55 or older), there is a low risk of any of these changes affecting your benefits.
It’s OK to have concerns about retirement. That’s why it’s essential to do the proper planning while time is still on your side. Planning for a secure retirement is about focusing on what you can control and putting the right strategies in place to mitigate your risks.
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