Expectations Versus Reality in Retirement
By Marc Cram
As we baby boomers approach retirement many of us have started to take a much closer look at what we will need in the form of assets if we are to live to the age of 80 and beyond. Most of us have been very focused on accumulation of assets up to this point and may not have stopped to consider what the future outcomes might look like.
We all have had expectations of what our accounts might look like and some of us have had those expectations dashed by market corrections or other financial setbacks. I think it is time that we took a close look at what other expectations we have for the future versus what reality might spring upon us. If we are to be successful in our own retirements we should move toward it with our eyes wide open and our plans firmly in place.
What follows is a short examination of five areas that each of us should prepare for and a few ideas that might help you improve your chances of success. Some of this might appear to be doomsday like but I think we will all be better off if we prepare for the worst while expecting the best, so let’s dig in.
Expectation #1: The stock market will continue to provide above average returns well into the next decade.
We know that investing in the stock market has produced the best chance of growing our assets at rates that beat inflation and other fixed money instruments over time. If you stay invested you will always get the average market return for the period you are in the market.
One thing we can say for sure about the markets, though, is that they will never go straight up or straight down. We tend to see periods of growth and periods of stagnation. In the short-term no one can predict whether you will make or lose money but we know that over the long term (10 plus years) you will get whatever the markets return.
The danger for us going forward is that when we start taking income from our investments, every negative year will shorten the lifespan of our potential income stream by as much as 5 years or more. If we want to live comfortably to ages of 85 or 90 we will need more predictable returns than those odds will give us.
Are you willing to bet that the markets will perform the way you want them to when you get ready to retire? I don’t think any of us is willing to take that bet and that is why more and more of us are looking for instruments that will guarantee us a minimum return and lifetime income streams with the money we already have accumulated. A little research on your part should yield some good choices for those assets you can’t afford to lose.
Expectation #2: I will be in lower tax bracket when I retire.
I am sure you have been told this by every planner or investment professional you have ever talked to. They all encouraged you to fully fund your IRAs and 401ks because of the current tax deductions and the tax deferred growth with the promise that when you retired you will be in a lower tax bracket. I have conducted seminars for over 5 years now where I ask the question of my audience, “do you think future tax rates will be lower, the same or higher”? I can count on one hand the number of people who said lower or the same. When you look at our country’s current level of debt along with the future liabilities for our major entitlement programs (which we will look at next) I think you too will be hard pressed to think your taxes will even stay the same going forward, let alone reduce.
Whatever your current tax bracket is, can you imagine living on less than you are today? If your income stays the same and your deductions disappear because your kids are gone and your home is paid off, what chance do you have to reduce your tax burden? The reality is that during a 20 year retirement, if you have accumulated all of your retirement assets in tax-deferred accounts, you will pay 10 times more in taxes than you saved in taxes over your lifetime, assuming no tax increase. Every increase in taxes going forward will mean you will need to take more money out of your savings to maintain the same lifestyle.
One way to solve this dilemma is to start funding a private tax-free retirement plan using an insurance product that is linked to a market index and designed to provide maximum cash accumulation with a minimum death benefit. This product is known as equity indexed universal life. Here again, a little research on your part will reveal multiple, high quality companies that currently offer these products.
Expectation # 3: I can count on Medicare and Social Security to be there for me like it was for my parents.
The reality is that both of these programs are in trouble and will only get worse as the 80 million baby boomers enter retirement. Ask anyone under the age of 40 if they think Social Security will be there for them and you will soon see that this reality is already well entrenched in our culture. The facts are that 60% of current retirees say that 50% of their income currently comes from Social Security, 34% say that it is 90% of their income and 22% say that it is 100% of their income.
By one account, it is predicted that by 2019 Medicare will consume 24% of all tax receipts and by 2042 it will consume 51% of all taxes collected.1 If you think universal health care will solve this problem, you must realize that Medicare is a form of universal health care and anything that will replace it will be burdened by the same reality of baby boomers living much longer in retirement than their parents ever did.
As for Social Security, it is predicted that the Social Security trust fund will begin be tapped into in 2018 and be completely depleted by 2044.2 If we had made changes to this program years ago we might have been able to extend it but I don’t see any congress willing to touch this problem until it is too late.
The bottom line is that benefits will need to go down, we will need to wait longer to be eligible and taxes will need to go up to pay for the massive increases in cost that will result from the higher usage figures projected. We are going to have to become responsible for our own retirement planning and should these promised benefits materialize for us we should feel lucky if we can plan an extra night on the town every month.
Expectation #4: I will live to my normal life expectancy.
This might well be true but then you must ask yourself, what is my life expectancy? When Social Security was instituted the average time spent in retirement was 3 years. Many of us today will spend 20 to 30 years in retirement. Statistically speaking, if you are a single male age 65 you have a 50% chance you will live to age 85 and a 25% chance to live to 92. If you are a single female age 65 you have a 50% chance you will live to 88 and 25% you will live to 94. If you are a married couple age 65 one of you has a 50% chance to live to 92 and a 25% to live to 97.
If these numbers don’t get you thinking about how long you will need for your money to last consider this. One of the fastest growing age groups in the United States are those people over the age of 100. There are currently over 27,000 people over 100 and that number is sure to grow as the baby boomers begin to age.
Expectation # 5: I will stay healthy well into my final years.
There is no doubt about it; we are much more conscious of our health and taking care of our bodies and minds than any generation in the history of the world. We are finding new ways to combat disease and to stave off illness as well as to treat conditions that would have killed us only a generation ago. However, all of this has come at a price and that price needs to be calculated into our future income needs.
According to a study by Fidelity Investments, a retired couple without employer-sponsored health insurance can expect to pay $215,000 for out-of-pocket health care costs like premiums and co-pays. Moreover, this number does not include significant costs like long-term care, which isn't fully covered by Medicare. These numbers also assume you live to your life expectancy and not beyond. Last year these costs rose by 7.5% and we do not know what kind of increases we may see in the years ahead. As we have outlined above, Medicare costs could easily rise by double digits in the next 20 years.
If we add in home health care and long-term care into this equation we can easily double the numbers above and put a further strain on our already over taxed retirement funds. One thing you can do about potential long-term care needs is to purchase a long-term care policy from one of the many experts in this field.
What you can do to prepare
The numbers aren’t pretty but there is no need to despair. Whether you have years to prepare for retirement or you are already there you can create a plan to succeed and prosper in your own retirement. To summarize let’s go over the realities again:
• Investment directly into stock market investments can leave you at the mercy of the markets and geopolitical events. You will need to be in investments that can give you predictable returns without the threat of market downturns.
• Taxes will probably be going up over the next few years and into your retirement. It would be best to use your tax-deferred retirement plans early in your retirement and it may be prudent to move them to tax-free instruments at your earliest opportunity.
• Government entitlement programs will take a larger and larger share of the tax revenue in the future and future benefits may well be reduced or eliminated. Start taking responsibility of your future income needs by using instruments that can give you market based growth in a tax-free environment.
• Plan to outlive your own life expectancy. Create plans that will provide income streams you cannot outlive. There are many instruments on the market today that provide living income benefits you cannot outlive and that can be funded with both taxable and tax-deferred assets you now own.
• Expect to stay healthy but plan for the probability that you will need to spend more on heath care in the future. Purchase a long-term care policy that will pay for future needs at home and in care facilities.
One thing you can do right now is to get educated and speak with a professional advisor, preferably one who carries the CERTIFIED FINANCIAL PLANNER® designation. The sooner you take action the greater your success will be. Remember, by planning for the worst while expecting the best, you will be the ultimate winner and your retirement years will be all you have dreamed they would be.
1 According to Medicare Trustee Thomas R. Saving, a professor of economics at Texas A&M University and senior fellow at the National Center for Policy Analysis.
2 Trustees of the Social Security Trust Fund
Marc Cram is a CERTIFIED FINANCIAL PLANNER® in Durham, North Carolina. He works with families to protect and increase their assets using safe liquid investments. Marc holds a free online seminar every Monday evening at 9:00 pm Eastern time and can be contacted through his website at www.cramgroup.com. You can download a free 12 page article on how to safely and conservatively build wealth at www.wealthyyou.us
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