June 25, 2019
How the Greatest Risk in Retirement isn’t Healthcare
Great news! People are living longer.
According to Stanford researchers, the average life expectancy is increasing by about three years every generation (or more specifically, every 25 years). In other words, you can expect to live about six years longer than your grandparents. (For reference, the current average life expectancy in North America is 81 for females and 77 for males.)
This is a global trend, and it’s not expected to slow down anytime soon.
Add to that the amazing medical advances that continue to be developed every day around the world and you’ve got an equation for the kind of longevity previous generations couldn’t have ever attained.
However, these trends are changing how many people think about and plan for their retirement. After all, how long we think we’ll live is an important factor in our long-term planning.
Right now, more and more Modern Retirees are delaying their retirement well past the age of 65 for reasons that include increased longevity and better health, particularly in those with a higher level of education. Other factors include changes in employer-sponsored retirement programs (moving away from pensions to 401(k)s) and changes in Social Security benefits.
Running out of money is a real fear for many people. But it doesn’t have to be. There are ways you can mitigate your financial risk and secure your future.
Consider insuring with an annuity
If you’ve never heard of it, an annuity is essentially a different type of insurance policy. But, instead of insuring your house or your car against damage, it’s a way to insure your income remains steady long after you retire.
These policies are designed to grow your funds like an investment, and then at the point of annuitization are paid out at regular intervals like any other stream of income. Think of this as a regular monthly paycheck. In other words, unlike other investments, it provides guaranteed income for the rest of your life. And the IRS hasn’t put any limits on annuity contributions yet.
But it’s important to note annuities aren’t technically investments, they’re contracts with an insurance provider like any other insurance policy. This means canceling them can be costly and there are rules to keep in mind.
Plan for healthcare
Most people underestimate exactly how much healthcare will cost in their retirement years. Medicare Part A (which may cover some hospitalization costs if you qualify) is free, but Medicare Part B is not. And that doesn’t take into account prescription drug coverage, supplemental policies, out-of-pocket costs, or the potential for long-term care expenses.
A recent study by Vanguard showed that the average 65-year-old woman would have paid $5,200 in 2018 for out-of-pocket and premium expenses. And the average couple aged 65 will need $285,000 in 2019 to cover healthcare costs for the rest of their lives.
Look at your current coverage and what Medicare will cover for you. Some employers offer supplemental coverage in retirement. You may also want to look into long-term care coverage. According to the U.S. Department of Health & Human Services, 70% of Americans will need some type of long-term care in retirement.
Maximize your Social Security benefits
Your Social Security benefits aren’t locked in stone. In fact, there are several ways to potentially increase the amount you receive.
The first (and simplest way) is to work the full 35 years required by the government program. Your Social Security benefits are estimated based on your highest-paid 35 years of work, and any years you didn’t work, or even years you cut back on hours, will count against your final tally. But if you work past 35 years and earn a higher amount than earlier in your career, those higher-paid years will replace your lower-paid years, which in turn will increase your benefits.
Plus, if you delay retirement you can earn as much as 8% more on your benefits up to age 70.
Reduce what you’re paying in taxes
As the old expression goes, when you save money, you earn money.
And there are several ways you could be saving on taxes that you’re not aware of, especially if you have several sources of income.
The first thing to consider is whether you can reduce your tax bracket. The simplest way to do this is to lower your expenses so you can take less money out of your retirement accounts.
You may also want to consider the cost of living in your city, and whether you’re willing to downsize or move to an area where it’s cheaper to live. Plus, selling your home may qualify you for tax breaks.