The Wall Street Journal had an article about the fear common to retirees about outliving their money. We've looked at this quite a few times. It can be difficult to switch from saving money to spending it. Knowing myself, I expect spending what we've accumulated will be difficult.
The title of the WSJ article addresses outliving your money but doesn't spend very much time on a big part of the reason why this a concern which is needing needing to pay for some sort of very expensive assisted living or home health care. One suggestion about this that was thrown in was if necessary, people can use their home equity to pay for this sort of care. Before yeah butting me about long term care insurance, I've seen content (sorry no link) about LTC insurance not keeping up anywhere close to the inflation rate of healthcare costs. I'm not an expert here, I don't sell insurance.
Average stays in facilities tend to not be very long but there are plenty of exceptions to that average.
Spending down at an expected rate and then at 90 not being able to cover this expense would certainly be stressful and getting to 90 with more money than you started with because you listened to someone who said you can only take 2.7% out while having sacrificed a long list of things you wanted to do would reasonably cause regret.
This is a problem to solve or maybe better for this post, to map out. What are your potential income sources and what could go wrong with those income sources? Are you likely to inherit money? What if that doesn't happen? What are regular expenses and how can you see them either going up or going down? What about irregular expenses like vet bills, expensive car repairs or repairs/remodeling for your house? What do you like to do and how much does it cost? Tough one now, what is the likelihood of having to help family financially and what might the details of that be? An even tougher one, if you have medical issues, how expensive are they likely to be? I understand the difficulty of that one but <very harsh comment coming> if you're 50, overweight and taking a half dozen medications, you should plan on health stuff being very expensive. Health issues are a real look in the mirror issue in terms of being honest with yourself about whether bad habits are part of the problem and what you might be willing to do about that versus issues that have nothing to do with habits that really are just bad luck.
Looking at Social Security is a good starting point. The SS Admin wants everyone to know how much they are due to receive. Looking up your benefits at different ages is easy an then figuring out whether the lower earning spouse is better off with their own benefit or the spousal benefit (50% of the higher earning spouse's benefit) is easy.
I've said many times that I plan to wait until 70 and that I think my wife should take hers at the same time which would be 64 and 2 months. My 64 and 2 month number is $3049 which is where I get the $1524.50 number for her. $6300 in today's dollars goes a long way for us, that's quite a bit more than our fixed monthly expenses but might be about equal to regular monthly expenses plus once or twice a year type expenses like property tax, home owners insurance and so on. What's the risk to Social Security income? Everyone knows this, the risk is some sort of benefit reduction. Something like 20-25% is what is thrown around in the media. In the past I worked through a process that led me to conclude that people born before 1975 won't have to actually confront a benefit reduction but plan for it anyway, where does that leave you?
If you will pull an income from an investment portfolio, what could go wrong? Lousy longer term returns could be a problem as could some sort of mistake. More simply, results that are less than expected which would be a problem.
We have a short term vacation rental. Obviously bookings could dry up or at least go through a some sort of downturn resulting in less income. At some point, we may not be able to do the work needed to continue to rent it out. We could hire a management company which would reduce our income or switch to a long term rental which would also reduce our income.
Do you plan to work one way or another, consulting, part time or monetized hobby? What could go wrong there? The demand for your service could be less than anticipated or some life circumstance could get in the way resulting in far less income or no income.
If you might inherit money, does your plan rely on that coming through? What happens if it doesn't or is much less than you thought? We stand to inherit a little but I've never factored that in. It's probably easy at 40 while parents are hopefully healthy at 70 or so, to say that you're not counting on inheriting money but at some point, maybe it should be factored in. If you're 63 with one living parent who is 95 with $2 million spending $10,000/mo on some sort of assisted living, odds are you're going to inherit money. If that money is in an IRA, that is going to change your math considerably due to having to withdraw all of that inherited IRA within 10 years. It's not like this is a bad problem but there can be expensive mistakes made in this sort of scenario
I want to believe that it is not realistic that if someone has a set of maybe five or six assumptions that go into their retirement plan, that not all of them would have a worst case outcome. Having one or two take a turn would be bumps in the road and we need to be able to roll with those punches. Everything going wrong would be really bad luck. We all know someone for whom bad luck just seems to find them. Harsh comment, if you're that person, plan accordingly.
For the fear of needing a lot of money toward the end for advanced care, if someone has enough, maybe they could partition off some of their net worth for this purpose. For us, the equity in our rental home could fit this bill if we ever need it. The mortgage will be paid off when I am 66. You'll find arguments on either side of investing in real estate but it is a store of value if nothing else and it has gone up enough in value since we bought that it just being an inflation hedge going forward would be a decent outcome. For someone in a different circumstance, maybe a Roth IRA could be where long term care expenses are partitioned.
This whole exercise was bottom up and based on very simple questions. Maybe you have very few moving parts or have many more moving parts but it is important to realize that no one's retirement plan will be done in by everything going exactly as planned. The threat is things going sideways and the consequences of that threat are magnified by being unprepared.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
No comments:
Post a Comment